Last Updated 25 May 2020

Air pollution economic case for enviromental regulation

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Economic development and prosperity takes place, several times, coupled with contamination of the urban environment. This situation is defined in economics as an externality, which is an effect from one activity which has consequences for another activity but is not reflected in market prices. When these consequences are the generation of external costs they are defined as negatives. This is the particular case of air pollution. For example, “Pollution represents an external cost because damages associated with it are borne by society as a whole and are not reflected in market transactions.”(Koomey and Krause, 1997) Despite the fact that stricter controls were put into practice in the last years, and the observed reductions in pollution, air pollution remains as a common concern among countries.

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There are four major measurable examples to correct this problem which are: Property Rights, Regulation, Taxes and subsidies, Marketable Permits. Although it works in few cases, small groups, if property rights are correctly defined it may avoid the problem, e.g. if a firm owns the right to clean air and can charge people for using it. Air pollution regulations were strengthened by enactment of the Air Quality Act in 1967, which introduced a regional approach to air pollution control; and has been has been increasing in the last years, E.g., limits on vehicle emissions, controls on allowable factory emissions, smoking bans. The problem on this measure is that does not encourage change in technology uses or new technology developments.

Taxes and subsidies, for example differential taxes on carbon emissions, has the benefit that the company that produces contamination “pays”, thus encouraging technology change and being more efficient. At last, marketable permits are a number of permits issued according to a total limit of output pollution. They may be auctioned to the highest bidder, going to companies that can not reduce pollution easily. The Clean Air Act is a well-known example of the application of the marketable permits technique.


Controlling air pollution is a difficult task, plenty of trade-off decisions. Many measures have been taken to stop the problem, but many of them have proven to be inefficient. It seems that taxes and subsidies are the best measures but this might be introduced slowly into the market, thus giving time to firms to adjust their production methods. Hence is that marketable permits are a validate instrument to go together with taxes in the meanwhile.


Norberg, Johan. “In Defense of Global Capitalism”. Publisher: Cato Institute. Place of Publication: Washington, DC. Publication Year: 2003. Page Number: 229.

Cherni, Judith A. “Economic Growth versus the Environment: The Politics of Wealth, Health and Air Pollution”. Publisher: Palgrave. Place of Publication: New York. Publication Year: 2002. Page Number: 1.

Colls, Jeremy. “Air Pollution”. Publisher: Spon Press. Place of Publication: New York. Publication Year: 2002. Page Number: 21.

Arya, S. Pal. “Air Pollution, Meteorology and Dispersion”. Publisher: Oxford University Press. Place of Publication: New York. Publication Year: 1999. Page Number: 15.

Koomey, Jonathan and Krause, Florentin. “Introduction to Environmental Externality Costs”. Year: 1997. Published in the CRC Handbook on Energy Efficiency. Energy Analysis Program. Applied Science Division. Lawrence Berkeley Laboratory.


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