Altruism, Voluntary Pollution Abatement, Regulation, Environmental Economics and Policy, Q52, Q58, K32,

Delgado, Michael S.

Khanna, Neha

English

Research Papers in Economics

Voluntary Pollution Abatement and Regulation
Michael S. Delgado
Department of Economics
State University of New York at Binghamton
mdelgad1@binghamton.edu
and 
Neha Khanna
Department of Economics and Environmental Studies Program
State University of New York at Binghamton
nkhanna@binghamton.edu
Poster prepared for presentation at the Agricultural & Applied Economics Association’s 2011
AAEA & NAREA Joint Annual Meeting, Pittsburgh, Pennsylvania, July 24-26, 2011
Copyright 2011 by Michael S. Delgado and Neha Khanna. All rights reserved. Readers may make 
verbatim copies of this document for non-commercial purposes by any means, provided that this 
copyright notice appears on all such copies.Voluntary Pollution Abatement and Regulation
Michael S. Delgado and Neha Khanna
Department of Economics, Binghamton University
Overview
The increasing popularity of voluntary pollution abatement programs 
raises the question of their effectiveness as a tool for environmental 
policy and their interaction with more traditional policy instruments for 
regulating pollution. We develop a model to:
 explain the existence of a voluntary 
  abatement market in the presence of 
  altruism
 examine the relationship between voluntary 
  abatement and traditional regulation
 examine the change in overall pollution 
  abatement as a result of an increase in regulation
 examine whether or not regulatory policies that ignore private                 
  abatement market reactions can effectively reduce pollution.
We find that:
 a voluntarily abatement market may exist if consumers' demand for        
  abatement is sufficiently strong
 an increase in regulation on otherwise non-abating consumers and        
  firms will cause a reduction in the equilibrium quantity of abatement in    
  the private market for voluntary abatement 
 regulation will always increase the total level of environmental quality,    
  regardless of the reduction in voluntary abatement
 optimal regulation that recognizes the contraction of the voluntary           
  market in response to regulation may be higher or lower than regulation 
  that does not recognize the contraction of the voluntary market.
 Literature and Contributions   
There exists a large literature that focuses on cost minimizing 
motivations for voluntary pollution abatement:
 firms seek to avoid future regulations (Maxwell et al. 2000)
 firm-regulator bargaining (Segerson and Miceli 1998)
 firm strategy with industry-wide targets (Dawson and Segerson 2008)
• product differentiation and duopoly structure (Arora and Gangopadhyay 
  1995)
Literature examining consumer motivations 
 typically use an impure public goods framework to model consumer       
  preferences (Kotchen 2005 and Kotchen and Moore 2007).
 finds the strongest motivations stem from altruism towards the                
  environment (biocentrism) and towards other individuals (altruism),         
  while the weakest motivation is warm-glow (egoism) (Clark et al.             
  2003 and Kotchen and Moore 2007).
Our framework assumes a standard model of altruism – private provision 
of a pure public good (Bergstrom et al. 1986), but can be easily 
generalized to the impure altruism framework (Andreoni 1990) as 
suggested by empirical evidence (Clark et 
al. 2003 and Kotchen and Moore 2007).
Our model builds upon previous literature by:
 providing a general model of voluntary 
  abatement
 modeling the indirect link between the 
  voluntary market for environmental attributes 
  and the regulated market
 establishing the relationship between mandatory abatement and             
  environmental quality in the presence of altruistically motivated demand 
  for environmental attributes
 comparing optimal levels of regulation between a naïve regulation          
  policy that does not recognize the reaction of the voluntary market to      
  mandatory regulation with an omniscient regulation policy that does        
  recognize the reaction of the voluntary market.
Model Structure
Results and Propositions
Conclusions and Policy 
Implications
There is ample theoretical and empirical evidence that voluntary pollution 
abatement may be demand driven through consumers' altruistic 
preferences for environmental attributes. Demand driven voluntary 
abatement that is altruistically motivated implies that:
• Traditional regulatory policies will be less effective due to the contraction    
  of the voluntary market in response to mandated abatement. 
• Naïve regulatory policies that do not recognize and incorporate the              
  contraction in the voluntary market into the optimal level of mandatory         
  abatement will not maximize social welfare.
• Under pure altruism, the socially optimal level of regulation will be larger     
  than the level of regulation chosen by a naïve policy.
• Under impure altruism, the optimal level of regulation may be larger or        
  smaller than the level chosen by a naïve policy.
References
• Andreoni, J., 1990. “Impure Altruism and Donations to Public Goods: A       
  Theory of Warm-Glow Giving,” Economic Journal, 100, 464-477.
• Arora, S. and S. Gangopadhyay, 1995. “Towards a Theoretical Model of     
  Voluntary Overcompliance,” Journal of Economic Behavior and                    
  Organization, 28, 289-309.
• Bergstrom, T., L. Blume and H. Varian, 1986. “On the Private Provision of   
  Public Goods,” Journal of Public Economics, 29, 25-49.
• Clark, C. F., M. J. Kotchen and M. R. Moore, 2003. “Internal and External   
  Influences on Pro-Environmental Behavior: Participation in a Green             
  Electricity Program,” Journal of Environmental Psychology, 23, 237-246.
• Dawson, N. L. and K. Segerson, 2008. “Voluntary Agreements with             
  Industries: Participation Incentives with Industry-Wide Targets,” Land          
  Economics, 84, 97-114.
• Kotchen, M. J., 2005. “Impure Public Goods and the Comparative Statics    
  of Environmentally Friendly Consumption,” Journal of Environmental           
  Economics and Management, 49, 281-300.
• Kotchen, M. J. and M. R. Moore, 2007. “Private Provision of Environmental 
  Public Goods: Household Participation in Green Electricity Programs,”        
  Journal of Environmental Economics and Management, 53, 1-16.
• Maxwell, J. W., T. P. Lyon and S. C. Heckett, 
  2000. “Self-Regulation and Social Welfare: 
  The Political Economy of Corporate 
  Environmentalism,” Journal of Law and 
  Economics, 43, 583-617.
• Segerson, K. and T. J. Miceli, 1998. “Voluntary
  Environmental Agreements: Good or Bad News 
  for The Environment?” Journal of Environmental
  Economics and Management, 36, 109-130.
• All photos downloaded from google.com.
Demand Side
• Two consumers each with utility given by:
                          Ui = U(Xi,E),    i = 1,2,
• Xi is the numeraire (private) good
• E = Zi + Z-i + E0 is total environmental quality     
  as a function of abatement purchased by           
  individual i, Zi, abatement purchased by others, 
  Z-i, and the background level of environmental  
  quality, E0.
• Both E and Z are pure public goods 
• Budget constraint is: Mi = Xi + PZi where M is    
  income and P is the price of abatement in the   
  voluntary market.
• Consumers purchase the abatement attribute   
  of a bundled product separately – the price       
  premium for the bundled product over                
  traditional products is the price of abatement.
• A Cobb-Douglas example:
    Max Ui = Xi
α(Zi + Z-i + E0)1-α s.t. Mi = Xi + PZi
            Supply Side
• Firm sells abatement attribute in the perfectly         
  competitive private abatement market.
• Firm's cost of abatement is C(Z) = cZ2, c > 0 
• Firm's problem is to choose the quantity of             
  abatement that maximizes profits:
                      Max π(Z) = PZ – cZ2
• The firm's supply curve of abatement: P = 2cZ
 Optimal Regulation
• Since only one consumer voluntarily                  
  purchases abatement, E = Zi + ZR + E0 where    
  ZR is the level of mandated abatement
• The total benefit from regulation is the               
  increase in utility across both consumers           
  (measured in terms of the numeraire) from        
  regulated abatement
• The marginal benefit from regulation is the        
  marginal utility from environmental quality         
  divided by the marginal utility of income 
    MB(ZR) = Σi MBi (ZR) = Σi MUi (ZR) / MUi (Xi)
• The total cost of abatement is the cost of           
  producing both voluntary and mandatory           
  abatement
• The optimal level of regulation is the level of     
  mandatory abatement that equates the              
  marginal benefit from regulation with the            
  marginal cost of regulation:
               ZR
* solves MB(ZR) = MC(ZR) 
       Market Equilibrium
• Equating the consumer's demand curve for            
  abatement with the producer's supply curve yields 
  the voluntary market equilibrium price and              
  quantity of abatement. 
• We assume consumer income is such that only     
  one consumer will choose to purchase abatement 
  in equilibrium (the other consumer free-rides).
1. We show, consistent with other models of altruistic 
preferences, that an increase in the level of environmental 
quality arising from regulation necessarily decreases the 
equilibrium price and quantity of abatement in the voluntary 
market.
• An exogenous (to the consumer) increase in the level of    
  the public good reduces demand for voluntary provision of 
  the public good. Hence, the demand curve in the                
  voluntary market shifts to the left.
2. We show, consistent with 
the assumption that 
abatement is a normal good, 
that an increase in the 
consumer's income increases 
the price and quantity of 
abatement in the voluntary 
market.
• An increase in consumer        
  income shifts the demand       
  curve for abatement in the      
  voluntary market to the right.   
  Hence, the equilibrium price    
  and quantity increase.
3. Mandatory regulation necessarily increases total environmental quality.
• An exogenous increase in the public good arising from mandatory abatement leads to a less 
  than one-for-one crowding out of voluntary contributions (because abatement is a normal      
  good) so total environmental quality increases following regulation.
• Mandatory regulation can always be used to improve total environmental quality 
• The reaction to mandatory abatement coming from the voluntary market dampens the           
  effectiveness of regulation.
• Traditional regulatory policies that ignore the voluntary market will be unable to achieve the   
  targeted level of environmental quality.
4.Under pure altruism, we show that an omniscient regulator who recognizes the reaction 
to mandatory abatement from the voluntary market will choose an optimal level of regulation 
that is higher than a naïve regulator who does not recognize the voluntary market reaction.
• The marginal benefit of regulation is higher in the case of the omniscient regulator,              
  because of the contraction of the voluntary market. Consumers substitute part of their         
  voluntary abatement with mandatory abatement, which means that consumers can              
  reallocate their income away from abatement and towards the numeraire good. The level    
  of environmental quality is maintained from the exogenously provided abatement coming    
  from regulation. 
5. Under impure altruism, the degree of altruism 
governs the degree of the response (contraction) in the 
voluntary market as a response to mandatory abatement. 
• A high degree of altruism implies a larger reaction to       
  regulation, while a low degree of altruism implies a          
  smaller reaction to mandatory abatement.
• The marginal cost is smaller relative to the marginal        
  cost for the naïve regulator who assumes that the            
  voluntary market will not react (which is equivalent to the 
  purely warm glow case, in which there is zero altruism).
• It is not necessarily clear as to whether or not the            
  marginal benefit is larger or smaller relative to the            
  marginal benefit for the naïve regulator.
• The optimal level of regulation may be larger or smaller  
  than the level chosen by a naïve regulator, depending     
  on the differences in the marginal benefit and cost.

Impure Altruism and Donations to Public Goods:

Impure Public Goods and the Comparative Statics of Environmentally Friendly

Internal and External Influences on Pro-Environmental Behavior: Participation in a Green Electricity Program,”

Private Provision of Environmental Public Goods: Household Participation in Green Electricity Programs,”

Self-Regulation and Social Welfare: The Political Economy of Corporate Environmentalism,”

Towards a Theoretical Model of Voluntary Overcompliance,”

Voluntary Agreements with Industries: Participation Incentives with Industry-Wide Targets,”

Voluntary Environmental Agreements: Good or Bad News for The Environment?”

Voluntary Pollution Abatement and Regulation

Voluntary Pollution Abatement and Regulation

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