Pollution of the environment is becoming an increasingly serious problem. A large contributor to this is industry which generates effluent as a by-product of its production process. Two methods of controlling the pollution generated by industry are the so-called â€œcommand and controlâ€ techniques and economic incentives. In theory, economic incentives promise a more economically efficient and equitable means of pollution control. This paper sets out to ascertain whether this would hold in practice by applying environmental economic theory to the practical problem of controlling the effluent generated by one particular industry, viz the South African leather industry.Environmental Economics and Policy,

Antrobus, G.G.

Fraser, Gavin C.G.

Mowat, S.P.

English

Research Papers in Economics

Agrekon, Vol 36, No 1 (December 1997)    Mowat, Antrobus & Fraser 
 
 
  598
THE EFFECTS OF ECONOMIC INCENTIVES IN 
CONTROLLING POLLUTION IN THE SOUTH AFRICAN 
LEATHER INDUSTRY 
 
S.P. Mowat1, G.G. Antrobus2 and G.C.G. Fraser3 
 
 
 
Pollution of the environment is becoming an increasingly serious problem. A large 
contributor to this is industry which generates effluent as a by-product of its production 
process. Two methods of controlling the pollution generated by industry are the so-called 
“command and control” techniques and economic incentives. In theory, economic incentives 
promise a more economically efficient and equitable means of pollution control. This paper 
sets out to ascertain whether this would hold in practice by applying environmental economic 
theory to the practical problem of controlling the effluent generated by one particular 
industry, viz the South African leather industry. 
 
DIE UITWERKING VAN EKONOMIESE INSENTIEWE OP DIE BEHEER VAN 
BESOEDELING IN DIE SUID-AFRIKAANSE LEERBEDRYF 
 
Omgewingsbesoedeling word 'n toenemend ernstige probleem. Een groot bydraer is 
nywerhede wat afvalwater as 'n neweproduk van die produksieproses genereer.  Twee 
metodes waardeur die besoedeling deur nywerhede gegenereer beheer kan word is die 
sogenaamde "beveel en beheer" tegnieke en ekonomiese insentiewe.  In teorie beloof 
ekonomiese insentiewe om ekonomies meer doeltreffend en ewewigtige metodes van 
besoedelingsbeheer te wees. Hierdie referaat poog om te bepaal of dit in die praktyk waar sal 
wees deur omgewings-ekonomie teorie toe te pas op die praktiese probleem van beheer van die 
afvalwater wat deur een besondere bedryf, nl. die Suid-Afrikaanse leerbeeryf gegenereer word. 
 
1. INTRODUCTION 
 
The leather industry is important to both the South African economy as a 
whole and to the agricultural sector in particular by utilising a by-product of 
livestock farming namely the skins and hides of slaughtered animals. 
However, a potential problem facing the South African leather industry, and 
one that has already confronted similar industries in the developed regions of 
Europe and the United States, is the threat of forced closure due to the 
environmental damage caused by the effluent generated by the leather 
                                                           
1  Lecturer, Department of Economics and Economic History, Rhodes University, East 
London 
2  Professor, Department of Economics and Economic History, Rhodes University, 
Grahamstown 
3  Senior Lecturer, Department of Agricultural Economics, University of Fort Hare, Alice Agrekon, Vol 36, No 1 (December 1997)    Mowat, Antrobus & Fraser 
 
 
  599
industry’s production process. This has already lead to a number of firms 
having to close down in the above mentioned regions (Jackson-Moss, 1995; 
Rose, 1995). 
 
Environmental economic theory claims that the most economically efficient 
and equitable means of reducing pollution to some predetermined level is 
through the use of economic incentives as opposed to the so-called “command 
and control” techniques (Seneca & Taussig, 1974; Baumol & Oates, 1988; 
Pearce & Turner, 1991). By equitable is meant that the cost of the externality 
caused by the production of a good be borne by the producers and consumers 
of the product. 
 
The aim of the paper is to investigate the promise offered by environmental 
economic theory by applying the theory to a practical situation, viz controlling 
the effluent generated by the leather industry to some predetermined level. It 
must, however, be noted that this study looks at two hypothetical leather 
firms discharging effluent into a body of water. It does not, therefore, take 
into account the interaction, especially in terms of the trading of market 
permits, amongst all firms in all industries. It does, however, give a realistic 
look at the practical application of the theory by using real data on the actual 
cost and reduction in effluent strength. 
 
2.  ECONOMIC THEORY OF POLLUTION CONTROL 
 
There are a number of ways of controlling pollution. These include moral 
suasion, education, environmental bonds, command and control techniques 
and economic incentives. 
 
Controlling pollution by making use of command and control methods 
involves directives to individual decision makers prohibiting them from 
exceeding some specified level  (Baumol & Oates, 1988). There are 
disadvantages in using command and control measures. Firstly, they are not 
an economically efficient means of pollution control because, if all firms, 
regardless of their individual cost of control, are required to limit pollution by 
the same amount, the pollution reduction will not be done at a minimum cost 
to society. Furthermore, polluters are not allowed the freedom to decide how 
best to control the pollution they cause. Secondly, they are not an equitable 
means of pollution control because the burden of research and development 
costs into new technology lies with the State rather than with the polluter. 
 
An alternative to command and control techniques in controlling pollution is 
the use of economic incentives. “Economic incentives attach a cost which is Agrekon, Vol 36, No 1 (December 1997)    Mowat, Antrobus & Fraser 
 
 
  600
determined either by the authorities or the market, to polluting activities. This 
cost is related to damages suffered as a result of the externalities resulting 
from the acting parties’ activities” (Stauth & Baskind, 1992). There are a 
number of advantages in using economic incentives instead of command and 
control methods to protect the environment. Economic incentives can be 
shown to be more economically efficient. They do not interfere directly in the 
internal operations of entrepreneurs and greater flexibility is allowed in 
meeting environmental objectives. Most importantly, firms for whom the cost 
of limiting environmentally damaging activities is lowest will do so first or to 
a greater degree than those whose cost of controlling pollution is greater. 
 
3. DATA  DESCRIPTION 
 
The most difficult aspect of this study proved to be that of obtaining data on 
the leather firms’ costs of treatment. Although data was sought from a 
number of firms it was found that all only had a vague idea of what their total 
costs of treatment are. This necessitated using treatment processes of two 
hypothetical firms cited in “A guide to wastewater management in the 
tanning and fellmongering industries” (WRC, 1987). The firms, a fellmongery 
and a chrome tannery, were chosen both because a detailed outline of the 
treatment process and the reduction of the effluent strength after each stage is 
provided. The treatment process above was broken down into its various 
components. Quotations on the cost of the mechanical components were 
obtained from a commercial supplier of plant items. The civil costs are based 
on estimates from a civil engineer. All other costs are based on estimates from 
the Leather Industries Research Institute (L.I.R.I.). 
 
The costs of the two firms and the reduction of effluent strength after each 
stage of treatment can be summarised as follows:4 
 
Table 1:  Total abatement costs and effluent strengths of firms 1 and 2. 
 
Stage Firm  1 
(TAC) (R) 
Firm 2 
(TAC) (R) 
Effluent Strength 1 
COD (kg) 
Effluent Strength 2 
COD (kg) 
0 103,84  120,96  4500  4800 
1 183,43  233,05  3550  3376 
2 402,29  545,82  2336  3220 
3 837,83  1  144,20  630  960 
 
                                                           
4  See Mowat, 1996 for full details of the derivation of these costs Agrekon, Vol 36, No 1 (December 1997)    Mowat, Antrobus & Fraser 
 
 
  601
The above data may then be used to derive the Total and Marginal Abatement 
Cost curves for the respective firms. 
 
4.  PRACTICAL APPLICATION OF ECONOMIC THEORY TO 
POLLUTION CONTROL 
 
Before applying the data to the environmental economic theory, a number of 
assumptions need to be made, viz: 
 
1.  the two firms make up the leather industry; 
 
2.  the strength of the effluent is measured by its chemical oxygen demand 
(COD). There may be other pollutants present in the effluent but they 
are not taken into account; 
 
3.  the predetermined maximum level of effluent that can be discharged 
each day is 5 850 kilograms of COD; and if the cost of the treatment is 
the same as a charge or the price of a permit, firms will prefer to treat. 
(The need for this assumption is to avoid the problem of an 
indeterminate equilibrium which arises from the “stepped” nature of 
the marginal abatement cost (MAC) curves). 
 
Where a standard for compliance is initiated, the regulating authority informs 
the firms of the appropriate reduction in pollution to meet the standard. If all 
firms are required to limit pollution by the same amount, the pollution 
reduction will not be done at a minimum cost to society. Assume, (derived 
from the data presented in table 1), that the regulator states that the overall 
strength of the effluent must be reduced to 5 850 kg of COD and therefore 
commands each firm to cut their effluent strength to 2 925 kg. The cost of the 
economy as a whole would be the cost to firm 1 plus the cost to firm 2 of 
cutting their respective effluent strengths to the stipulated levels. Firm 1 
would have to undertake stages 1 and 2 of its treatment process and firm 2 
would need to do all three stages of treatment. The overall cost of using 
standards to achieve the predetermined level of effluent strength would be R1 
546; R402 for firm 1 and R1 144 for firm 2. 
 
The imposition of taxes or the payment of subsidies to reduce the levels of 
pollution leads to the same outcome. The use of taxes or subsidies is a lower 
cost solution to the abatement problem than the use of standards. If the 
regulating authority wants to obtain the same overall optimal level of effluent 
as under a system of standards and assuming they have perfect knowledge of 
the relevant cost functions, the authority sets a charge (or offers a subsidy) of Agrekon, Vol 36, No 1 (December 1997)    Mowat, Antrobus & Fraser 
 
 
  602
18,03 cents per kilogram of COD discharged (or not discharged). Both firms 
should treat until the MAC of treatment equal the charge or subsidy. 
Therefore firm 1 will respond by undertaking stages 1 and 2 and thereby 
reducing the strength of its effluent by 2 164 kg to 2 336 kg. Firm 2 would only 
undertake stage 1 and reduce the strength by 1 424 kg to 3 376 kg. The overall 
strength is therefore 5 712 kg which is within the desired level of effluent 
strength. The cost of achieving the standard under a system of charges or 
subsidies has been firm 1’s treatment cost of R402 plus firm 2’s cost of R233 
for a total cost of R635. 
 
Theory maintains that the use of marketable permits will lead to the same 
least cost solution to controlling pollution as charges or subsidies. It should be 
noted that the assumption that the regulating authorities have perfect 
knowledge of the firms relative cost functions is highly unlikely to hold in 
practice. The consequence of this would be that the charge would have to be 
set on a trial and error basis. This process is not costless. Marketable permits, 
however, have the advantage of reducing the uncertainty and adjustment 
costs found in setting charges and subsidies. 
 
The regulating authority can directly restrict the strength of the effluent by the 
number of permits it issues. To reduce the effluent to the same optimal 
strength it would therefore issue 5 850 permits (each permit would allow the 
holder to discharge 1 kg of COD per day) Given that the sum of the MAC 
curves is the industry demand curve for permits and that the authorities 
supply 5 850 permits, the price per permit would be 18,03 cents. At this price 
the firms would act in the same manner as they would under a system of 
charges or subsidies. Polluters with high abatement costs (firm 2) will prefer 
to buy permits while low abatement cost firms (firm 1) will prefer to sell 
permits in favour of abatement. 
 
While it can be seen that the actual c o s t  o f  r e d u c i n g  p o l l u t i o n  t o  a  
predetermined level is the same for charges, subsidies and marketable 
permits, it could be argued that the latter are the most economically efficient. 
The reason for this is because they do not include the costs of trying to set a 
charge or subsidy on a trial and error basis. This method of setting a charge 
would be even more costly than the theory envisages, given the ‘stepped’ 
nature of the MAC curves. Furthermore, marketable permits also take into 
account economic growth and inflation, automatically adjust to new entrants 
and allow standards to be varied with comparative ease. 
 Agrekon, Vol 36, No 1 (December 1997)    Mowat, Antrobus & Fraser 
 
 
  603
5. CONCLUSIONS 
 
While this study is narrow in scope, it is encouraging in so much as it would 
seem, in this particular application, to confirm the theoretical promise that 
economic incentives are the least cost solution to the abatement problem, 
when compared to a system of standards. Furthermore, it suggests that 
market permits, because of their lack of search costs, are the most 
economically efficient of the economic incentives looked at. It would 
nonetheless be necessary to do more research in this field as the theory is not 
tailor made for all practical situations. Further evidence of the viability of 
economic incentives could, however, encourage wider use by policy makers. 
 
REFERENCES 
 
BAUMOL, W.J. & OATES, W.E. (1988). The theory of environmental policy (2nd). 
New York : Cambridge University Press. 
 
JACKSON-MOSS, C.A. (1995). Personal communication. Deputy Director: 
Administration, L.I.R.I. Technologies, Grahamstown. 
 
MOWAT, S.P. (1996). Economic incentives in controlling pollution in the South 
African leather industry. Unpublished M Soc Sc thesis, Rhodes University, 
Grahamstown. 
 
PEARCE, D.W. & TURNER, R.K. (1991). Economics of natural resources and the 
environment. Baltimore : The Johns Hopkins University Press. 
 
ROSE, P.D. (1995). Personal communication. Director, L.I.R.I. Technologies, 
Grahamstown. 
 
SENECA, J.J. & TAUSSIG, M.K. (1974). Environmental economics. Englewood 
Cliffs, New Jersey : Prentice-Hall. 
 
STAUTH, R.B. & BASKIND, P.H. (1992). Resource economics. In R.F. Fuggle 
and M.A. Rabie (eds), Environmental management in South Africa. Cape Town: 
Juta. 
 
WRC. (1987). A guide to wastewater management in the tanning and fellmongering 
industries. Report 41, Pretoria : Water Research Commission. 
 
 

A guide to wastewater management in the tanning and fellmongering industries. Report 41, Pretoria : Water Research Commission.

Economic incentives in controlling pollution in the South African leather industry. Unpublished M Soc Sc thesis,

Economics of natural resources and the environment. Baltimore : The Johns Hopkins

Environmental economics. Englewood Cliffs,

Resource economics.

The theory of environmental policy (2nd). New York :

The effects of economic incentives in controlling pollution in the South African Leather Industry

The effects of economic incentives in controlling pollution in the South African Leather Industry

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics