Economics and the Environment, 8th Edition

CHAPTER 6Measuring the Costs of Environmental Protection

6.0 Introduction

When the Environmental Protection Agency (EPA) tightened the national air-quality standard for smog (ground-level ozone), the agency developed official cost estimates for this regulation, ranging from $600 million to $2.5 billion per year. Where do numbers such as this come from?¹

On the face of it, measuring the costs associated with environmental cleanup appears substantially easier than measuring the benefits. One can simply add up all the expected expenditures by firms on pollution-control equipment and personnel, plus local, state, and federal government expenditures on regulatory efforts, including the drafting, monitoring, and enforcing of regulations. This engineering approach to measuring cost is by far the most widespread method in use.

However, because engineering cost estimates are often predicted costs, they require making assumptions about future behavior. For example, cost estimates may assume full compliance with pollution laws or assume that firms will adopt a particular type of pollution-control technology to meet the standards. To the extent that these assumptions fail to accurately foresee the future, engineering cost estimates may be misleading on their own terms. In a famous case of getting it wrong, the EPA overestimated the costs of sulfur dioxide control by a factor of two to four; “credible” industry estimates were eight times too high.²

Moreover, from the economic point of view, ...