Friday, September 26, 2008

Environmental Risk & Perchlorate

The EPA has announced that they will not be creating any standards for cleaning our drinking water from perchlorate - a toxic chemical found in rocket fuel, fireworks, road flares and fertilizer. This has set off a large reaction by politicians and environmentalists about the safety of our drinking water and how one part of the government is influencing the EPA. Some scientific research has shown that perchlorate is a developmental health risk for babies and fetuses, and interferes with thyroid functions.

One of the ideas I discuss in the Environmental & Natural Resource Economics course is Environmental Risk, and the factors that go into determining if an environmental risk is sufficient enough to warrant action by the government. Determining if action is needed is based on the costs of reducing the level of perchlorate compared to the benefits of reducing perchlorate in the drinking water. If the costs of reducing perchlorate are greater than the benefits, then the risk management strategy to follow is to not reduce the level of perchlorate in drinking water.

Without the data from the report, let's think about this as a thought exercise. The costs would be the costs to water sanitation/purification plants (which are mostly regulated here in the United States) and many of these costs can be passed on to drinking water customers. The benefits would be the reduction in developmental health risks and the health effects of thyroid functions. So from societies viewpoint, what are the benefits of reducing developmental health risks to babies and what are the benefits of reducing thyroid functions? If these benefits are smaller than the costs then not imposing stricter regulations is the appropriate (from a benefit-cost perspective) decision.

What if users of products with perchlorate were to pay (either in terms of fines to those injured from previous pollution - say through the courts) or to have current users pay higher prices for fireworks or fertilizer due to a tax on those products? The tax is what is usually referred to in economics as a Pigouvian tax. While the overall level of previous pollution will unlikely be affected since a court fine is a fixed cost, the current users have a greater incentive to use fireworks or fertilizer that has lower (or no) levels of perchlorate since these prices would be lower as compared to current products with taxing perchlorate.

If the tax could be set equal to the marginal pollution cost from current consumption of perchlorate products, then in terms of maximum net social benefits, this would give the efficient allocation of this pollutant.

What do you think?

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