How much pollution should society allow? We learned in Chapter 9 that “how much” decisions always involve comparing the marginal benefit from an additional unit of something with the marginal cost of that additional unit. The same is true of pollution.

The marginal social cost of pollution is the additional cost imposed on society as a whole by an additional unit of pollution.

For example, sulfur dioxide from coal-fired power plants mixes with rainwater to form acid rain, which damages fisheries, crops, and forests, while groundwater contamination, which may be a side effect of fracking, damages health. Typically, the marginal social cost of pollution is increasing—each additional unit of pollution emitted causes a greater level of damage than the unit before. That’s because nature can often safely handle low levels of pollution but is increasingly harmed as pollution reaches higher levels.

The marginal social benefit of pollution is the benefit to society from an additional unit of pollution. This may seem like a confusing concept—how can there be any benefit to society from pollution? The answer lies in the understanding that pollution can be reduced—but at a cost. For example, air pollution from coal-fired power plants can be reduced by using more-expensive coal and expensive scrubbing technology; contamination of drinking water due to fracking can be limited with more-expensive drilling techniques; wastewater contamination of rivers and oceans can be reduced by building water treatment facilities.

All these methods of reducing pollution have an opportunity cost. That is, avoiding pollution requires using scarce resources that could have been employed to produce other goods and services. So the marginal social benefit of pollution is the goods and services that could be had by society if it tolerated another unit of pollution.

Comparisons between the pollution levels tolerated in rich and poor countries illustrate the importance of the level of the marginal social benefit of pollution in deciding how much pollution a society wishes to tolerate. Because poor countries have a higher opportunity cost of resources spent on reducing pollution than richer countries, they tolerate higher levels of pollution. For example, the World Health Organization has estimated that 3.5 million people in poor countries die prematurely from breathing polluted indoor air caused by burning dirty fuels like wood, dung, and coal to heat and cook—a situation that residents of rich countries can afford to avoid.

Using hypothetical numbers, Figure 16-1 shows how we can determine the socially optimal quantity of pollution—the quantity of pollution society would choose if all the social costs and benefits were fully accounted for. The upward-sloping marginal social cost curve, MSC, shows how the marginal cost to society of an additional unit of pollution varies with the quantity of pollution. As we mentioned, marginal social cost of pollution is typically increasing, as another unit of pollution causes more harm than prior units. The marginal social benefit curve, MSB, is downward sloping. At high levels of pollution, the cost of achieving a reduction in pollution is fairly small. However, as pollution levels drop, it becomes progressively more costly to engineer a further fall in pollution as more expensive techniques must be used, so the MSB is higher at lower levels of pollution..

The socially optimal quantity of pollution in this example isn’t zero. It’s Q_OPT, the quantity corresponding to point O, where MSB crosses MSC. At Q_OPT, the marginal social benefit from an additional unit of pollution and its marginal social cost are equalized at $200.

But will a market economy, left to itself, arrive at the socially optimal quantity of pollution? No, it won’t.