ABSTRACT
Industrial pollution as a negative externality is one of the major environmental problems in India, affecting especially the water resources that generate multiple benefits to both households and firms. If industrial pollution in an ill-specified policy environment is directly proportional to the level of industrial output, then any attempt to increase the latter would correspondingly raise the social costs of pollution – in most cases, non-linearly. This has larger welfare implications: the welfare loss would be much worse in developing countries where the standard of living of a larger labour force is determined by the growing industrial output level (Solow 2009). In other words, there is a ‘trade-off’ between social benefits and social costs of controlling pollution and in most cases; these benefits and costs affect diverse economic agents differently. Therefore, ‘how much to pollute’ becomes a normative question in any pollution control policy effort in a social welfare maximizing context. In technical terms, this determines at what pollution level a socially optimal, Pareto efficient equilibrium between gains and losses from it can be achieved in an economy. The standard Pigouvian solution suggests that an efficient level of pollution is the one at which the marginal social benefits are equal to the marginal social costs provided all the social costs and benefits are measurable in monetary terms (Pigou 1932).
