Environmental Policy Comparison Under Various Potential Forms of Health Response Function

This study is concerned with health damages from SO2 under different assumptions on the relationship between air concentrations and their marginal health impacts. SO2 concentration profiles resulting under emission caps, and a system of tradable emission allowances are compared. Using slopes and curvatures of the health response function consistent with evidence in medical literature, emission caps are shown to lead to lower aggregate damages under all considered parameters, an advantage of $26-452 million. The benefit of emission caps over tradable allowances increases with the curvature of the response function, but falls with its slope. The advantage of emission caps in terms of environmental damages is never overturned completely for the considered functional forms. The marginal damage function would have to be steeper than what the current medical evidence suggests for price instruments to outperform emission caps in terms of aggregate damages. With other welfare consequences included – emission abatement costs, consumer and producer surpluses, and government revenue – emission caps always lead to a $3.7-4.1 billion greater measure of social welfare