The Cost of Improving the Quality of the Environment

Abstract

The analysis in this paper is directed at comparing the relative effectiveness of two different methods of meeting the Bush Administration's goals outlined in the Clean Air Plan. The analytical vehicle used in the analysis consists of a computable general equilibrium model composed of twelve producing sectors, thirteen consuming sectors, six household categories classified by income, a foreign sector, and a government. First, it is found that irrespective of what type of strategy is followed to improve environmental quality, both output and consumption decline as does household utility. Hence, there is a quantifiable trade-off between economic activity (economic growth) and the quality of the environment. Beyond this, the aggregate loss in production and economic welfare (measured by consumption expenditures and utility) is less under a policy which stresses reliance on alternative fuels (brought about by taxation) than through one that requires the installation of pollution-abatement devices (that is, regulation).