The allocative efficiency implications of water pollution abatement cost comparisons

Assessments of the efficiency of water pollution control allocations are usually based on abatement cost comparisons. The general rule is that efficiency is improved by reallocating abatement from sources with high marginal costs to low‐cost sources. The welfare‐theoretic foundation of this rule is well established for situations with nonstochastic emissions. In situations with stochastic emissions, pollution control involves improving the distribution of emissions. Nevertheless, efficiency analyses involving stochastic emissions usually sidestep formal consideration of the stochastic element by measuring pollution control and control costs with respect to changes in long‐term average flows. An economic model of stochastic emissions is used to demonstrate that this approach can give misleading results. An alternative procedure is briefly discussed.