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Water Pollution*

 Types of Water Pollution

Water Pollution is usually categorized as either being Point Source or Non-point Source.

Point source water pollution is defined as emissions which enter water bodies from an easy-to-identify single source, such as a pipe from a factory or the outfall from a sewage works” (Hanley 239). 

Non-point source water pollution is defined as "[pollution that] is caused by rainfall or snowmelt moving over and through the ground.  As the runoff moves, it picks up and carries away natural and human-made pollutants, finally depositing them into lakes, rivers, wetlands, coastal waters, and even our underground sources of drinking water" (Pollution Runoff). 


Reducing Water Pollution

The United States government created the Environmental Protection Agency (EPA) in its present form in 1972 to address these and other negative externalities that affect both people and the environment. 

For the most part, they have implemented traditional command-and-control policies to reduce the level of water pollution.  This can be done by limiting the type of inputs allowed for production, monitoring the production process, and by monitoring the actual emissions.  

Another option that is available is the use of voluntary policies.  This gives firms the option to reduce pollution on their own. Firms can utilize their own research and development to find the most cost-effective way to reduce pollution to the desired range.  This will usually only happen if there is a threat of regulation later. 


In addition to the regulatory policies and the voluntary options, the EPA has three basic economic tools that they could utilize in their policies to reduce water pollution. They are as follows:

  • Taxes - These taxes are placed on the polluting firms themselves, or on the units of pollution emitted.  It is often the case that the consumers of industries that pollute also incur part of the tax.  To illustrate a tax on pollution emitted, assume an automobile plant is located on a river.  The government's monitoring agency is aware of the pollution and monthly collects a sample of the water in the river to test the level of pollution discharged from the plant.  For every "X" amount of chemicals present, the firm must pay "Y" to the government.  These costs can be budgeted into the firm's expenses creating a high price tag on the automobiles they sell.          
  • Subsidies - A firm could actually receive payment from the regulatory agency if the pollution levels in the affected water bodies stay at or below the desired amount.   An example might be seen in a community of dairy farmers.  It could be difficult to identify the specific polluter responsible for the nitrate pollution from cow manure in the near by water body.  With a subsidy program in place, all farmers have an incentive to decrease their waste to obtain the financial benefit of the subsidy.
  • Tradable Pollution Permits - Firms would trade permits as long as two elements are observed. 1. The buying firm’s cost of reducing pollution is more than the cost of the permit. 2. The selling firm's cost of abatement is less than the price of the permit. The following example might help to describe this idea. 

Even with all of these economic incentives available, "regulation through design standards and performance standards dominates water pollution control policy"(Hanley, 251).

Information Sources:

"Pollution Runoff (Nonpoint Source Pollution)." U.S. Environmental Protection Agency. 29 Nov. 2006. April 2007.

* Unless otherwise noted, the information in this section was summarized during a study of the following text: Hanley, Nick, and Jason F. Shogren and Ben White. Introduction to Environmental Economics. New York: Oxford University Press, 2001.

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