Cost-Effective and Stochastic Dominance Approaches to Stochastic Pollution Control

Most economic studies of pollution externalities focus on the relative efficiency or cost-effectiveness of alternative pollution control instruments. Much less attention has been paid to policy goals and objectives. However, a comprehensive pollution control strategy depends on all of these choices. This paper examines several efficiency properties of cost-effective pollution control strategies in a stochastic setting when economic damages from pollution are unknown. A number of policy goals are considered. In this setting and under a primal approach, it is found that certain stochastic dominance conditions must be satisfied for the strategies to exhibit desirable efficiency properties. A dual approach to cost-effective pollution control, which is based on a stochastic dominance objective, is also considered.