The supply and demand for pollution control: Evidence from wastewater treatment

This paper analyzes the determination of pollution control from wastewater treatment plants as an economic decision facing local or regional regulators. Pollution control is measured by plant design effluent concentration levels and is fully endogenous in a supply- and-demand model of treatment choice. On the supply side, plant costs are a function of the design treatment level of the plant, and on the demand side, treatment level is a function of both the costs of control and the regional or regulatory preferences for control. We find evidence that the economic model of effluent choice by local regulators has a good deal of explanatory power. We find evidence that wastewater treatment plant removal of biological oxygen demand (BOD) is sensitive to many local factors including the size of the treatment plant, the flow rate of the receiving water, the population density of the surrounding area, regional growth, state sensitivity to environmental issues, state income, and the extent to which the damages from pollution fall on other states. We find strong evidence that regulators are sensitive to capital costs in determining the design level of BOD effluent reduction at a plant. Thus, proposed reductions in federal subsidies for wastewater treatment plant construction are likely to have significant adverse effects on water quality.