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Economics 467 B1: Soil Pollution in China Timothy Lau 1444107


Notorious for its smog in Beijing, it is but one of the many environmental issues that China faces;

one of the deceivingly subtle yet extremely damaging – and arguably the most pressing – of these

problems is its soil pollution. A tainted piece of land can be as green as a healthy one. Soil

contamination is often found in developing– and recently developed – countries where a lot of

farmland, industry, and mining can be found. As such, the presence of pollutants such as heavy

metals in the ground are high in concentration. China is no exception; after the past century of

heavy industrialization to drastically speed up its economy, China is not lacking in any of these

categories. Heavy metals, like cadmium, lead, and arsenic, are released from factories into the

ground which are then leaked into the nearby farmlands. Soil pollution is also caused by redundant

use of chemicals such as –cides – pesticides and herbicides among the many – and fertilizers. In

China’s case, the soil situation is dire. Not only is the contamination widespread, it is extreme;

officials say that the pollution in nearly 15% of the polluted land is so severe that no agriculture

should be allowed on it.

Literature Review

While Chinese soil pollution is nothing new, it is an increasingly pressuring situation. Even though

the official authorities have failed to recognize the urgent nature of the situation until recently,

there have already been many books, papers, and news articles published on the effects of the

problem and potential ways to solve it. In 2017, the Economist wrote an article on the situation,

stating that the contamination was already extremely widespread. According to a government

survey in 2014, “16.1% of all soil and 19.4% of farmland was contaminated by organic and

inorganic pollutants and metals such as lead, cadmium, and arsenic” (Economist, 2017). To put

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

things into perspective, that is about 250 000 square kilometers of land – approximately equivalent

to all of the farmland in Mexico. 40% of the affected land was found to have heavy metal

contaminants. The pollutants have already started to enter the food chain; “extensive sampling of

edible crops have been conducted…and heavy metal contamination of crops was assessed…heavy

pollution of lead, cadmium, and chromium were found” in which “36 crops from 41 were heavily

polluted with heavy metals” (Li, 2011).

What is in common with most of these articles was that, until recently, pollution has been mostly

overlooked in China. Some attribute it to neglect, while others blame it on China’s political system;

“because China is centrally planned, the policies are not always focused on the conditions and

requirements of the individual areas” (Delang, 2017). Delang goes into several suggestions in

dealing with the soil pollution in China; he proposes that the laws be more stringent, introduction

of better, greener technology, and additional funding. He blames the Chinese government for their

lack of initiative on creating and enforcing their laws, the lack of laws in general, as well as the

inefficiencies that come from the lack of incentives of invoking the laws. However, his

recommendations are general at best, and have already been planned out by the Chinese since


While Delang’s solutions leave some to be desired, he does shed some light behind the challenges

that the Chinese government faces. The biggest hurdle facing the Chinese is political discourse.

He notes that “disagreements between local governments” are a huge reason why soil pollution

requires “an overarching national approach.” However, with soil pollution, it fundamentally

Other papers have only recommended “economical” scientific methods, and not economic methods to control
the market; this is because soil pollution cannot simply be solved by controlling emission levels.

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

accumulates without dispersion; as such, different concentrations of heavy metals in different areas

would be dealt with better by their respective local authorities due to their extensive knowledge of

their land – though the question of if Chinese local authorities would deal with it at all is in itself

another problem. Many of these smaller governments “do not give soil quality sufficient

consideration” (Delang, 2017). This is a big trade-off between this issue and the previous one.

While the Chinese government can offer a firm guiding hand in soil remediation, they are also

prone to promote nationwide policies that have no regard to “regional anomalies”, which result in

an inefficient use of resources – at worst, there is a local failure of the policy. In addition, an

economic policy regarding the regulation of these firms may cause them to simply move to another

location with less stringent laws. Because many of China's manufacturing industries provide much

of the local government’s revenue, they are incentivized to act against the interests of the federal

government. Furthermore, “soil pollution” is just an umbrella term. It includes heavy metals,

volatile organic compounds, persistent organic pollutants, and more, all mixed together. Each of

these have different techniques of decontamination. While the Chinese have been able to overcome

some of these technical barriers, their methods are completely economically unviable, which will

be discussed later.

Effects of Soil Pollution

Soil pollution presents a myriad of problems: health related, environmentally related, and

economically related. While smog has quick-moving, visible drastic effects such as respiratory

issues, soil contamination is less noticeable and less forgiving. Heavy metal toxins cannot be

cleansed by the body; when ingested, they will slowly accumulate over time. High concentrations

of consumption – which is inevitable due to bioaccumulation – will cause joint and bone disease

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

with the potential to develop into cancer. Among other symptoms, they are also likely to cause

neuromuscular blockage, reduced central nervous system function, and developmental damage in


Accumulation of pollution in the soil also causes a number of environmental problems. High heavy

metal concentrations causes soil erosion and loss of natural nutrients, reducing the ability of the

soil to support plant life. Furthermore, these contaminants have the potential to create water

pollution if the compounds in the soil leach into ground water or if run off, which contains heavy

metals and –cides, reaches other water sources. Soil also “naturally releases volatile compounds

into the atmosphere” through ammonia volatilization3 and denitrification4; the air pollution caused

by the soil is proportionate to the toxic content in the soil itself5. Large quantities of nitrogen and

sulfur composites including sulfur dioxide are released into the atmosphere which causes acid rain.

This becomes a vicious cycle: the acidic rain will cause acidic soils, which harms micro-organisms,

and disrupts soil chemistry, reducing plant ability to absorb nutrients. Moreover, plants that are

able to absorb what little nutrients they can also absorb contaminants, which in turn passes on the

poisonous compounds up the food chain; exposed animals, including humans, will also experience

the wide range of effects, increasing mortality rates and the potential of animal extinction. Large

– if not whole – portions of ecosystems would be harmed.

Economically, soil pollution harms a lot of agriculture. In China’s case, this is an incredibly large

problem. Not only do they have to feed a large and persistently increasing population, a large

Victims of the Love Canal disaster in New York were found to have precursor symptoms of leukemia. 33% of the
population were found to have chromosomal damage (typically 1% in a regular population).
Nitrogen in the soil changes easily; some forms changes to ammonia gas and is subsequently released into the
Nitrates reduced and ultimately produces nitrogen in its N2 form.
Note that air emissions are also a direct causation of soil pollution.

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

portion of their GDP is from agriculture. Coupled with the decrease in arable land as a result of

urbanization and soil pollution, contaminants in the soil interferes with plant life; in 2006, the

Chinese ministry of environmental protection said that “its grain yields had fallen by 10 million

tonnes” (Economist, 2017). This economic problem is exacerbated if human quality of life is

considered. A report from the China Economic Weekly “estimates that the theoretical economic

losses from [discarding] contaminated rice could be as much as $3 billion a year.” However, due

to the high standardized screening costs and the economic losses from discarding the rice itself,

the contaminated rice is likely to stay in the supply chain. In 2002, it was found that, in a

nationwide inspection directed by the Chinese ministry of agriculture, 28% of the samples of rice

taken had excess lead and 10% had excess cadmium (Economist, 2017). This problem itself is a

self-perpetuating cycle, a positive feedback loop: as the population – and therefore demand for

rice – increases, the use of –cides and fertilizers also increase. Be that as it may, there are little to

no policies pertaining to planting rice in polluted areas, and thus the rice is distributed and

consumed throughout China and the world. Because the situation has become so critical, the people

are worried about the quality of their food. As a result, “China is forced to import food from other

countries” (Delang, 2017), resulting in money taken out of the government budget.

The side effects of this type of poison is not its only problem. Soil pollution is extremely hard to

get rid of; out of air, water, and soil, soil is probably the hardest to remedy. As compared to air or

water pollution, which, with enough money and effort, may take years or decades to clean up, soil

toxins will last centuries underground. It is also extremely expensive per square unit of land to

clean; it cost the American government 21 years and over $400 million from the Superfund Act6

also known as the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

to clean a 6.5 hectare piece of land7 in New York. Similarly, it cost the British government about

$3900 per square metre to treat its soil with bacteria in order to get ready for the 2012 Olympics.

In theory, it would cost the Chinese over $1 trillion to clean its 250 000 square kilometres of

polluted soil using the method the British used. Besides the fact that China does not have a large

sum of money to put into this problem, with China’s level of contamination, simply pouring money

into the problem like New York’s “superfund” is just economically unviable.

Current Policies

In order to combat its dire situation, China has resorted to a “jack of all trades” kind of response.

In 2014, the government made its regulations and penalties on polluters stricter. In 2015, they

created a ten-point plan, nicknamed the “Soil Ten Plan”,8 with the aim of reducing worsening soil

contamination, making 90% of the polluted land safe to use by 2020, and controlling pollution

risks, raising the percentage of safe to use land to 95%, by 2030. However, most of the plan

indicates that the government plans to assess the situation until 2018 and start establishing control

laws by 2020. Due to the severity of the situation – not to mention the hard-to-treat nature of this

toxin – many experts see this as a “sensible, realistic timeframe (China Water Risk, 2016).”

To ensure that land can be utilized safely by 2020, there are several key public policies within the

Soil Ten Plan that the Chinese government are employing. For industrial pollutants, they have

introduced monitoring and regulations for heavy metals, hoping to reduce its use by 10%. They

also have started to encourage recycling. For agricultural pollution, they are trying to regulate the

use of fertilizers and –cides through local governments so that there will be no increase of its use

Roughly $6100 per square meter
This is the third plan regarding pollution issued by the Chinese following the air pollution plan and the Water Ten

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

by 2020, to equip over 75% of large scale farms with waste handling facilities, and regulate

irrigation water quality to comply with standards. In summary, their plan for 2020 is to identify

different soil types and create steps to remediate soil quality for each one. They are also currently

creating legislature that will define who is responsible for the soil pollution in the past and integrate

the “polluter pays” principle into Chinese law.

Scientifically, China has been working on several projects to deal with this debacle. It has tried

using chemicals to reduce the effects of the heavy metals in the soil, as well as experimenting with

growing poplar and willow trees, which absorb heavy metals from the fields. They also have tried

to breed a variety of rice that absorbs less contaminants in order to try and reduce cadmium

consumption. Many of these scientific approaches to the problem has been met with disappointing

results. Using chemicals in order to neutralize contaminants has little effect, and has the additional

complication of adding more unnecessary chemicals into an already polluted system. The tree

method works well but renders the fields unusable for a long time – for a country struggling with

feeding its population, this is unacceptable. And while the rice hybrid does decrease consumption

of heavy metals, it significantly lowers the yield of the crop – which not only brings back the

problem of feeding the population, but also hurts the farmers economically as well.

As for the population itself, many farmers and non-governmental organizations have tried to use

the legal approach in order to try and stop the large firms from contributing to the pollution of the


Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

All in all, the Chinese government is still in the observing stage of their fight against soil pollution.

As such, there have not been many solidified policies put in place – the Chinese seem to be trying

a little bit of everything in order to test out the waters and see what works.

Policy Evaluation

As many of the people who took the judicial approach found out, their cases in court did not go

well. Because courts in China favour large firms, not only do the plaintiffs have to prove burden

of proof and establish the link between the pollution and the polluter, many of them have to fight

against the bias in China’s heavily politicized judicial system. Coupled with this, which already

causes a very low chance of success for the farmers, the high transaction costs found in legal fees

and the lengthy time requirements of a court case make the private legal method unviable; using

this policy approach would just cost a lot of money and time for practically no chance of success.

Many of the policies in the Soil Ten Plan can be summarized into government regulation of

pollutants. They are also creating a “polluters pay” law, which will probably be in the form of a

tax. Command and Control is a centralized form of approach towards attaining the efficient level

of emissions. The government sets the standards for the quality of medium and sets the level of

emissions it would allow in order to achieve that quality. Then, through legal controls, it specifies

the amount of pollution a firm is allowed to emit. In some cases, regulations are written to specify

how certain activities can be carried out or how much output a firm is allowed to produce. As with

other policies, government intervention comes with its advantages and its disadvantages. While

controls are simple to understand and makes it easier for the government to fine or close down

firms that have infringed on said regulations, this policy comes with many different problems. For

example, it comes with very high costs incurred from information gathering, monitoring, and

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

enforcement costs, incentivizing the government to integrate more lax, inefficient policies to

regulate such as uniform standards. Because, in reality, a spectrum of firms will present a spectrum

of production capabilities and costs, uniform standards are not cost-efficient. The political and

information gathering process that comes along with forming these regulations is also very slow,

allowing further accumulation of pollutants in the soil. Furthermore, these regulations also de-

incentivizes firms to reduce beyond the standards – though, for a country with such centralized

government control like China, this should be less of a problem. One last problem with regulations,

though it is common with every other policy, is the measurement problem – the government must

get the standard emission control levels right or else there would be inefficiencies with pollution

output, leading to the failure for the market to clear.

While they have so many downsides, government regulations are pretty effective policies if the

government is able to get the emission standards right. First of all, emission levels, being controlled

by the government, would be efficient. Any pollution exceeding allocated levels would be fined,

meaning that inefficiencies would be paid for. Because the government is able to set different

standards for different firms, cost inefficient levels of emissions caused by multiple emission

sources can be heavily reduced as long as they do not resort to uniform standards. As solving the

soil pollution problem in China is essential in the survival of their people, the government is

incentivized to use whatever means and effort to remedy their dilemma; as long as the risk of not

spending enough money on information gathering, monitoring, and enforcement or incorporating

poor policies is reduced, the risk of having inefficient levels of pollution is reduced. While this

policy may seem like it requires a lot of conditions to succeed, most of the liability is on the

Chinese government due to their centralistic politics; because most of the firms are controlled by

the government, most of the risks are government based, and, as mentioned before, the government

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

is heavily incentivized to solving their problem. Therefore, they are able to ignore problems such

as the principle agent problem and possibility of a political response by the polluters, making it

easier for them to reduce the risks towards their goals. As a result, government regulations have

the potential of being an extremely useful tool that the Chinese can use.

Another major form of policy the Chinese government is planning on implementing is the “polluter

pays” principle. While it is not codified into law yet, the most likely policy that the Chinese will

be utilizing is in the form of a tax. The tax oriented solution is similar in principle to the Pigouvian

tax; to internalize the externality with a price instrument. With taxes, the polluter faces a new cost

in addition to their production costs. Because these externalities – in how they do not account for

environmental damage – induce prices that are too low, the taxes correct the price system;

emissions taxes are the equivalent of paying for services provided by the environment. With this

policy comes many advantages; first and foremost, it fundamentally incentivizes the creation of

these policies because of the revenue that it generates. This could make up for some of the money

that has been lost from the damages caused by soil pollution, and can go towards further abatement

of the pollution – helping with the enormous task of cleaning up that much land – or social

programs that increase welfare. Generally, this increases the efficiency of the overall economy.

Taxes also allows flexibility in finding the most efficient means of abatement – instead of having

to spend a lot of money trying to gather information on ways to reduce environmental damage,

taxes simultaneously generates data and money. Furthermore, this policy promotes efficiency in

the form of investment in technology. Assuming ceteris paribus, there is a deficit in output supplied,

and therefore firms are incentivized to find better techniques to increase their output. Because of

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

the increased costs, it also encourages better management from firms, meaning that there would

be less risk of having such a disaster happen again in the future.

Because the tax policy increases the marginal production cost of the firm, there is a scale effect

and aggregate output is decreased. While this is good in the sense that emission levels are

unambiguously decreased, the reduction in output will increase prices of good. As such, the burden

of the tax may be shifted onto the consumers. Another ambiguous effect is that it may be a form

of entry barrier, in which the tax discourages entry to the market. While the lack of optimal entry

introduces market failure, the opportunity cost is reduced pollution; because the situation is so dire,

the diminished entry could be better for China in spite of an imperfect market.

There are several distinct disadvantages of taxation to counter its advantages: namely, they are

politically unpopular. It is extremely hard to get introduce taxes in politics for fear that there will

be retaliation. Taxes also have to be constantly monitored and adjusted, as natural fluctuations like

inflation deteriorates the functionality of the tax. And again, as with other policies, there is a cost

in trying to figure out the most efficient level of tax – which, an important note to add, corruption

in politics would most certainly inhibit the goal of reaching efficiency. The political situation in

China remedies some of these disadvantages. For example, because China is communistic, there

are less politics involved in introducing a tax; there is less fear of a political retribution. As long

as obstructive factors do not get in the way, taxes are a very good policing option for China to use.

Most other policies that the government can introduce have intrinsic flaws that hinders progression

towards China’s predicament. For example, performance bonds are a centralized approach – which

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

harmonizes well with China’s preferred policy making – and reduces incentive for polluters to

engage in excessive pollution by shifting burden on proof onto polluters. However, they have a

disadvantage that policy makers cannot simply ignore: the bond applies for emissions over a

specific area of land. If pollution spills over, the policy itself cannot make the firms pay for their

pollution. This diminishes the incentive to reduce pollution and thus abates China’s goal of

contamination control. Another policy that is fundamentally flawed is emission subsidies. Not only

does it go against the “polluters pay” principle, introducing a subsidy would mean increasing

profits for firms, instilling incentive for more polluters to enter the market. Coupled with the

increase in entry, the subsidy reduces production cost, which increases output per firm, resulting

in a large scale effect of increased pollution. Furthermore, there is a moral stipulation that comes

with a subsidy: payments for the subsidy would have to come from the general population – the

victims of the pollution. There are also concerns of a moral hazard in that the government cannot

be sure that the offenders do not keep offending even after they are paid; as such, there are high

monitoring costs that go along with this policy. Because there are these associated extra costs,

coupled with the already extremely high cost of reducing the soil pollution, this policy is

economically unviable for China.

A potential solution to the problems presented by the subsidy and tax programs is to decrease the

emissions baseline below the efficient level of emissions such that the firm pays for each unit of

pollution emitted above said baseline. This is technically a subsidy program with negative

subsidies, and is equivalent to a tax system with rebates equal to baseline paid back to the firm.

This system becomes more like a tax as the baseline approaches zero (and vice versa). As such, it

is able to accommodate for the entry problem; it will not have a barrier of entry as extreme as just

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

a tax, or as much entry encouragement as a subsidy, and may even achieve potential entry. With

the tax rebate, pollution is reduced from the scale and technique effects, and the burden of the tax

that would have been transferred over to consumers are reduced. Note that the tax rebate system

will still carry the same distinct disadvantages that the normal tax system has. For it to be effective,

the policy requires a lot of informational data on each firm. Pollution emissions information must

be accurate because firms have the incentive to lie in order to gain more of the rebate; therefore,

the monitoring cost for this policy would be relatively high. As the Chinese have not codified their

“polluters pay” principle into law, this is a potential policy that they can implement.

An important assertion to make is that market distortions9 will render these policies moot. For

example, introducing a tax when market power is present will result in deficient supply as well as

a reduction in overall social welfare. As a result of the deadweight loss, the government will have

to reduce the tax that they introduce as a “second best” solution; pollution externality will no longer

be fully paid for and will remain an externality. The output subsidy is a potential solution to this

problem, but it comes with a similar moral implication previously mentioned: the government will

be paying a monopolist who pollutes. While the Chinese do not have to worry about politics

regarding policy implementation as much, a subsidy goes against what they want to implement

and thus should not be considered.

The current policies that the Chinese have planned to establish have a very high chance of helping

them succeed in creating safe to use farmland. While regulations and taxes have their own flaws,

Includes a multitude of distortions: market power, taxation distortions caused by fiscal policy (eg, labor); taxing
pollution increases price of dirty goods, thereby increasing demand for untaxed leisure whenever leisure is a
substitute to dirty goods. Thus environmental taxes act as labor taxes, reducing supply of labor and exacerbating
the distortion in labor markets; by reducing the deadweight loss associated with pollution damages, we may
introduce a deadweight loss in labor.

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

and, with politics behind the scene, may individually fall short of an efficient standard of emissions,

the two complementary policies working in tandem may help in reducing their counterparts’ flaws.

It should be noted that with the two working together, the Chinese government must be careful

setting the levels or else the standard might go too far. This would introduce inefficiency by

creating a deadweight loss, which causes market failure. They must also be very aware of market

distortions. However, it can be argued that even if going over an efficient level of emissions hurts

China economically, their pollution situation is so dire that reducing these externalities further than

efficient would help China’s economy in the long run.

Policy Recommendation

A policy that China can potentially introduce is the market emission permits (allocations) approach.

It creates “property rights” for emitting pollution; permits allow a specified quantity of emissions

that a firm is allowed to emit and all pollution sources are required to have a permit. The

government creates a number of licenses to firms that is equal to the efficient emission level and

issues them out to firms through auction or distribution. Because they are transferable, firms are

allowed to buy or sell these them how they see fit, consequently creating a market of output that

is limited by emission levels. This way, even if the government does not issue out the permits in a

manner that is cost efficient among the multiple emission sources, the firms themselves would be

able to correct the inefficiency and achieve cost minimization.

Other than being able to theoretically self-sustain efficiency through the power of the market, there

are other advantages to this policy that rectifies the shortcomings of the other methods. For

example, while taxes need to be constantly monitored and adjusted for inflation erosion, there is

no need to do so for the permit system, as the market directly sets the price for each license.

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

Monitoring costs to the government, a big issue that regulation has, are reduced because permits

incentivizes firms to report “cheaters” to the system simply because of the competitiveness that is

introduced by the market system. Informational costs that would normally plague command and

control methods in order to achieve efficiency are also reduced heavily. While efficient regulations

require the government to gather accurate and precise data – such as abatement costs, damage done

by firm emissions, and savings in pollution – the market permit methods relies on the market to

solve for an efficient allocation of emissions. Any such informational gathering that the

government needs to do by utilizing this method is just finding the overall efficient pollution level

so that they can sell the appropriate amount of permits. This is a vast improvement for China’s

position due to the immense costs they face from soil purification.

Another advantage to the market permits is that this system is very versatile in terms of efficiency.

It is not limited to, say, regulations, where a set limit to emissions is the set limit. For example, the

Chinese could attach a tax to the system where, if a firm wanted to produce more pollution than

they had permits for, they could pay a per unit tax for any extra unit of contaminant produced. This

versatility is still efficient because pollution is just a negative externality – a by-product of

economic activity. If it is paid for, then theoretically it is no longer an externality. They can also

add or remove permits as they so wish. This flexibility component is one big advantage that permits

have over other policies. Because other policies require such large informational requirements, it

takes a lot of time for the government to correct any mistake that they may make. By utilizing the

market, any of these mistakes will simply be resolved over time. However, it is important to note

that the goal of the Chinese is to reduce soil pollution as much as possible because of its many

adverse effects; allowing firms to produce more than efficient – even if it is an efficient amount of

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

production – may not be in the country’s best interests. So while additional production may be

economically sound, it may not be socially or environmentally viable.

The biggest advantage that this proposal offers is that it pretty much aligns with what the Chinese

already wants. Not only is it a government-centralized plan in which the government controls how

much pollution their firms produces, which is very much in line with how left leaning the Chinese

government is, this policy is a “polluter pays” method. When the government first introduces the

pollution permits into the market, firms will pay the government for the right to pollute10 before

the permits become the property of the market. The permit system will also allow the government

to have strong control on how much pollution is produced – they can, at any time, introduce more

into the market or withdraw them. As such, while they do rely on the market and superficially

seem to be against how the Chinese government operates, market permits allow the Chinese a firm

grip on the situation – which they want politically – and requires polluters to pay – which they also

want, policy-wise – while costing them little effort.

Even the drawbacks of this policy are somewhat lackluster when compared to the flaws of the

others. While the introduction of permits may create thin markets – due to inexperience, markets

are not well established, causing small amounts of trades – this is only a short term problem. It is

mostly alleviated by time and costs the government very little effort to fix. Another concern is that

permits may be used to generate a barrier of entry; some may hoard these licenses in attempt to

force smaller firms out, causing market failure. This flaw may incur some monitoring costs, and

can be remedied by government enforcement. However, this detriment presents an advantage for

This is becoming a pretty tedious list but this also gives the government an incentive to use this method – it
generates income (albeit a one-time income)

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

the Chinese in that non-polluting organizations may hoard these permits, reducing the total amount

of emissions. Because they are paid for, there is no inefficiency towards reducing emissions further

than efficient. Another concern that comes from having a permit policy is the measurement issue

– this policy is heavily dependent on the government in setting the right number of permits. If it

fails in doing so, then the entire policy falls apart. However, as mentioned before, because China

has set a large timeframe for monitoring the problem, it is likely that its government will be able

to set the right emissions standard. It is important to mention that this policy is not an umbrella

policy; the government will have to apply different permits for different industries. In the interest

of achieving cost-efficiency in the overall economy, this may incur additional costs to the

government in setting up market allocations.

An important emphasis must be placed on an inherent effect of this policy: market emission

allocations inherent raises prices. Because market emission permits limit output of a good based

on how much a firm pollutes, supply in that market is reduced. Through the scale effect, pollution

is diminished. However, this comes at a cost similar to that of a tax; because the supply is decreased,

the price of the good is driven up. The firm may push the burden of such a price increase onto the

consumers, and as such, market permits will no longer be purely a “polluters pay” policy, since

victims would be paying as well. While this is not necessarily a disadvantage – nor can we call the

pollution reduction an “advantage”, as it comes with such a cost – it is an effect of the policy that

the Chinese will have to take into account. It should be noted that a limit on output from pollution

limits will raise prices, which, without taking pollution into account, would be inefficient for firms.

This may incentivize firms to invest into more green technology, theoretically increasing output

again and therefore driving prices down.

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

The brother to emissions allocation is the Output Based Allocations (OBAs) system that Alberta

uses. In the same category as market permits, OBAs are based on output rather than emissions;

given a certain level of output, firms are allowed to emit some level of pollutants. OBAs also make

firms pay on the margin for any units above that point. Polluters below the threshold can either

store up their allocations or sell them off. The trade-off of having an OBA is that, because the

pollution limit is based on output, firms are incentivized to produce more in order for more

leniency on their allowed pollution levels – resulting similarly to an output subsidy. As such, OBAs

generate relatively more pollution. However, due to the higher output, prices are kept low and

consumers avoid being charged more. A distinct benefit that OBAs have over other policies is that

it solves the potential problem of market distortions. As discussed before, many policies fail when

pollution is coupled with market biases such as market power, and that a potential solution to such

a problem is a subsidy. Because OBAs act very similarly to a combination of a subsidy and a tax,

this can be implemented without the moral stipulation or political implications that comes with the

subsidy, allowing the Chinese to potentially kill two birds with one stone. While some allocation

policies11 do not fully address the duality nature of this problem and end up only being a band-aid

solution, the Chinese have enough money and time at their disposal to rectify the potential

inefficiency such that the policy results in a fully optimal market. As such, OBAs are an alternative

policy to market emission allocations that the Chinese can utilize.

In essence, regardless of if it is based on emissions or outputs, the market permit system is a very

powerful, versatile government centralized policy – the government is essentially regulating the

Like the OBAs used by Alberta, discussed later

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

amount of emissions by abusing the power of the market. They are even able to reduce the cost of

monitoring because the system itself fundamentally incentivizes firms to police amongst

themselves. Because they mesh so well with China’s preference for centralized policies, the

advantages they present, as well as their relatively easy-to-mitigate deficiencies, market allocations

are very potent, effective tools that China can and should utilize.

Important Remarks

- There is an important remark to make which applies not only to the market permit system

but to the other policies mentioned as well. China is a large country with a large number

of industries. If the Chinese government only regulates only one industry, be it a tax or

permit, they will experience what is known as “leakage”. Reducing output of that industry

will drive up prices, and consumers will end up moving over to an unregulated industry

where prices are relatively lower. Pollution output in that industry would rise. The Chinese

government must be careful in how they implement their policies because leakage causes

increases in pollution in unregulated jurisdictions. They must also be wary of their

international trade; because China has a lot of international trade, their firms face a lot of

international competition. However, pollution is transboundary whereas Chinese

jurisdiction is not. If they are not careful, they may end up increasing pollution emissions

among firms not under their control while hurting their domestic firms.

- The Chinese government must pay close attention to any revenue generating process and

their methods of spending their income. Taxation policies – while internalizing the

externality and thereby making pollution generation efficient – may create deadweight

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

losses elsewhere, such as labor markets; as emphasized by market power, if there is an

existing market imperfection other than pollution, a pollution policy may further reduce

overall market efficiency. As such, the government must be careful in where they spend

any money generated by such process. They can potentially use it for social programs or

“recycling” the money, reducing taxes elsewhere in the market. This is a short-term

investment which reduces distortions. The long-term investment would be to invest in

greener technology. In China’s case, this may result in disrupting certain markets with

already existent externalities; however, because their soil pollution is at such a critical stage,

coupled with the fact that soil pollution is so damaging, any investment in green technology

will aid the contaminant removal process while reducing the risk of this crisis from

repeating itself. The Chinese government must be aware of these factors when

implementing their policies in the near future.

- With the multifaceted properties of its critical situation, as well as political impediments

that they face, the Chinese government requires a firm yet fine, meticulous touch in dealing

with its soil pollution problem. The policies that have been proposed by the Chinese also

require some form of fastidious manipulation, in terms of costs and implementation. While

the intrinsic characteristics of the market permit system – namely, the “abuse” of the power

of the market – gives the Chinese some room to work in the “overarching” method that

they like, the Chinese simply cannot afford to remain stagnant in dealing with this dilemma.

They must adapt their idiosyncratic way of implementing policy and work together with

the local authorities. This issue, which affects nearly 1.4 billion people12, simply requires

This is nearly 20% of the people in the world.

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

too much information – both on the local situation as well as information on firm pollution

damages and costs – and money to fix. Because soil pollution is pretty closely tied to air

and water pollution, reducing soil pollution also reduces the others as well; the benefits of

adapting to their situation completely outweigh the costs.

- In the context of soil pollution, all of the policies discussed are solely purposed to contain

and reduce the contaminant emissions. While this is useful in slowing down accretion,

“dealing with it” is an entirely different issue. Soil type pollutants cannot simply be left to

dilute and disperse itself within the environment like air and water pollution. It does not

have absorptive factors in nature to reduce its effects; for example, heavy metal

contaminants already in the system cannot be absorbed and “removed” the same way as

carbon dioxide, which can be recycled through trees and carbon sinks such as large bodies

of water. These toxins will simply accumulate while becoming all the more potent because

of it. Because of its dynamic nature, there is no way of remediation without human

interaction. As such, simply limiting emission levels through these economic policies will

not suffice in the removal of soil pollution; removal will have to rely much more on

scientific methods. These methods themselves will rely on, among other things, the

cooperation of the different levels of government, sufficient funding, technology available,

cost-efficiency of these technologies, and most importantly, how efficiently the Chinese

implement their policies.

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107

Summary and Conclusion

Soil pollution is a poison that is as subtle as it is deadly. Due to the increasing difficulty in feeding

its people caused by urbanization and pollution, the Chinese government can no longer turn a blind

eye on the toxins contributed by its agricultural and industrial sectors. Not only being able to cause

air and water pollution, soil contaminants also harms the health of people living nearby, damages

the environment, and is a detriment towards the economy – specifically agriculture. They are also

incredibly hard and expensive to treat. To deal with this problem, the Chinese have been following

a long, methodical policy of information gathering, which is set to end within the next year, and

plans to establish regulatory emission levels as well as “polluter pays” laws that will help control

the accumulation of toxins in the soil as well as make the contaminated land safe to use.

Because of the fundamentally “hard to deal with” nature of soil pollution, China’s slow,

methodical policies are considered to be reasonable by many experts. This way, they will reduce

the risk of introducing wrong regulatory standards and therefore reduce the risk of market failures.

China has introduced a tag team of strategies towards dealing with emissions control: regulations

and taxes. The two working together and China’s political nature have the potential to reduce many

of these individual flaws. A market permit system would also be very helpful towards China’s

predicament; its advantages addresses many of the shortcomings of the policies that China has

introduced and many of its flaws are rectified by China’s situation. As such, it would be an asset

for China to include this policy in its arsenal to fight against its soil pollution crisis.

Economics 467 B1: Soil Pollution in China Timothy Lau 1444107


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 Tan, Debra, and Dawn McGregor. “China’s Soil Ten.” China Water Risk, 17 July 2016,

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 Econ 467 class notes

Soil Pollution in China
An environmental economic study on the soil pollution issue that China faces, policy
evaluations, and a policy recommendation.

Timothy Lau
ECON 467 B1