1.0 Introduction
Industrial pollution has been and continues to be a major factor causing the degradation of the environment around us, affecting the water we use, the air we breathe and the soil we live on.
But of these, the pollution of water is arguably the most serious threat to current human welfare.
Water is polluted not only by industries but also by households. Both industries and household wastewater contain chemicals and biological matter that impose high demands on the oxygen present in water. Polluted water thus contains low levels of dissolved oxygen as a result of the heavy biological oxygen demand (BOD) and chemical oxygen demand (COD) placed by industrial and household waste materials discharged into water bodies and water systems, both above and below the earth's surface.
In addition to low levels of dissolved oxygen in water, industrial wastes (effluents) also contain chemicals and metals that are directly harmful to human health and the ecosystem.
The supply of water through river valley projects and ground water extraction thus has repercussions for the health and safety of people. Apart from health effects, which indirectly affect human productivity, polluted water also affects land productivity. Crop production suffers from using contaminated irrigation water from both surface sources and from groundwater aquifers.
The definition of pollution in economics is based not only on the physical effect on the environment but crucially on the human response to the physical effect. The physical effect can be biological (e.g. change in biodiversity, or ill- health) or chemical (e.g. effect of harmful chemicals from industrial waste on aquatic life in a river).
The human response is a result of a loss of welfare (Seneca and Taussig, 1984, Pearce and Turner, 1990). Thus, while physical scientists base their perception of pollution solely on the physical effect on the environment, economists rely on perceived utility losses to recognize and define pollution.
Environmental pollution is an ‘externality' in welfare economics. An externality is present whenever individual A's utility and production relationships include real (i.e. non-monetary) variables, whose values are chosen by others (persons, corporations, governments) without particular attention to the effects on A's welfare (Baumol and Oates, 1988). An externality can be either beneficial (positive) or harmful (negative).
Examples of beneficial externalities are, a neighbour's rose garden entering as a real variable in the utility functions of others living in the neighbourhood,and services of a lighthouse entering as a real variable in the production function of shipping companies.
Negative externalities include noise pollution by aircrafts using an airport, which enters as a real variable in the utility functions of persons living in the neighbourhood, and the pollution of a river, which enters as a real variable in the production function of water-supply undertakings drawing from the river or agriculture.
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