Internalization in a stochastic pollution model

This paper develops and applies a stochastic model for internalizing pollution externalities. Pollution occurs or does not, depending on factors related to a stochastic environment and human error. But the probability of pollution can be altered by adopting various technologies. The model is applied to the problem of effluent runoff from dairies near the San Francisco Bay, which can prevent shellfish harvest in the bay. With runoff holding areas, pollution occurs if a rainstorm is severe enough to cause overflow. Standards rather than taxes are used as policy instruments in the model. Results generally indicate that an accurate approximation of stochastic distribution is a necessity. Specific implications for the dairy problem are that present regulations are too lenient.