Heavy metal pollution is a serious concern in China, with nine incidents of lead poisoning occurring last year, and seven more already occurring by the end of May this year.

The most severe heavy metal pollution case so far is pointed out in a study by Professor Pan Genxing at Nanjing Agricultural University, showing that 10 percent of China's rice market, and more than 60 percent of rice grown in some southern provinces, may contain high levels of cadmium. Long-term exposure to cadmium can damage the lungs, blood, heart and kidneys.

This is no exaggeration; if you live in one of the southern provinces in China, there's more than a 50 percent chance that you will develop cadmium-related diseases by the time you enter your fifties.

A friend once told me that the whole Chinese population is engaged in a long-term chronic suicide mission, as the country continues to go down this growth path, where food safety scandals run rampant, and the environmental regulations are lax.

The central government seems to be determined to address both issues. There have been a series of stringent measures released recently to clean up the food industry.

On the environment, Vice Minister of Environmental Protection Li Ganjie said at a recent press conference that the State Council had just approved a plan for the treatment and reduction of heavy metal pollution for the period between 2011 and 2015.

He said severe measures will be imposed on industries involving high heavy metal use, such as the management of lead storage batteries and the secondary lead industry. That is all fine. But typically in China, results do not quite match up with rhetoric.

As local officials put economic development ahead of environmental protection, relevant regulatory authorities often lack the resources and the political will to enforce the central government's mandates.

All environmental protection agencies in China officially have a budget. But like many government agencies in China, they have to find other resources for funding. And an important source of revenue is pollution fees, which is meant to penalize polluters with manufacturing licenses so that they would invest in technologies to reduce pollution and thus avoid paying future penalties.

Sounds like a good idea, right?

The situation is very similar to the traffic authority ticketing illegally parking on the street where I live. They occasionally come over to ticket a few cars, but they never seem determined to ticket all the illegally parked cars and clean up the entire street.

So people continue to park illegally as usual, as if the occasional tickets are just the normal cost of parking - they certainly beat the cost of buying a monthly parking space.

And I thought hard about this phenomenon, and it strikes me as an economist as perfectly rational on both sides.

Revenue from fines

This is indeed market equilibrium!

From the traffic authority's perspective, they have no incentives to clean up the entire street once and for all, because if they do, although one-time ticket revenue will increase dramatically, they would almost certain lose significant revenue from fines in the future.

One cleaned up street means one fewer source of ticketing revenues. So they would always come occasionally to ticket a few cars to show their presence.

From the drivers' perspective, it makes even more sense accepting a reasonable chance of being ticketed is just part of the normal cost of cheaper illegal parking.

I suspect the situation involving pollution fees is more or less the same. The local environmental protection agencies need fees to supplement their budget, while enterprises paying the fees consider them part of the normal cost of doing business.

Neither side, I mean the regulator and the regulated, has any incentive to change the status quo, and to make a significant investment to reduce pollution. It is just the silent public footing the bill.

Another source of pollution is what I call judgment-proof companies. These are newly set up small companies without much in the way of assets and they don't feel they have much to lose if they are caught violating the environmental protection laws.

There have been many cases involving such companies, in which the damages caused are many times more than what the companies can offer in compensation, even if there is a severe court judgment against them. They simply close their doors, and move on to fleece the next sucker.

The combination of small companies and the potentially large environmental hazard costs creates the phenomenon of these judgment-proof companies, that is, companies which pollute as they like but do not have sufficient assets to compensate the victims, and are ready to close the doors at any moment.

How to deal with these rogue companies? I offer two solutions. One is to pass legislation to prosecute key executives of such companies. Criminalizing such behavior, even where there is lack of intent to cause harm or simply negligence, is justified in some Western countries. Another measure is to hold these companies' creditors liable. Asset-less companies can't operate without borrowed money.

So the idea is to make the risk lenders face not only the costs stemming from their borrowers' environmental liabilities and the loss of loans because of diminution of collateral's value, but from the possible direct civil liability against themselves as well.

This will make creditors think twice about financing unscrupulous ventures that put the environment at risk. The Comprehensive Environmental Response, Compensation, and Liability Act in the United States is essentially based on this theory.