Chapter 17Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1...

Chapter 17 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1

ECON

Designed byAmy McGuire, B-books, Ltd.

McEachern 2008-2009

17

CHAPTERExternalitiesand the Environment

Micro


Renewable Resources

LO1

Used conservatively– Can be drawn on

indefinitely Some are open-access Common-pool problem

– People exploit a resource• Personal marginal benefit > personal

marginal cost– Personal marginal cost

• Ignores costs imposed on others


Renewable Resources

LO1

Not owned as private property

Open-access resources– No private property

rights– Negative externalities


Resolving the Common-Pool Problem

LO1

Open-access resources Government regulation

– Output restrictions – Taxes – Use resource:

socially optimal rate– Improve allocative

efficiency


Optimal Level of Pollution

LO2

External costs with fixed technology– Fixed-production technology

• Cut emissions: cut production– Marginal social cost

• Marginal

private cost• Marginal

external cost



LO2

Socially efficient production– Demand (marginal benefit) intersects

marginal social cost curve– Government regulation

• Limit production• Tax = marginal external cost

– Marginal social cost = marginal benefit– Total social gain

• Total social cost (firms ignore external cost)


Exhibit 1LO2

Negative Externalities: The Market for Electricity in the Midwest

0.10

$0.14

Dol

lars

per

kilo

wa

tt-h

our Marginal

social cost Marginal private cost; 50 million kilowatt-hours of electricity are produced per month.

The marginal external cost of production is imposed on society.

350 Millions of kilowatt-hours

of electricity per month50

Marginal

private cost

D

a

c

Marginal social cost; only 35 millions kilowatts-hour are produced, which is the optimal output.

Marginal social cost curve includes marginal private cost and marginal external cost.

Total social gain

b



LO2

External costs with variable technology– Variable technology

• Reduce emissions: alter the production process

• Cleaner technology– Production of cleaner air

• Diminishing returns



LO2

Reducing greenhouse gases

– Marginal social cost curve

• Upward-sloping

– Marginal social benefit curve

• Downward-sloping

• Diminishing marginal benefit to society

– Optimal level of air quality

• Marginal social benefit = marginal social cost

– Higher than optimal level of air quality

• Social waste


Exhibit 2LO2

The Optimal Reduction in Greenhouse Gas Emissions

Dol

lars

per

uni

t

Total

social

gain

Marginal

social cost

Marginal

social benefit

AHigh

Greenhouse gas emissions

A’ Low

a

b

c

Optimal level of greenhouse gas emissions: point a; marginal social benefit of reducing such emissions = the marginal social cost

If some lower level of emissions were dictated by the government , the marginal social cost would exceed the marginal social benefit, and social waste would result.



LO2

Shift in marginal social cost curve

– Technological breakthrough: Lower marginal cost of cutting greenhouse gas

• Downward shift of MSC curve

• Lower optimal level of emissions Shift in marginal social benefit curve

– Higher marginal benefit of reducing emissions

• Upward shift of MSB curve

• Lower optimal level of emissions


Exhibit 3LO2

Effect of Changes in Costs or Benefits of Reducing Greenhouse Gas Emissions

Marginal

social benefitMarginal

social cost

Dol

lars

per

uni

t

A0 A’ Higher

quality air

Marginal

social

benefit

Marginal

social cost

Dol

lars

per

uni

t

A0 A’’ Higher

quality air

MSC’

(a) Lower cost of reducing emissions (b) Greater benefit of reducing emissions

MSB’


LO2C

ase

Stu

dy

The Lungs of the Planet Tropical rainforests = open-access

Recycle carbon dioxide: oxygen and wood 6-7% of Earth’s land surface Half of world’s plant and animal species

In relatively poor

countries Burn forest

Pasture Farmland

Growing demand

for timber


LO2C

ase

Stu

dy

The Lungs of the Planet ‘Slash and burn’

Add greenhouse gas to atmosphere Reduces atmosphere’s ability to clean itself Flash floods Mud slides Soil erosion,

lost nutrients Lost ecosystem


LO2C

ase

Stu

dy

The Lungs of the Planet Tropical rainforest

Benefits around the globe Little immediate personal cost Costs of

deforestation:

around the globe Solution

Property rights



LO2

The Coase theorem

– For low transaction costs

– Efficient solution

• Least cost solution

• Assign property right to one party

• One side bears the externality cost

– Inefficient outcome

• If high transaction cost

• If large number of parties involved



LO2

Market for pollution rights

– Government

• Sells pollution rights

• Limits maximum level of pollution per day

– Firms

• D = marginal value of pollution

• Buy pollution rights

– Value of pollution permits

• Fluctuates


Exhibit 4LO2

Optimal Allocation of Pollution Rights

1000 250 Tons of

discharge per day

Dol

lars

per

ton

25

$35

D’D

SSuppose the demand for a river as a discharge service is D.

No environmental controls: polluters dump 250 tons per day, where the marginal benefit of discharge is zero.

Regulatory authorities: establish 100 tons as the maximum daily level of discharge and then sell the rights, the market for these pollution rights clears at $25 per ton.

If the demand for pollution rights increases to D’, the market-clearing price of pollution rights rises to $35 per ton.


Pollution Rights and Public Choice

LO2

Pollution regulation

– Special interest of polluters Before 1990

– Command-and-control environmental regulations

• Particular technologies to reduce emissions Market for pollution rights

– Economic efficiency approach

• Reduce emissions: Cost-effective


Environmental Protection

Environmental Protection Agency EPA

Clean Air Act of 1970 Clean Water Act of 1972 Resource Conservation and

Recovery Act of 1976 Superfund Law of 1980

LO3


Air Pollution

Atmosphere Economic resource People value clean air;

willing to pay more Smog

40% from automobile emissions

40% from consumer products

15% from manufacturing

LO3


Air Pollution

Clean Air Act of 1970 90% reduction in auto emissions By 1990, average emissions fell

Lead: 97% Monoxide: 41% Sulfur dioxide: 25%

U.S. air quality: good U.S. – major source of fossil-fuel carbon

dioxide emissions

LO3


Exhibit 5LO3

Fossil-Fuel Carbon Dioxide

Emissions per Capita:

The 25 Worst

Nations


LO3C

ase

Stu

dy

Makesicko City Mexico City

Population increase From 3 million

in 1950 To 20 million

today More industry; More vehicles High pollution; Low oxygen, Tropical sun Average commuting time: 4 hours/day Low incomes

Environmental quality = luxury


Water Pollution

Sources Sewage Chemicals

Sewage Dumped into

waterways; no cleaning Negative externality

Federal money: treatment plants

LO3


Water Pollution

Chemicals 10% from point pollution

Factories, industrial sites Two thirds – from nonpoint

pollution Agricultural pesticides

and fertilizers In most states: pesticides

have fouled some groundwater

LO3


Hazardous Waste and the Superfund

Before 1980 Firms

Pay others to haul

and dispose Not responsible for cleaning

Superfund Law of 1980 Companies

Pay others to haul and dispose Pay for clean up

LO3


Solid Waste: “Paper or Plastic?”

U.S. households 4 pounds of garbage per resident per day

Mostly packaging 200 million tons per year

70% of garbage - landfills Recycled: 15% of garbage

75% paper products 15% - incinerated

Trash-to-energy plants

LO3


Exhibit 6LO3

Paper and Cardboard Recycling:

Top 25 among Advanced Economies


Solid Waste: “Paper or Plastic?”

2 out of 3 aluminum cans: recycled Returnable deposit laws

Increase recycling Recycling: imposes environmental costs

Curbside recycling Trucks

Newsprint De-inked

LO3


Positive Externalities

LO4

Beneficial externalities Education

– Personal benefits– Benefits to society

• Positive externality Public policy

– To increase quantity beyond private optimum


Exhibit 7LO4

Education and Positive ExternalitiesNo government intervention: equilibrium quantity of education (E); marginal private benefit of education equals the marginal cost as reflected by the supply curve.

Education also confers a positive externality on the rest of society, so the social benefit exceeds the private benefits.

At E, the marginal social benefit exceeds the marginal cost, so more education increases social welfare. In this situation, government tries to increase education to E’, where the marginal social benefit equals the marginal cost.

Chapter 17Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1...

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Transcript of Chapter 17Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1...