Chapter 32 Environmental Economics. Copyright © 2008 Pearson Addison Wesley. All rights reserved....

Chapter 32

Environmental Economics

Copyright © 2008 Pearson Addison Wesley. All rights reserved. 32-2

Introduction

Many people see wild horses as a living symbol of the nation’s natural beauty, while others regard them as pests.

One thing is certain: U.S. taxpayers spend more than $50 million per year on more than 50,000 wild horses and 5,000 of their cousins, wild burros.


Learning Objectives

• Distinguish between private costs and social costs

• Understand market externalities and possible ways to correct externalities

• Describe how economists can conceptually determine the optimum quantity of pollution


Learning Objectives (cont'd)

• Explain the roles of private and common property rights in alternative approaches to addressing the problem of pollution

• Discuss how the assignment of property rights may influence the fates of endangered species

• Contrast the benefits and costs of recycling scarce resources


Chapter Outline

• Private versus Social Costs

• Correcting for Externalities

• Pollution

• Common Property

• Wild Species, Common Property and Tradeoffs

• Recycling


Did You Know That...

• Every decision involving the environment involves a tradeoff?

• The economic way of thinking about endangered species requires considering the costs of protecting them?

• Economists want to help us opt for informed policies that have maximum net benefits?


Private versus Social Costs

• Private Costs

Costs borne solely by the individuals who incur them

Also called internal costs


Private versus Social Costs (cont'd)

• Social Costs

The full costs borne by society whenever a resource use occurs

Measured by adding internal to external costs



• Environmental issues occur when social costs exceed private cost.

• The cost of polluted air—consider both private and social costs

• Question What if you had to pay the social cost of

driving a car?



• Externality

A situation in which a private cost (or benefit) diverges from a social cost (or benefit)

A situation in which the costs (or benefits) of an action are not fully borne (or gained) by the two parties engaged in a scarce-resource-using activity


Correcting for Externalities

• An externality arises when there is a divergence between private cost and social cost.

• The remedy is to change the signal for decision making.

• In the case of industrial pollution, the firm must be forced to internalize the cost of the environmental damage.


Figure 32-1 Reckoning with Full Social Costs


Correcting for Externalities (cont'd)

• The polluters’ choice

1. Install pollution abatement equipment or change production techniques

2. Reduce pollution-causing activity

3. Pay the price to pollute


Correcting for Externalities (cont'd)

• Is a uniform tax appropriate?

It may be appropriate to levy a uniform tax, as external costs might vary from location to location.

We must establish the amount of economic damages; we have to come up with a measure of economic costs.


Policy Example: Belgian Governments Forgo a Uniform Tax and Kill Off Jobs

• In 2004, DHL announced plans to expand its operations in Brussels.

• The expansion correlated with an increase in late-night flights.

• National and regional Belgian governments objected.

• DHL moved 1,300 jobs to Leipzig, Germany.


Pollution

• Question How much pollution is too much?

• Answer The optimal quantity is determined by a

comparison of marginal costs and benefits.


Figure 32-2 The Optimal Quantity of Air Pollution

The optimal quantityof pollution occurswhere MC = MB


Pollution (cont'd)

• Optimal Quantity of Pollution

The level of pollution for which the marginal benefit of one additional unit of pollution abatement just equals the marginal cost of that additional unit


International Policy Example: Canada Confronts a High Marginal Cost of Pollution Abatement

• Under the Kyoto protocol, Canada promised that it would reduce emissions of global warming gasses.

• Since signing the treaty, Canada’s emissions have actually increased by 1.5% per year.


International Policy Example: Canada Confronts a High Marginal Cost of Pollution Abatement (cont'd)

• Canada’s government continues to promise that the nation will reach its promised level of emissions.

• Although the estimated explicit and opportunity costs to the entire Canadian economy would be at least $30 billion per year.


Common Property

• Private Property Rights

Exclusive rights of ownership that allow the use, transfer, and exchange of property


Common Property (cont'd)

• Common Property

Property that is owned by everyone and therefore by no one

Examples are air and water



• Question What do you think: Why does

pollution occur when property rights are poorly defined?

• Answer When no one owns a particular resource,

no one has any incentive (conscience aside) to consider misusing it.



• Voluntary agreement and transactions costs

Is it possible for externalities to be internalized via voluntary agreement?

What are the costs incurred by the parties who seek to negotiate an agreement?




Voluntary agreements: contracting

Opportunity cost always exists, whoever has property rights.




Transaction Costs

All costs associated with making, reaching, and enforcing agreements

Must be low relative the expected benefits



• Changing property rights

Closing the gap between private costs and social costs

Taxation

Subsidization

Regulation



• Are there alternatives to pollution-causing resource use?

Why aren’t we shifting to solar panels and electric cars?

Could manufacturing solar panels cause pollution?


Example: Profiting by Generating Electricity from Thin Air in Ireland

• The northern portion of Ireland abounds with farmland.

• Although the extreme northern tip of the country is too rugged to farm.

• Yet numerous landowners in this part of Ireland generate revenues.


Example: Profiting by Generating Electricity from Thin Air in Ireland (cont'd)

• The source of the landowner’s earnings is not the land itself, but the steady winds that blow across it.

• Several companies now harness the winds to power turbines that generate electricity.


Wild Species, Common Property, and Trade-Offs

• One of the most distressing common property problems involves endangered species.

• Virtually all species not endangered are private property (dogs, cats, cattle, sheep and horses).

• Endangered species (spotted owls, bighorn sheep and condors) are typically common property.


Wild Species, Common Property, and Trade-Offs (cont'd)

• In 1973, the federal government passed the Endangered Species Act in an attempt to keep species from dying out.

• As more and more species were put on the endangered list, a trade-off became apparent.


Recycling

• Recycling

The reuse of raw materials derived from manufactured products


E-Commerce Example: Boom Times in Personal Computer Recycling

• In a typical year, owners of more than 2 billion pounds of unwanted electronic equipment pay 400 companies nearly $1 billion to find something to do with it.

• Recycling firms profit from charging businesses and individuals to collect their computers, remove data, refurbish and resell them.


Recycling (cont'd)

• Recycling’s invisible costs

Costs include

Resources used in recycling

Pollution created during recycling


Recycling (cont'd)

• Landfills

An argument in favor of recycling is to avoid using landfills.

Data indicate we are not running out of solid waste landfill sites.

Expansion of solid waste disposal sites may be outpacing demand.


Recycling (cont'd)

• Should we save scarce resources?

Some resources may not be getting scarcer at all.

The inflation-corrected price of most resources has been falling for decades.


Issues and Applications: The Government’s Climbing Costs to Protect Wild Horses

• The common property problem

• Confronting transaction costs in caring for wild horses

• Turning again to the private sector


Summary Discussion of Learning Objectives

• Private costs versus social costs Private costs are borne solely by those

who use resources.

Social costs are the full costs that society bears when resources are used.

• Market externalities and ways to correct externalities Tax those who create externalities


Summary Discussion of Learning Objectives (cont'd)

• Determining the optimal amount of pollution The level of pollution at which the marginal benefit

of pollution abatement equals the marginal cost of pollution abatement

• Private and common property rights and the pollution problem Private property rights permit exchange and use

of a resource.

Common property is owned by everyone and thus by no one.



• Endangered species and the assignment of property rights Animals that are privately owned (e.g.,

dogs and livestock are abundant)Owners have incentives to take care of

these animals.

Wild animals are common property resources and many are endangered because no one has an incentive to protect these animals.



• Benefits and costs of recycling

BenefitsLimits use of natural resources

CostsRecycling uses resources

End of Chapter 32

Environmental Economics

Chapter 32 Environmental Economics. Copyright © 2008 Pearson Addison Wesley. All rights reserved....

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