Lake Mead: 112 miles long; 759 miles of shoreline, 532 feet at greatest depth. Has 247 square miles of surface, and 28 million acre feet of water, when filled to capacity- which hasn’t happened since 1983.

Society and Environmental Issues

• Political systems determine who makes decisions– Centralized dictatorships

• Little or no input from public– Democracies

• Variable amounts of input from public• Societal values determine basis for decisions

– China in the cultural revolution and now– US: 19th century robber barons vs 20th century regulated

commerce• Digression: Laissez faire capitalism penalizes honest capitalists.

• Economic system determines how prices are set– Centralized planning– Free market

Free Market• Most efficient way to transfer goods (commodities)

– Only involves transfer of goods– Post-transactional taxes do not interfere with markets

• Income tax• Excess profit tax

– Labor is also a commodity• Necessary conditions for a free market

– Homogeneous commodity– Sufficiently many buyers and sellers

• No near monopolies– Many transactions

• Each transaction is a small part of the market– Buyers and sellers have perfect knowledge about prices– Buyers and sellers maximize their own advantage– Price is the only signal used to allocate goods

• Example– Tomatos at the Urbana Farmers’ Market

Reality of Markets

• Homogeneous commodity or various qualities?– Gasoline ....– Computers?– Cars?– Mobile phones?

• Price as the only signal for allocating goods?• Perfect knowledge of prices among buyers?

– Internet• Many sellers or near monopolies?

– ~ 5 grain dealers control >90% of US grain sales– 1970s: “Big 3” automobile manufacturers– until 1990: AT&T

• Regulated monopoly – Each transaction a minor part of the whole market?

• Car dealerships• Labor

– Knowledge of jobs at a distance?– Difficulty moving to take advantage of new opportunities?

Characteristics of Goods in a Free Market

• Rivalry– Purchase of an item reduces its supply for other people

• Excludability– Buyer is the only one with access to the product– If I pay, only I benefit

• All costs of production are included in the price– No externalities

• Water pollution from paper mills ---> cheaper paper• Emergency room treatment of pesticide poisoning• Acid rain from Midwest power plants

Environmental ‘Goods’ Tend to Lack….

• Rivalry– My breathing does not diminish your air supply

• Excludability– If I pay to put scrubbers on my factory chimney,

everyone benefits• Including the competitor who doesn’t do so…

• Well-defined property rights– Who owns the air?– Fisheries?

• The Tragedy of the Commons– Garrett Hardin, Science, 162:1243-1248, 1968

Free Market Remedies

• Externalities can be eliminated in several ways– Tax on polluter– Quota for maximum pollution – Standard for quality of environmental asset

• Practically– Penalties must include shutting business down– Discounting of future expenses must be factored in

• Ford and the Pinto• Design well-defined property rights

– Pollution control credits

Limits of Markets in Policy Decisions

• Public Policy aims to increase the public good– Requires equitable treatment of various sectors of

society• Economics deals with the efficient transfer of goods

– Equity is not an economic consideration• Economists consider monetary value

– Many human values are not monetary• What is the $ value of a human life?• What is the monetary value of my pleasure in being

in wilderness?• Incommensurables

– Non-monetary values to which $ values can be assigned

• Intangibles– Nonmonetary values to which $ values can not be

assigned• Fear cannot be translated into $$

Summary of Environmental Economics

• Free market works well for simple transactions– Tangible goods– Easy comparisons of

quality– Breaks down in much of

modern commerce• Near monopolies• Incomplete information

– Assumes a single public• My good is your good

• Environmental problems involve– Incommensurables

• Allergies vs perma-press fabric

– Intangibles• Owning a new car

Summary of Environmental Economics

• Conflicting publics– Ranchers in Utah

and ‘my’ national parks

– Hoover Dam and Grand Canyon ecosystems

– Cheap electricity and the Adirondacks