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
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