The Environmental Threat - Pollution impairs health, reduces life expectancy, and thus reduces labor-force activity and output.
- It entails real costs, as measured by impaired health, reduced life spans, and other damages.
Air Pollution - Smog is only one form of air pollution.
Acid Rain - Sulfur dioxide (SO2) is an acrid, corrosive, and poisonous gas created when high-sulfur fuels are burned.
Smog - Nitrogen oxides (NOX), another ingredient in the formation of acid rain, are also a principal ingredient in the formation of smog.
The Greenhouse Effect - Excess buildup of carbon dioxide (CO2) is creating a gaseous blanket around the earth.
- The potential effects of this blanket are intensely debated.
Water Pollution - Water pollution is another environmental threat.
Organic Pollution - The most common form of water pollution comes from the disposal of organic wastes from toilets and garbage disposals.
- Inadequate treatment systems often result in the closure of waterways and beaches.
Thermal Pollution - Thermal pollution is an increase in the temperature of waterways brought about by the discharge of steam or heated water.
Solid-Waste Pollution - Most solid wastes originate in agriculture and mining.
- Solid waste originating in residential and commercial use is considered dangerous because it accumulates where people live.
Pollution Damages - Some monetary measure of environmental damage is important to our decision making.
- We won’t get clean air unless we spend resources to get it.
Assigning Prices - Economists can estimate the dollar value of damage by assessing the economic value of lives, forests, lakes, and other resources.
- It is difficult to measure the value of intangibles like lost views of sunsets, wildlife, and recreation opportunities.
Cleanup Possibilities - The EPA estimates that 95 percent of current air and water pollution could be eliminated by known and available technology.
Market Incentives - Market incentives play a major role in pollution behavior.
The Production Decision - Business managers seeking to maximize profit will produce the rate of output where MR = MC.
- Production decision – The selection of the short-run rate of output (with existing plant and equipment).
The Efficiency Decision - The efficiency decision requires a producer to choose that production process that minimizes costs for any particular rate of output.
- Efficiency decision – The choice of a production process for any given rate of output.
- The efficiency decision does not lead to a low production of pollution.
- Pollution abatement can be achieved, but only at significant cost to the producer.
Cost of Pollution Abatement - The behavior of profit-maximizers is guided by comparisons of revenues and costs, not by philanthropy, aesthetic concerns, or the welfare of the environment.
Profit Maximization in Electric Power Production - Price or Cost
- (dollars per kilowatt-hour)
- Quantity (kilowatt-hours per day)
- Using cheap but polluting process
- Quantity (kilowatt-hours per day)
- Using more expensive but less polluting process
- Price or Cost
- (dollars per kilowatt-hour)
Market Failure: External Costs - People tend to maximize their personal welfare, balancing private benefit against private cost.
- They ignore costs that are external to them.
- External costs are costs of a market activity borne by a third party.
- Whenever external costs exist, a private firm will not allocate its resources and operate its plant in such a way as to maximize social welfare.
- If pollution costs are external, firms will produce too much of a polluting good.
Externalities in Production - External costs exist when social costs differ from private costs.
- External costs are equal to the difference between the social and private costs.
- External costs = Social costs – Private costs
Externalities in Production - Social costs are the full resource costs of an economic activity, including externalities.
- Private costs are the costs of an economic activity directly borne by the immediate producer or consumer (excluding externalities).
Externalities in Production - The market does not allocate resources efficiently when external costs are present.
- This is a case of market failure.
- Market failure – An imperfection in the market mechanism that prevents optimal outcomes
Market Failure - Price or Cost (dollars per unit)
- Quantity (units per time period)
- A consumer, like a producer, tends to maximize personal welfare.
- When people use vacant lots as open dumps, the polluter benefits by substituting external costs for private costs.
Regulatory Options - There are two general strategies for environmental protection.
- Alter market incentives in such a way that they discourage pollution.
- Bypass market incentives with some form of regulatory intervention.
Market-Based Options - Market incentives can be used to reduce or eliminate the divergence between private and social costs.
Emission Charges - An emission charge is a fee imposed on polluters, based on the quantity of pollution.
- An emission charge increases private marginal cost and encourages lower output and cleaner technology.
Emission Charges - An emission charge might persuade firms to incur higher fixed costs.
- If emission charges are high enough, firms will install new technology to avoid the charges.
Emission Fees - Price or Cost (dollars per unit)
- Quantity (units per time period)
Recycling Materials - A producer has no incentive to use recycled materials unless they offer superior cost efficiency and greater profits.
- A bonus that emission charges offer is an increased incentive for the recycling of materials.
- Raising the price consumers pay for scare resources encourages them to use less.
“Green” Taxes - An efficient way to control pollution is to make those who cause it bear some of the costs through “green” taxes.
- “Green” taxes run the gamut from retail taxes on gasoline to landfill charges on waste disposal.
Pollution Fines - Imposing fines or liability for cleanup costs changes the incentive structure for firms.
Tradable Pollution Permits - Tradable pollution permits let firms purchase the right to continue polluting.
- The key to the success of polluting permits is that they are bought and sold among private firms.
Tradable Pollution Permits - The system starts with a government-set standard for pollution reduction.
- Firms that reduce pollution by more than the standard earn pollution credits which the may sell to other firms.
Tradable Pollution Permits - The principal advantage of pollution permits is their incentive to minimize the cost of pollution control.
- Entrepreneurs now have an incentive to discover cheaper methods for pollution abatement.
Pricing Pollution Permits Command-and-Control Options - With the command-and-control option, the government commands firms to reduce pollution and then controls the process for doing so.
- Excessive process regulation may raise the costs of environmental protection and discourage cost-saving innovation.
Command-and-Control Options - Government failure – Government intervention that fails to improve economic outcomes.
Central Planning - Some of the worst evidence of government failure exists in the most regulated economies.
- Government-directed production isn’t more environmentally-friendly than market-directed production.
Balancing Benefits and Costs - Protecting the environment entails costs as well as benefits.
Opportunity Costs - The use of our scarce resources to clean the environment involves an opportunity cost.
- Opportunity cost – The most desired goods or services that are foregone in order to obtain something else.
Opportunity Costs - The environmental expenditures contemplated by present environmental policies represent only 1-3 percent of total output.
The Optimal Rate of Pollution - Optimal rate of pollution is the rate of pollution that occurs when the marginal social benefit of pollution control equals its marginal social cost.
- Optimal rate of pollution
- Marginal cost of pollution abatement
- Marginal benefit of pollution abatement
The Optimal Rate of Pollution - A totally clean environment is not economically desirable.
- The costs of environmental protection are substantial and must be compared to the benefits.
- Marginal analysis tells us that a zero-pollution goal isn’t economically desirable.
- Some studies suggest the cost/benefit ratio is extraordinarily high.
Who Will Pay? - Whether producers or consumers pay the cost of reducing pollution depends on how much competition exists in the polluting industry and the price elasticity of demand.
Who Will Pay? - If producers can pass the cost of pollution control along to the consumer, higher prices reduce pollution in two ways:
- Higher prices help to pay for pollution-control equipment.
- Higher prices encourage consumers to buy less polluting goods.
The “Greenhouse” Threat - Some scientists worry about the carbon emissions we are now spreading into the atmosphere.
- They warn that CO2 is warming the earth’s atmosphere and predict the polar caps will melt, continents will flood, and weather patterns will go haywire.
The Green House Effect - Scientists fear there is a build-up of carbon dioxide might trap heat in the earth’s atmosphere, warming the planet.
The Skeptics - Other scientists are skeptical about both the temperature change and its cause.
Global Externalities - One thing is certain, CO2 emissions are a global externality.
- Without some form of government intervention, there is little likelihood that market participants will voluntarily reduce them.
Kyoto Treaty - In December of 1997, most of the world’s industrialized nations pledged to reduce CO2 emissions.
- The Kyoto Treaty encourages nations to develop a global system of tradable pollution permits to encourage cost efficiency.
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