ch 17 externalities and the environment micro econ4
TRANSCRIPT
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 17 ECON4 William A. McEachern
1
Externalities
and the
Environment
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Resources
• Exhaustible resource
– A resource in fixed supply
• Renewable resource
– A resource that regenerates itself
– Can be used indefinitely if used
conservatively
2
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Renewable Resources
• Open-access resources
– Rival in consumption and nonexclusive
– Subject to the common-pool problem
– No private property rights
– Negative externalities arise
3
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Renewable Resources
• Common-pool problem
– People exploit a resource
• Personal marginal benefit > personal
marginal cost
– Personal marginal cost
• Ignores costs imposed on others
4
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Resolving Common-Pool Problem
• Government regulation
– Output restrictions
– Taxes
– Use resource: socially optimal rate
– Improve allocative efficiency
5
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Optimal Level of Pollution
• External costs with fixed technology
– Fixed-production technology
• Cut emissions: cut production
– Marginal social cost
• Marginal private cost
• Marginal external cost
6
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Optimal Level of Pollution
• 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)
7
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 1
8
Negative Externalities: The Market for Electricity in the Midwest
0.10
$0.14
Dolla
rs p
er
kilo
watt
-hour
Marginal
social cost
350
Millions of kilowatt-hours of electricity per month
50
Marginal
private cost
D
a
c
If producers base their output on
marginal private cost, 50 million
kilowatt-hours of electricity are
produced per month. The
marginal external cost of
electricity is the cost of pollution
imposed on society. The
marginal social cost curve
includes both the marginal
private cost and the marginal
external cost. If producers base
their output decisions on
marginal social cost, only 35
million kilowatt-hours are
produced, which is the optimal
output. The total social gain
from basing production on
marginal social cost is reflected
by the blue-shaded triangle.
Total social gain
b
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Optimal Level of Pollution
• External costs with variable technology
– Variable technology
• Reduce emissions: alter the production
process
• Cleaner technology
– Production of cleaner air
• Diminishing returns
9
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Optimal Level of Pollution
• 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
10
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 2
11
The Optimal Reduction in Greenhouse Gas EmissionsD
olla
rs p
er
unit
Total
social
gain
Marginal
social cost
Marginal
social benefit
AHigh
Greenhouse gas emissions
A’ Low
a
b
c
The optimal level of greenhouse
gas emissions is found at point a,
where the marginal social benefit
of reducing such emissions
equals the marginal social cost. If
some lower level of emissions
were dictated by the government,
such as A’, the marginal social
cost would exceed the marginal
social benefit, and social waste
would result. The total social
waste resulting from a lower than
optimal level of emissions is
shown by the pink-shaded
triangle.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Optimal Level of Pollution
• 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
12
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Optimal Level of Pollution
• Shift in marginal social benefit curve
– Higher marginal benefit of reducing
emissions
• Upward shift of MSB curve
• Lower optimal level of emissions
13
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 3
14
Effect of Changes in Costs or Benefits of Reducing
Greenhouse Gas Emissions
Marginal
social benefitMarginal
social cost
Dolla
rs p
er
unit
A0 A’ Higher
quality air
Marginal
social
benefit
Marginal
social cost
Dolla
rs p
er
unit
A0 A’’ Higher
quality air
MSC’
(a) Lower cost of reducing emissions (b) Greater benefit of reducing emissions
MSB’
Either a reduction in the marginal social cost of cleaner air, as shown in panel (a), or
an increase in the marginal social benefit of cleaner air, as shown in panel (b),
increases the optimal level of air quality.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Optimal Level of Pollution
• 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
15
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Optimal Level of Pollution
• 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
16
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 4
17
Optimal Allocation of Pollution Rights
1000 250
Tons of discharge per day
Dolla
rs
per
ton
25
$35
D’
D
S
Suppose the demand for a river
as a discharge service is D. In
the absence of any
environmental controls, polluters
dump 250 tons per day, where
the marginal benefit of discharge
is zero. If 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.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Pollution Rights & Public Choice
• 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
18
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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
19
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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
20
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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
21
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 5
22
Fossil-Fuel Carbon
Dioxide Emissions
per Capita: The 25
Worst Nations
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Air Pollution
• We need to cut air pollution by:
– Sharply improving energy efficiency in
buildings, vehicles, and machines
– Shifting from fossil fuels to nuclear, wind,
solar, and other renewable energy
sources
– Preserving forests as absorbers of
carbon dioxide, or as “carbon sinks”
– Capping agricultural emissions
23
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Water Pollution
• Sources
– Sewage
– Chemicals
– Oil
• Sewage
– Dumped into waterways; no cleaning
• Negative externality
– Federal money: treatment plants
24
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Water Pollution
• Chemicals
– 10% from point pollution
• Factories, industrial sites
– Two thirds – from nonpoint pollution
• Runoff from agricultural pesticides and
fertilizers
– In most states: pesticides have fouled
some groundwater
25
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Water Pollution
• Oil
– Cleanup of oil spills on land – overseen
by the EPA
– 600,000 underground storage tanks for
oil and chemicals
• Potential threat of contamination for
groundwater
– Cleanup of offshore oil spills - overseen
by the U.S. Coast Guard
26
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Hazardous Waste
• Before 1980
– Firms - Pay others to haul and dispose
• Not responsible for cleaning
• Superfund law of 1980
– Comprehensive Environmental Response,
Compensation, and Liability Act
– Companies - Pay others to haul and
dispose
• Pay for clean up
27
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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 plants28
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 6
29
Paper Recycling Rates of Top Ten Paper-Producing Countries
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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
30
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Positive Externalities
• Beneficial externalities
– Consumption or production benefits other
consumers or other firms
• Vaccination
– Personal benefits
– Benefits to society
• Positive externality
31
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Positive Externalities
• Public policy
– To increase quantity beyond private
optimum
• Marginal social benefit
– Includes all the benefits for society
• Private benefits
• External benefits
• Marginal social benefit curve
– Above the private demand curve
32
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Exhibit 7
33
Education and Positive Externalities
E0 E’
Quantity of education per period
Dolla
rs p
er
unit
DMarginal
private benefit
D’
Marginal
social benefit
SMarginal
cost
e’
e
In the absence of government
intervention, the equilibrium
quantity of education is E, where
the 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 benefit. At
quantity 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.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Positive Externalities
• Positive externalities
– Decisions based on private marginal
benefits
• Result in less than the socially optimal
quantity of the good
– Point to market failure
– Public policy: increase quantity beyond
the private optimum
34