Environmental Protection Chapter 13
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Transcript Environmental Protection Chapter 13
Environmental Protection
Chapter 13
The Environmental Threat
Pollution impairs health, reduces life
expectancy, and thus reduces laborforce 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.
Cost of Pollution Abatement
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
MC1
Price = MR
A
ATC1
Profit
0
1000
Quantity (kilowatt-hours per day)
Using more expensive but
less polluting process
Price or Cost
(dollars per kilowatt-hour)
Price or Cost
(dollars per kilowatt-hour)
Using cheap but polluting
process
MC2 MC1
P = MR B A
ATC2
ATC1
Profit
0
1000
Quantity (kilowatt-hours per day)
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.
Externalities in Production
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
Price or Cost (dollars per unit)
Market Failure
Social MC
Private MC
A
B
External
cost
0
qS
qP
Quantity (units per time period)
Price (= MR)
Externalities in Consumption
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)
MC + fee
Private MC
Price
Fee = t
0
q1
q0
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.
Higher User Fees
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 governmentset 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
Marginal Cost of Pollution Abatement
Reduction in Emissions
(in tons)
Copper Smelter
Electric Utility
1
$200
$100
2
250
150
3
300
200
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
When process regulation raises the
cost of environmental protection, we
have government failure.
– 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 benefit
of pollution
abatement
=
Marginal cost
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.
Cost-Benefit Analysis
Marginal analysis tells us that a zeropollution 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.