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.