Environmental Protection Chapter 13 The Environmental Threat

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Environmental Protection

  • Chapter 13

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.


  • 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

  • Price = MR
  • A
  • MC1
  • ATC1
  • Profit
  • Price or Cost
  • (dollars per kilowatt-hour)
  • 0
  • Quantity (kilowatt-hours per day)
  • 1000
  • Using cheap but polluting process
  • P = MR
  • A
  • MC2
  • ATC1
  • Profit
  • 0
  • Quantity (kilowatt-hours per day)
  • 1000
  • B
  • MC1
  • ATC2
  • 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.

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

Market Failure

  • Social MC
  • Private MC
  • Price (= MR)
  • B
  • A
  • External cost
  • Price or Cost (dollars per unit)
  • Quantity (units per time period)
  • 0
  • qS
  • qP

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

  • Fee = t
  • MC + fee
  • Price
  • q1
  • q0
  • 0
  • Price or Cost (dollars per unit)
  • Quantity (units per time period)
  • Private MC

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 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.

Cost-Benefit Analysis

  • 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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