Transcript 슬라이드 1 - Konkuk

Chapter 4
Pollution Problems: Must We
Foul Our Own Nests?
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
Key Concepts





Cost-benefit analysis
Supply and demand as
marginal costs and
benefits
Externalities and
opportunity costs
Marginal social costs
Marginal social benefits




Externalities in
consumption
Externalities in
production
Market failures
Pollution rights markets
Environment and Its Services

Environment




Environment services


Air
Water
Land
Are used during the production process
Consequences of using the environment



Depletion of exhaustible resources
Irresponsible usage of replaceable resources
Waste disposal
What Is Pollution?

The Environment and Its Services
Exhaustible resources
 Replaceable resources
 Waste disposal


Recycling Wastes and the Concept of
Pollution

4-4
Pollution occurs when recycling process
es fail to prevent wastes from accumulat
ing in the environment
Common Forms of Pollution

Air Pollution






Water pollution



Level of dissolved oxygen
Materials and matter
Land pollution


4-5
Carbon monoxide
Sulfur dioxides
Nitrogen oxides
Hydrocarbons
Particulates
Dumping of wastes
Tearing up Earth’s surface
Markets and Resource Allocation

Supply and demand schedule intersection determines
market equilibrium

Market-determined equilibrium reflects the socially
optimal allocation of resources

Maximum social well-being is achieved whenever
marginal social benefit equals marginal social cost

We now fit cost-benefit thinking into the supply and
demand model
Market: the Demand Side

Demand curve



Shows the maximum quantity of a good or service that can be bought at any given
price
Shows the maximum price consumers will be willing to pay for each successive unit of
a good or service
Demand curve is downward sloping:


Suppose the first pizza is sold at $10the marginal benefit of the first pizza is at least
$10
The second pizza is worth less, say, $8 reflecting the declining marginal willingness to
pay

Market demand curve is reflecting the marginal private benefit of consumption

Marginal private benefit is the benefit that accrues to the direct consumers of a
good or service resulting from a one-unit increase in consumption
Marginal Social Benefit

Normally consuming goods or services does not affect anybody except the
direct consumer

However: consider vaccination for a contagious disease

There is a spillover of benefits from the vaccine to third parties (that is, to the
society, not only the direct consumer), or externalities in consumption

Externality in consumption is a change in satisfaction, which can be either
positive or negative, for someone other than the direct consumer of an item

When externalities are present, the marginal private benefit does not equal
marginal social benefit:
Marginal social benefit = Marginal private benefit +/- Externality
Demand and
Marginal Private Benefit
$
The demand
curve is a
marginal private
benefit curve
14
12
10
8
6
4
D = MPB
2
1
4-9
2
3
4
5
6
Quantity of pizza
Externality in Consumption
$
MSB = MPB ± Externality
14
12
10
8
6
4
MSB
2
MPB
1
4-10
2
3
4
5
6
HIV vaccine
Marginal Private Cost

A supply curve shows the maximum quantity of a good or
service that sellers are willing to offer given the price

A supply curve shows the minimum price sellers are willing to
accept for an additional unit of a good or service

The supply curve is the producer’s marginal private cost curve

Marginal private cost is the increase in total cost that producers
incur when output is increased by one unit
Increasing Slope of Supply Curve

Supply curve is upward sloping reflecting the
fact that the marginal private costs increase
as the volume of production increases

Increasing opportunity costs reflect the fact
that as producers produce more they have to
attract resources that are increasingly
valuable

Example: hiring workers in a student town
Externality in Production

In most production processes, the actual producer of a product
bears all costs associated with this production so that the
marginal private product and the marginal social product
coincide

Externalities in production occur whenever production of a good
or service leads to cost changes (negative or positive) in the
production of the other items

Examples



Smoking
Landscaping
Marginal social cost = Marginal private cost +/- Externality
Supply and Marginal Private Cos
t
$
11
10
S = MPC
9
8
7
6
5
1
4-14
2
3
4
5
6
Quantity of pizza
Externality in Production
MSC = MPC ± Externality
$
MSC
11
10
S = MPC
9
8
7
6
5
1
4-15
2
3
4
5
6
Quantity of pizza
Market Failure

The market leads to the outcome where the marginal
private benefit to consumers is equal to the marginal
private cost of producers

When externalities exist and are of significant size,
the market equilibrium outcome is not a socially
optimal one

Market failure occurs when markets, operating on
their own, do not lead to a socially optimal allocation
of resources
Explicit and Implicit Costs

Explicit costs of production are the ones incurred by
the producer to buy or hire the resources required to
produce


Actual cost outlays
Implicit costs of production are the ones incurred by
the producer for the use of self-owned, selfemployed resources required to produce

Household members’ labor
Marginal Social vs Marginal
Private Cost

A firm dumping its waste into the river
produces negative externalities by increasing
the social cost of production

The market outcome in this case is not
socially optimal since the private supply curve
is not the social supply curve

In case of negative externalities, too much
production occurs
Market Equilibrium
without Externalities
$
14
12
S = MPC
10
8
7
6
4
D = MPB
2
1
4-19
2
3
3.5
4
5
6
Quantity of pizza
Marginal Private Cost vs Marginal
Social Cost

The true cost of producing electric power is the cost
that would exist were the river not polluted by the
paper producers

However, the power producer have to clean the water
so from their perspective the cost of producing
power has to include the cost of cleaning water

The market gets it wrong again since it
underestimates the true costs of production by
ignoring the externality so that too little power is
produced
Why Polluters Pollute


4-21
Property rights in the environment eit
her nonexistent or not enforced
Much of environment’s services share
d by entire population
Consumer Surplus and the Demand Curve
–A consumer’s willingness to pay for a good is the
maximum price at which he or she would buy that good.
–Individual consumer surplus is the net gain to an
individual buyer from the purchase of a good. It is equal
to the difference between the buyer’s willingness to pay
and the price paid.
The Demand Curve for Used Textbooks
Price of bo
ok
Aleisha
$59
Potential b
uyers
Brad
45
Claudia
35
Aleisha
Brad
$59
Claudia
35
Darren
Edwina
25
45
10
Darren
25
Edwina
10
D
0
Willingness
to pay
1
2
3
4
5
Quantity of books
A consumer’s willingnes
s to pay for a good is the
maximum price at which
he or she would buy that
good.
Willingness to Pay and Consumer Surplus
–Total consumer surplus is the sum of the individual
consumer surpluses of all the buyers of a good.
–The term consumer surplus is often used to refer to
both individual and total consumer surplus.
Consumer Surplus in the Used Textbook Market
Price of boo
k
Aleisha’s consumer surplu
s:
$59-$30=$29
$59
Aleisha
Brad’s consumer surplu
s:
$45-$30=$15
45
Brad
Claudia’s consumer s
urplus: $35-$30=$5
35
Claudia
30
Price = $30
25
Darren
10
The total consumer surpl
us is given by the entire
shaded area - the sum of
the individual consumer
surpluses of Aleisha, Bra
d, and Claudia - equal to
$29 + $15 + $5 = $49.
Edwina
D
0
1
2
3
4
5
Quantity of books
Consumer Surplus in the Used Textbook Market
Consumer Surplus
The total consumer surplus
generated by purchases of
a good at a given price is e
qual to the area below the d
emand curve but above tha
t price.
Price of co
mputers
Consumer
surplus
Price = $1,500
$1,500
D
0
1 million
Quantity of computers
How Changing Prices Affect Consumer Surplus
–A fall in the price of a good increases consumer surplus
through two channels:
• A gain to consumers who would have bought at the
original price and
• A gain to consumers who are persuaded to buy by the
lower price.
Consumer Surplus and a Fall in the Price of Used Textboo
ks
Price of b
ook
$59
Aleisha
Increase in Aleish
a’s consumer surp
lus
Increase in Brad’s co
nsumer surplus
45
Brad
Claudia
35
Increase in Claude’s
consumer surplus
30
Original price = $30
Darren
25
20
New price = $20
10
Darren’s consum
er surplus
Edwina
D
0
1
2
3
4
5
Quantity of books
A Fall in the Market Price Increases Consumer Surplus
Price of comp
uters
Increase in consumer
surplus to original buy
ers
$5,000
Consumer surplu
s gained by new
buyers
1,500
D
0
200,000
1 million
Quantity of computers
Producer Surplus and the Supply Curve
–A potential seller’s cost is the lowest price at which he
or she is willing to sell a good.
–Individual producer surplus is the net gain to a seller
from selling a good. It is equal to the difference
between the price received and the seller’s cost.
–Total producer surplus in a market is the sum of the
individual producer surpluses of all the sellers of a
good.
The Supply Curve for Used Textbooks
Price of bo
ok
$45
Engelbert
Donna
35
25
Carlos
15
Betty
Andrew
5
0
Potential
sellers
S
1
2
3
4
5
Quantity of books
Cost
Andrew
$5
Donna
15
Carlos
25
Betty
35
Engelbert
45
Producer Surplus in the Used Textbook Market
Price of book
S
$45
Engelbert
35
Donna
Price = $30
30
25
0
Betty’s pro
ducer surp
Andrew’s prlus
oducer surpl
us
Betty
15
5
Carlos’s
producer
surplus
Carlos
Andrew
1
2
3
4
5
Quantity of books
Producer Surplus
Price of wheat (per bushel)
S
$5
The total producer surp
lus from sales of a goo
d at a given price is the
area above the supply
curve but below that pri
ce.
Price = $5
Producer surp
lus
0
1 million
Quantity of wheat (bushels)
A Rise in the Price Increases Producer Surplus
Price of wheat (per bus
hel)
Increase in produ
cer surplus to orig
inal sellers
Producer surp
lus gained by
new sellers
S
$7
5
0
1 million
1.5 million
Quantity of wheat (bushels)
Putting It Together: Total Surplus
• The total surplus generated in a market is the
total net gain to consumers and producers from
trading in the market. It is the sum of the
producer and the consumer surplus.
• The concepts of consumer surplus and producer
surplus can help us understand why markets are
an effective way to organize economic activity.
Total Surplus
Price of book
S
Equilibrium pr
ice
Consumer surpl
us
$30
E
Producer surplu
s
D
0
1,000
Equilibrium quantity
Quantity of books
Pollution and Resource Allocation
Price $
Loss of well-being to
society
B
11
MSC
S = MPC
C
10
A
9
D = MPB = MSB
r0
4-38
r1
Reams per day
Externalities and the
Market Outcome

When a negative externality in production exists, the
outcomes in the markets do not reflect an allocation
of resources that maximizes social well-being

Market incentives in case there are externalities lead
to suboptimal production levels

For the polluter, production costs are artificially reduced so
they overproduce

For the power producers, production costs are artificially
increased so they underproduce
How Much Pollution Control is
Appropriate?

We need to apply cost and benefit analysis to answer
this question

Measurement of both costs and benefits of pollution
control measures is difficult

As pollution control increases, marginal costs of it
increase while the marginal benefits of it decline

The level of pollution control that yields the maximum
net social benefit is the one at which the marginal
social benefit equals marginal social cost
Why Polluters Pollute


4-41
Property rights in the environment eit
her nonexistent or not enforced
Much of environment’s services share
d by entire population
The Appropriate Level of Polluti
on Control
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Pollution
Control or
Eliminated
Stench
Total Social
Cost of
Control
($000)
Marginal
Social Cost
of Control
($000)
Per-Person
Marginal
Benefit of
Control
Marginal Social
Benefit of
Control ($000)
Total Social
Benefit of
Control ($000)
Net Social
Benefit of
Control
($000)
1st 10%
10
10
10.00
100
100
90
2nd 10%
20
10
8.00
80
180
160
3rd 10%
30
10
6.00
60
240
210
4th 10%
40
10
4.00
40
280
240
5th 10%
50
10
2.00
20
300
250
6th 10%
60
10
1.60
16
316
256
7th 10%
70
10
1.20
12
328
258
8th 10%
80
10
.80
8
336
256
9th 10%
90
10
.40
4
340
250
10th 10%
100
10
.20
2
342
242
4-42
Direct Controls

Assumes regulatory bodies know what social
optimum is

Assumes regulatory bodies can allocate
pollution reducing costs efficiently

Fail to provide polluters with economic
incentives not to pollute so enforcement can
be a problem
Indirect Controls

Economic incentives are there

Incentives to overproduce are reduced for the
polluter

Determining the benefits of cleaning the waste is
difficult

Enforcement is not easy

Taxes are a political matter
Pollution Rights Markets

A market that exists when firms are allowed to buy
and sell government-issued licenses granting the
holder the right to create a certain amount of
pollution

Economic incentives are there

Any desired level of pollution can be achieved by the
market rather than administrative means
What Can Be Done About Pollution?
Creation of Pollution Rights Markets



4-46
Pollution rights license
Pollution rights market
Clean Air Act of 1990