Transcript Negative Externalities: Pollution

17
ECONOMICS OF THE
ENVIRONMENT
© 2012 Pearson Education
We burn huge quantities of fossil fuels—coal, natural gas,
and oil—that cause acid rain and global warming.
We dump toxic waste into rivers, lakes, and oceans.
These environmental issues are simultaneously everybody’s
problem and nobody’s problem.
The fish stocks in the world’s oceans are not owned by
anyone.
They are common resources that everyone is free to use.
But we are overusing our fish stocks and brings some
species into extinction.
What can be done to conserve the world’s fish stocks?
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Negative Externality: Pollution
An externality is a cost or benefit that arises from
production and falls on someone other than the producer,
or a cost or benefit that arises from consumption and falls
on someone other than the consumer.
A negative externality imposes an external cost.
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Negative Externality: Pollution
Sources of Pollution
Economic activity pollutes air, water, and land, and these
individual areas of pollution interact through the
ecosystem.
The three biggest sources of pollution are road
transportation, electricity generation, and industrial
processes.
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Negative Externality: Pollution
Effects of Pollution
While the facts about the sources and trends in air pollution
are not in doubt, there is disagreement about the effects of
air pollution.
The least controversial is acid rain caused by sulphur
dioxide and nitrogen oxide emissions from coal- and oilfired generators of power stations.
Acid rain begins with air pollution, and it leads to water
pollution and damages vegetation.
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Negative Externality: Pollution
Many scientists believe that carbon dioxide emissions
are a major cause of global warming and climate
change.
The effects of pollution mean that production and
consumption decisions impose costs that are not taken
fully into account when decisions are made.
You are now going to see how economists analyse these
decisions and solve the pollution problem.
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Negative Externality: Pollution
Private Cost and Social Cost of Pollution
A private cost of production is a cost that is borne by the
producer.
Marginal private cost (MC) is the private cost of
producing one more unit of a good or service.
An external cost of production is a cost that is not borne by
the producer but is borne by others.
Marginal external cost is the cost of producing one more
unit of a good or service that falls on people other than the
producer.
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Negative Externality: Pollution
Marginal social cost (MSC) is the marginal cost incurred
by the entire society—by the producer and by everyone
else on whom the cost falls.
Marginal social cost is the sum of marginal private cost
and marginal external cost.
MSC = MC + Marginal external cost
We express costs in dollars but remember that the dollars
represent the value of a forgone opportunity.
Marginal private cost, marginal external cost, and marginal
social cost increase with output.
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Negative Externality: Pollution
External Cost and
Output
Figure 17.1 illustrates the
MC curve,
the MSC curve,
and marginal external cost
as the vertical distance
between the MC and MSC
curves.
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Negative Externality: Pollution
Production and Pollution: How Much?
In the market for a good with an externality that is
unregulated, the amount of pollution created depends on
the equilibrium quantity of the good produced.
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Negative Externality: Pollution
Figure 17.2 shows the
equilibrium in an
unregulated market with
an external cost.
The quantity of the good
produced is where
marginal private cost (MC)
equals marginal social
benefit (MSB).
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Negative Externality: Pollution
At the market equilibrium,
MSB is less than MSC, so
the market produces an
inefficient quantity of the
good.
At the efficient quantity of
the good, MSC = MSB.
With no regulation, the
market produces too much
of the good and creates a
deadweight loss.
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Negative Externality: Pollution
Property Rights
Sometimes externalities arise because of the absence of
property rights.
Property rights are legally established titles to the
ownership, use, and disposal of factors of production and
goods and services that are enforceable in the courts.
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Negative Externality: Pollution
Figure 17.3 illustrates how
the establishment of
property rights achieves an
efficient outcome.
The producer of the good
bears all the costs.
The market outcome is
efficient because at the
quantity of the good
produced MSC equals
MSB.
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Negative Externality: Pollution
The Coase Theorem
The Coase theorem is a proposition that if property rights
exist, only a small number of parties are involved, and
transactions costs (defined below) are low, then private
transactions are efficient.
There are no externalities because all parties take into
account the externalities involved.
The outcome is independent of who has the property
rights.
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Negative Externality: Pollution
The Coase solution works only if transactions costs are
low.
Transactions costs are the cost of conducting a
transaction.
An example is the transactions costs of buying a home
include fees for a realtor, a mortgage loan advisor, and
legal assistance.
When a large number of people are involved in an
externality and transactions costs are high, the Coase
solution of establishing property rights doesn’t work and
governments try to deal with the externality.
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Negative Externalities: Pollution
Government Actions in a Market with External Costs
There are three main methods that the government uses
to cope with external costs:
 Taxes
 Emission charges
 Cap-and-trade
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Negative Externalities: Pollution
Taxes
The government can set a tax equal marginal external
cost.
The effect of such a tax is to make marginal private cost
plus the tax equal to marginal social cost,
MC + tax = MSC.
This tax is called Pigovian tax, in honor of the British
economist Arthur Cecil Pigou, who first proposed dealing
with externalities in this fashion.
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Negative Externalities: Pollution
Figure 17.4 shows how a
pollution tax equal to the
marginal external cost can
achieve an efficient
outcome.
At the quantity of the good
produced MSC = MSB.
The government collect a
tax revenue.
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Negative Externality: Pollution
Emissions Charges
The government sets a price per unit of pollution, so that
the more a firm pollutes, the higher are its emissions
charges.
For the emissions charge to induce the firm to generate
the efficient level of pollution, the government would need
a lot of information that is usually unavailable.
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Negative Externality: Pollution
Cap-and-Trade
Each firm is assigned a permitted amount of pollution per
period and firms trade permits.
The market price of a permit confronts polluters with the
social marginal cost of their actions and leads to an
efficient outcome.
This method was used successfully to decrease lead
pollution in the United States.
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The Tragedy of the Commons
The tragedy of the commons is the overuse of a
common resource that arises when its users have no
incentive to conserve it and use it sustainably.
Examples include the overfishing of Atlantic Ocean cod
and South Pacific whales.
The traditional example from which the term derives is the
common grazing land surrounding middle-age British
villages.
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The Tragedy of the Commons
Sustainable Use of a Renewable Resource
Renewable resource is one that replenishes itself by
birth and growth of new members of the population.
Sustainable catch is the quantity of fish that can be
caught year after year without depleting the stock.
If the stock is small, the quantity of new fish born is
small, so the sustainable catch is small.
If the stock is large, many fish are born but they must
to complete for food….
so only a small number survive to reproduce and grow
large enough for fishers to catch.
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The Tragedy of the Commons
Figure 17.5 illustrates the
sustainable catch.
As the stock of fish
increases, the sustainable
catch increases.
Beyond that number, more
fish compete for food and
the sustainable catch falls.
If the catch exceeds the
sustainable catch, the fish
stock diminishes.
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The Tragedy of the Commons
The Overuse of a Common
Resource
Figure 17.6 shows why
overfishing occurs.
The supply is the marginal
private cost curve, MC.
The demand is the marginal
social benefit curve, MSB.
Market equilibrium occurs at
800,000 tons per year and
$10 a pound.
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The Tragedy of the Commons
The marginal social cost
curve is MSC.
The efficient quantity is
300,000 tons per year.
At the market equilibrium,
there is overfishing and a
deadweight loss arises.
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The Tragedy of the Commons
Achieving an Efficient Outcome
It is harder to achieve an efficient use of a common
resource than to define the conditions under which it
occurs.
The three main methods used to achieve the efficient use
of a common resource are
 Property rights
 Production quotas
 Individual transferable quotas (ITQs).
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The Tragedy of the Commons
Property Rights
By converting the common
resource to private
property, fishers face the
full social cost of their
actions.
The marginal social cost
curve becomes the supply
curve and the resource is
used efficiently.
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The Tragedy of the Commons
Production Quotas
By setting a production
quota at the efficient
quantity, the resource
might be used efficiently.
Figure 17.8 shows the
profit on the marginal ton
of fish.
A fisher who cheats will
increase his profit. There is
an incentive to overfish.
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The Tragedy of the Commons
Individual Transferable Quotas
An individual transferable quota (ITQ) is a production
limit that is assigned to an individual who is free to
transfer (sell) the quota to someone else.
A market in ITQs emerges.
If the efficient quantity of ITQs is assigned, the market
price of an ITQ confronts resource users with a marginal
cost equal to MC + price of ITQ.
With MC + price of ITQ equal to MSB, the quantity
produced is efficient.
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The Tragedy of the Commons
Figure 17.9 shows the
situation with an efficient
number of ITQs.
The market price of an
ITQ increases the
marginal social cost to
MC + price of ITQ.
Users of the resource
make MSB equal
MC + price of ITQ, and
the outcome is efficient.
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