ECON 101: Chap. 12.1 - Economics of Pollution

Keystone Pipeline

• operates under the supervision of Canada energy Regulator (CER) and U.S. Federal Energy Regulatory Commission (FERC)

• Property of TransCanada Keystone Pipeline GP Ltd., and has been in operation since 2010

Environmental Debate

• a tradeoff between economic growth and environmental protection

• creates tensions between people who prefer more effort in protecting the environment and those who point to the high costs of doing so

Outline + Keypoints

• Economics of pollution

• Command and control regulation

• Market-oriented environmental tools

• Benefits and Costs of U.S. Environmental Laws

• International Environmental Issues

• The Tradeoff between economic output and environmental protection

Externalities or Spillover

• effect of a market exchange on a third party who is outside or “external” to exchange

• can be negative or positive

Negative Externality

Situation where a third party, outside of the transaction, suffers from a market transaction by others

• litter in public areas, loud music, pollution of all sorts

• Free markets tend to provide too many goods that come with these externalities

• Gov’t interventions can help limit these quantities, which increases social benefits generated in these markets

Positive Externality

Situation where a third party, outside of the transaction, benefits from a market transaction by others

• front yard gardens that a passer-by can enjoy, pollination of our trees by our neighbouring beekeepers’ bees

• Free markets tend to provide too little of the good that comes with these externalities

• gov’t intervention in such markets can increase their social (allocative) efficiency.

Pollution as a Negative Externality

Affects individuals beyond the producer and the consumer of the product that generates the pollutant

Additional External Costs

Costs incurred by the third parties outside the production process when a unit of output is produced

Social Costs

Costs that include both the private costs incurred by producers and the additional costs incurred by third parties outside the production process

Taking Social Costs into account: Supply Shift

• if firm takes only its own costs of production into account, then its supply curve will be Sprivately and the market E will occur at Eo

• Accounting for additional external costs, firm’s supply curve will be Ssocial

• New equilibrium will occur at E1 where the Supply curve will shift to the left and up the demand curve

Market Failure

• happens when market, on its own, does not allocate resources efficiently in a way that balances social costs and benefits → externalities are one example of a market failure

• if firms were required to pay social costs of pollution, they would create less pollution but produce less of the product and charge a higher price

• low price for fossil fuels such as gasoline often do not include the whole social costs of pollution