Chapter 12 - Environmental Protection and Negative Externalities

Voluntary Exchange

benefiting both buyers and sellers is a fundamental building block of the economic way of thinking

Externality

is the effect of a market exchange on a third party who is outside or “external” to the exchange (sometimes called spillover)

Negative Externalities

Refers to a cost that arises from the production or consumption that falls on someone other than the producer or consumer. This happens when cost to society > cost to the good producers. (noise from construction or exhaust from automobiles)

Positive Externalities

exists if the production and consumption of a good or service benefits a third party not directly involved in the market transaction. This happens when the social benefit > private benefit. (public parks or education)

Remember that a demand curve…

reflects the private value to consumers (reflects the maximum amount buyers are willing to pay)

Supply Curve reflects the…

private cost to producers (reflects the minimum price sellers are willing to produce at (breakeven)).

Market Equilibrium

maximizes sum of producer and consumer surplus.

Pollution is a

negative externality.

The social costs of pollution include:

1) a company’s private costs of production

2) the external costs of pollution that pass on to society as a result of the production.

Social Cost

Private Cost + External Cost

Example of pollution negative externality

Manufactured Refrigerators

Command-and-Control Regulation:

regulatory approach where the government sets specific limits and standards that must be followed by businesses and industries.

Environmental Protection Agency (EPA)

was created in 1970 to oversee all environmental laws.was created in 1970 to oversee all environmental laws.

Clean Air Act

was established in 1970 to address air pollution.

Clean Water Act

was created in 1972 to ensure clean and safe water sources.

Endangered Species Act

was created in 1973 to provide a framework to converse and protect endangered and threatened species and their habitats.

Advantages

Clarity, predictability, direct control, & immediate impact.

Clarity

provides clear and specific guidelines for compliance.

Predictability

firms know the exact requirements and can plan accordingly to meet these standards.

Direct Control

allows for direct intervention in reducing harmful activities to meet environmental goals.

Immediate Impact

can quickly reduce harmful activities by imposing strict limits and mandating specific technologies or practices.

Disadvantages

Lacks incentive, inflexibility, high administrative costs, & bureaucratic complexity.

Lacks Incentive

once firms meet standards, they have no incentive to improve further.

Inflexibility

can be rigid, not allowing for innovation or cost effective alternatives.

High Administrative Costs

requires substantial resources for monitoring, enforcement, and compliance verification.

Bureaucratic Complexity

can create complex and cumbersome regulatory frameworks that are difficult to navigate.

Emission Limits:

• Standard: Discharge must not exceed 30 mg/L of total suspended solids

(TSS) and 20 mg/L of biochemical oxygen demand (BOD) daily.

• Reporting: Daily measurements, monthly reports to the EPA.

Technology Requirements:

• Standard: Install and maintain state-of-the-art water treatment facilities.

• Inspection: Annual inspections by EPA-certified inspectors.

Monitoring and Reporting:

• Standard: Continuous monitoring systems for pollutant levels.

• Reporting: Monthly compliance reports to the EPA.

Penalties for Non-Compliance:

• Fines: $10,000 per day of non-compliance.

• Suspension: Possible temporary suspension for repeat offenders.

• Disclosure: Public reporting of non-compliance.

Training and Certification:

• Standard: Annual EPA certification for water treatment personnel.

• Verification: Checked during annual inspections.

Innovation Incentives:

• Grants: For new water treatment technologies.

• Recognition: "Clean Water Excellence" award for exceeding standards by 20% or more.

Market-oriented environmental policies

create incentives to allow firms some flexibility in reducing pollution.

The three main categories of market-oriented approaches to pollution

control are:

1) Pollution Charges

2) Marketable Permits

3) Subsidies and Tax Incentives

A pollution charge

is a tax (also called corrective tax) imposed on the quantity of

pollution that a firm emits.

• Incentivizes firms to reduce emissions as long as the marginal cost of reducing the emissions is less than the tax.

• In order to achieve an efficient result, a pollution tax = the external cost.

Pollution charges can:

1. Reduce pollution at a lower cost to society.

2. Raise revenue for government.

3. Enhance economic efficiency.

A pollution charge

provides incentive for firms to figure out the least expensive technologies for reducing pollution.

• Firms that can reduce pollution cheaply and easily will do so to minimize their

pollution taxes.

• Firms that will incur high costs for reducing pollution will end up paying the

pollution tax instead.