Principles of Microeconomics Chapter 12: Environmental Protection and Negative Externalities

12.1 The Economics of Pollution

  • Since the 1970s, the U.S. has implemented various anti-pollution policies, leading to significant progress against many pollutants.
  • However, there are remaining significant pollution issues:
    • High levels of air and water pollution.
    • Hazardous waste disposal.
    • Destruction of wetlands and wildlife habitats.
    • Impact of pollution on human health.
    • Carbon release as a notable concern.

Externalities

  • Externality: An effect of a market exchange on a third party not involved in that exchange.
    • Can be negative or positive.
    • Negative externality: Third party suffers (e.g., pollution).
    • Positive externality: Third party benefits (e.g., hotels benefiting from events).

Pollution as a Negative Externality

  • Private costs: Costs incurred by sellers/ producers.
    • Basis for firm’s supply curve.
  • Additional external costs: Costs borne by third parties outside the production process.
  • Social costs: Sum of private costs and external costs.

Efficiency of Markets

  • An efficient market is one where supply (cost to produce) equals demand (benefit to consumers).
  • Externalities disrupt this balance, leading to inefficient production levels.

Taking Social Costs into Account

  • If firms consider only their costs, equilibrium at E0 (supply curve Sprivate).
  • If they account for external costs (e.g., $100), new equilibrium at E1 (supply curve Ssocial).

Market Failure

  • Market failure: Inefficient allocation of resources affecting social costs and benefits.
  • If firms paid social costs of pollution, they would reduce pollution but potentially produce less and charge higher prices.

12.2 Command-and-Control Regulation

  • Command-and-control regulation: Laws specifying allowable pollution levels and required pollution controls.
    • Firms must invest in anti-pollution technologies.
    • This regulation ensures that firms consider social costs in production decisions.

Difficulties with Command-and-Control Regulation

  • Lack of incentive to exceed legal pollution standards.
  • Inflexibility: Same standards for all firms.
  • Political compromises lead to loopholes and exceptions.

12.3 Market-Oriented Environmental Tools

  • Pollution charge: Tax imposed on emissions, incentivizing cost-effective pollution reduction measures.
    • Example: Gas tax, disposal fees for chemicals.

Pollution Charge Example

  • Example of a firm with a $1,000 pollution charge incentivized to reduce pollution by 30 pounds if cost to reduce is $900 (less than charge).

Marketable Permits

  • Marketable permit program: Firms can buy/sell pollution permits, promoting cost-efficient pollution management.
    • Choices: Purchase permits or mitigate pollution and sell excess permits.

Better-Defined Property Rights

  • Property rights: Legal ownership rights that prevent infringement without compensation.
    • Relevant for endangered species on private land.

12.4 Benefits and Costs of U.S. Environmental Laws

  • Benefits of cleaner environments include:
    1. Improved public health and longevity.
    2. Benefits to industries relying on clean resources (e.g., farming, fishing).
    3. Increased property values.
    4. Enhanced general enjoyment of the environment.

Marginal Analysis of Pollution Reduction

  • Marginal costs of pollution reduction usually increase; initial easy reductions are made first.
  • Marginal benefits of pollution reduction typically decline, as more effective steps are taken initially.
  • At point QA, resources are efficiently allocated; at point QC, marginal costs exceed marginal benefits, indicating inefficiency.

12.5 International Environmental Issues

  • Global environmental problems, like climate change, require international cooperation.
  • International externalities: Environmental issues that cross borders and can't be managed by any single nation.

Fossil Fuels and Climate Change

  • High-income countries historically contribute to greenhouse emissions via fossil fuel use.
  • The Paris Climate Agreement obligates countries to limit CO2 emissions.

Details of an International System

  • There is skepticism about the possibility of a global government enforcing environmental regulations.
  • A decentralized, market-oriented approach may be necessary for global environmental challenges.

12.6 Tradeoff between Economic Output and Environmental Protection

  • Analysis of tradeoffs can be visualized using a Production Possibility Frontier (PPF).
  • Societies weigh economic output against environmental protection, choosing different points (e.g., P for more output, T for better protection).
  • Inefficient choices (like M) are undesirable.