The Environmental Threat

1

• The Environmental Threat
• Pollution impairs health, reduces life
  expectancy, and thus reduces labor-force activity
  and output.
• It entails real costs, as measured by impaired
  health, reduced life spans, and other damages.

2

• Acid Rain
• Sulfur dioxide (SO2) is an acrid, corrosive, and
  poisonous gas created when high-sulfur fuels are
  burned.

3
Smog

• Nitrogen oxides (NOX), another ingredient in the
  formation of acid rain, are also a principal
  ingredient in the formation of smog.

4
The Greenhouse Effect

• Excess buildup of carbon dioxide (CO2) is
  creating a gaseous blanket around the earth.
• The potential effects of this blanket are
  intensely debated.

5
Organic Pollution

• The most common form of water pollution comes
  from the disposal of organic wastes from toilets
  and garbage disposals.
• Inadequate treatment systems often result in the
  closure of waterways and beaches.

6
Solid-Waste Pollution

• Most solid wastes originate in agriculture and
  mining.
• Solid waste originating in residential and
  commercial use is considered dangerous because it
  accumulates where people live.

7
Pollution Damages

• Some monetary measure of environmental damage is
  important to our decision making.
• We wont get clean air unless we spend resources
  to get it.

8
Assigning Prices

• Economists can estimate the dollar value of
  damage by assessing the economic value of lives,
  forests, lakes, and other resources.
• It is difficult to measure the value of
  intangibles like lost views of sunsets, wildlife,
  and recreation opportunities.

9
Cleanup Possibilities

• The EPA estimates that 95 percent of current air
  and water pollution could be eliminated by known
  and available technology.

10
The Production Decision

• Business managers seeking to maximize profit will
  produce the rate of output where MR MC.
• Production decision The selection of the
  short-run rate of output (with existing plant and
  equipment).

11
Cost of Pollution Abatement

• The behavior of profit-maximizers is guided by
  comparisons of revenues and costs, not by
  philanthropy, aesthetic concerns, or the welfare
  of the environment.

12
Market Failure External Costs

• People tend to maximize their personal welfare,
  balancing private benefit against private cost.
• They ignore costs that are external to them.
• External costs are costs of a market activity
  borne by a third party.

13
Externalities in Production

• Whenever external costs exist, a private firm
  will not allocate its resources and operate its
  plant in such a way as to maximize social
  welfare.
• If pollution costs are external, firms will
  produce too much of a polluting good.

14
Externalities in Production

• Social costs are the full resource costs of an
  economic activity, including externalities.

• Private costs are the costs of an economic
  activity directly borne by the immediate producer
  or consumer (excluding externalities).

15
Externalities in Production

• The market does not allocate resources
  efficiently when external costs are present.

• This is a case of market failure.
• Market failure An imperfection in the market
  mechanism that prevents optimal outcomes

refer to graph on board
16
Regulatory Options

• There are two general strategies for
  environmental protection.
• Alter market incentives in such a way that they
  discourage pollution.
• Bypass market incentives with some form of
  regulatory intervention.

17
Command-and-Control Options

• With the command-and-control option, the
  government commands firms to reduce pollution and
  then controls the process for doing so.
• Excessive process regulation may raise the costs
  of environmental protection and discourage
  cost-saving innovation.

18
Emission Charges

• An emission charge is a fee imposed on polluters,
  based on the quantity of pollution.
• An emission charge increases private marginal
  cost and encourages lower output and cleaner
  technology.

19
Green Taxes

• An efficient way to control pollution is to make
  those who cause it bear some of the costs through
  green taxes.
• Green taxes run the gamut from retail taxes on
  gasoline to landfill charges on waste disposal.

20
Tradable Pollution Permits

• Tradable pollution permits let firms purchase the
  right to continue polluting.
• The key to the success of polluting permits is
  that they are bought and sold among private firms.

21
Tradable Pollution Permits

• The principal advantage of pollution permits is
  their incentive to minimize the cost of pollution
  control.

• Entrepreneurs now have an incentive to discover
  cheaper methods for pollution abatement.

22
The Optimal Rate of Pollution

• Optimal rate of pollution is the rate of
  pollution that occurs when the marginal social
  benefit of pollution control equals its marginal
  social cost.

23
Cost-Benefit Analysis

• Marginal analysis tells us that a zero-pollution
  goal isnt economically desirable.
• Some studies suggest the cost/benefit ratio is
  extraordinarily high.

24
Who Will Pay?

• If producers can pass the cost of pollution
  control along to the consumer, higher prices
  reduce pollution in two ways

• Higher prices help to pay for pollution-control
  equipment.
• Higher prices encourage consumers to buy less
  polluting goods.

25
The Greenhouse Threat

• Some scientists worry about the carbon emissions
  we are now spreading into the atmosphere.
• They warn that CO2 is warming the earths
  atmosphere and predict the polar caps will melt,
  continents will flood, and weather patterns will
  go haywire.

26
Global Externalities

• One thing is certain, CO2 emissions are a global
  externality.
• Without some form of government intervention,
  there is little likelihood that market
  participants will voluntarily reduce them.

27
Kyoto Treaty

• In December of 1997, most of the worlds
  industrialized nations pledged to reduce CO2
  emissions.
• The Kyoto Treaty encourages nations to develop a
  global system of tradable pollution permits to
  encourage cost efficiency.