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Pollution• Waste that is not recycled

• Examples:– Carbon monoxide, sulfur oxides, nitrogen oxides, and

other hazardous compounds released by motor vehicles and industrial plants

– Carbon dioxide released by the burning of fossil fuels– Deforestation– Chlorofluorocarbons (CFCs)– Industrial wastes, leaking septic tanks and landfills,

and pesticides

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Externalities

• Pollution is the classic example of an economic externality– The cost or benefit of an economic activity

that spills over onto the rest of society

• Externalities can be positive or negative– Pollution is a negative externality

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Spillover Costs• A negative externality in which costs are

shifted from the private market onto society– Involve costs created by an economic activity

that are shifted to other firms or individuals

– Spillover costs are created by both businesses and individuals

– Examples:• Environmental pollution• Noise pollution• Congestion

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Spillover Benefits

• A positive externality in which benefits are shifted from the private market onto society– Examples:

• Education• Immunization of children

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Inefficient Resource Allocation

• Externalities can cause resources to be inefficiently allocated– We produce and consume too much of a

product (overallocate resources to its production) if negative externalities are present

– We produce and consume too little of a product (underallocate resources to its production) if positive externalities are present

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The Effects of Pollution in a Single Market

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Costs of Production• Social costs of production

– Total costs of production, including private costs to the producer and spillover costs borne by society

• When markets base output decisions on costs of production, do so on the basis of private costs of production only, not on full costs of production– Socially optimal level of output is based on full

social costs of production

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The Effects on One Market ofPollution in Another Market

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Overallocation and Underallocationof Resources

• Overallocation of resources– The production of more than the socially

optimum amount of a good or service

• Underallocation of resources– The production of less than the socially

optimum amount of a good or service

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Environmental Policies and Politics

• Three factors explain why the environmental movement is both recent and a product of affluent, economically advanced countries:

1. Growth in population, accompanied by increases in output, has greatly increased amounts of pollutants released into air and water

2. Degree of peril occasioned by pollutants is greater today than in preceding centuries

3. We have become more affluent, and the demand for environmental quality has increased markedly

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Environmental Legislation• Spillover costs and misallocation of resources

result from externalities unless government takes an active role in controlling the situation

• Federal government did not become involved in air pollution control until 1950s– Air Pollution Act of 1955– Clean Air Act of 1963 (1970, 1977, and 1980)

• Environmental Protection Agency (EPA) was formed by executive order in 1970 to administer environmental laws– Federal Water Pollution Act of 1972

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Which Level of Government?• Pollution control policy is administered by

federal, as well as state and local, governments– Federal level may be the more appropriate to

regulate the environment because:• Whatever the source of air and water pollution, the

problem affects neighboring communities, states, and even countries

• Local communities, acting in their own perceived self-interest, may be lax in setting standards to control air and water pollution

• States have widely differing resources

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Methods of Regulation

• Government agencies, at any level, use the following methods to limit adverse environmental effects:

1. Standards

2. Pollution fees

3. Pollution permits

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The Standards Approach• Maximum acceptable levels of pollutants

are established– Firms that exceed these levels are punished,

usually by fines

• Standards may be classified as:– Performance standards

• Specify required level of performance but not means of compliance

– Design standards• Specify both required level of performance and

means of compliance

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Pollution Fees• Two types:

– Effluent fees• Taxes on production causing water pollution

– Emissions fees• Taxes on production causing air pollution

• If pollution fee is at least equal to social spillover cost, imposition of tax will correct overallocation of resources that results from pollution– Gives firms incentive to change behavior

• Can either pay fee or find new process of production less harmful to environment

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Marketable Pollution Permits

• Maximum level of pollution acceptable to society is divided into units

• Government issues permits that allow business firms to produce these units of pollution in their production process– Permits can be bought and sold– Eventually wind up in the hands of firms with

highest costs of reducing pollution• Result in lowest cost to society (producers and

consumers) of pollution control

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Which Method Is Better?

• Given problems with standards approach, many economists favor pollution fees or pollution permits

– Both more flexible than standards and rely on marketplace to control pollution more efficiently

– Both less expensive than standards regulation and do not stifle technological change

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World Carbon Dioxide Emissions

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United States Carbon Dioxide Emissions

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World Petroleum Consumption

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United States Petroleum Consumption

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OPEC• Organization of Petroleum Exporting Countries

– Members: 13 oil exporting countries– Controls supply of petroleum by setting quotas on oil exports of

each member country

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United States Petroleum Prices

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United States Retail Motor Gasoline Prices

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Other International Environmental Problems

• Aside from global warming and use of finite energy, other global issues include:– Ozone depletion– Deforestation– Loss of biodiversity– Desertification

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Evaluation of Environmental Policies

• Cost-benefit analysis– Compares costs and benefits of a policy or program

• Environmental protection costs are the total of all costs incurred by government, businesses, or households

• Benefits of environmental protection are improvements in environmental quality that result– Some are quantifiable– Many cannot be calculated in monetary terms

• In reconciling costs with benefits of environmental protection, must consider monetary and nonmonetary benefits and benefits to future as well as current generations

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Economics of Conservation• Market can act as mechanism to encourage conservation

– Taxes or subsidies (payments from government for some given action) increase market prices and therefore lead efforts to conserve

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Economics of Recycling• Examples of recyclable products:

– Aluminum– Newspapers– Cardboard– Magazines– Tin cans– Glass– Plastics– Scrap metal– Used oil

• Popular alternative to landfilling

• Two most pressing problems of recycling:1. Motivating consumers and businesses to recycle2. Developing markets for recyclable goods

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Effects of Environmental Policyon U.S. Economy

• Some critics argue that environmental regulation has increased costs of American business and causes adverse effects on the U.S. economy:– Inflation– Reduction in national output, which leads to:

• Increased unemployment• Slowdown in economic growth

• Others argue that employment has actually increased as a result of environmental regulation because decrease in jobs in polluting firms is offset by increase in jobs at firms formerly harmed by pollution

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Criticism of U.S. Environmental Policy

• George W. Bush has been strongly criticized by environmentalists for his environmental policies– Wants voluntary restraint by businesses that contribute to global

warming, rather than mandatory controls

– Widespread use of hydrogen fuel cells—the centerpiece of Bush energy plan—might not be as environmentally friendly as he wants to believe

– Supported approval of federal dump for nuclear waste at Yucca Mountain in Nevada

– Proposed drilling for oil and gas in Arctic National Wildlife Refuge

– Reversed prior policy in many areas, including logging and mining

– Favors reducing federal government’s role in pollution control

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International Aspects of Pollution Control

• Two major international environmental summits– Rio Earth Summit (Brazil, 1992)

• Climate Change Convention• Biodiversity Convention

– World Summit on Sustainable Development (Johannesburg, 2002)

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The Economic Left and the Economic Right

• THE ECONOMIC LEFT (Liberal)– Support active government

role in protecting environment

– May favor standards regulation, as well as policies drafted at national and international levels

– May take position that we should do whatever it takes to get the job done and not worry about government’s expanding role in the economy

• THE ECONOMIC RIGHT (Conservative)– More likely to oppose

environmental regulation– More likely to favor pollution

fees and marketable pollution permits over regulation of pollution by means of standards

– May also prefer state and local solutions to environmental problems over policies developed at federal and international levels

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