Principles of Economics - 3e Chapter 12 Environmental Protection and Negative Externalities

Environmental Protection and Negative . A . FIGURE Environmental Debate Across the country , countless people have protested , even risking arrest , against the Keystone Pipeline . Credit of People Risk Arrest at State Department in Boston Protesting Keystone Pipeline by , BY 20 ) CHAPTER OBJECTIVES In this chapter , you will learn about The Economics of Pollution Regulation Environmental Tools The and Costs of Environmental Laws International Environmental Issues The Tradeoff between Economic Output and Environmental Protection Introduction to Environmental Protection and Negative BRING IT HOME Keystone You might have heard about Keystone in the news , It was a pipeline system designed to bring oil from Canada to the near the Gulf of Mexico , as well as to boost crude oil production in the United States . While a private company , planned to build and own the pipeline , US government approval was required because of its size and location . There were four phases in plans to build the pipeline , and the first two of these had been in operation . Sounds like a great idea , right ?

A pipeline that would move much needed crude oil to the Gulf would increase oil production for manufacturing needs , reduce price pressure at the gas pump , and increase overall economic growth . Supporters argued that the pipeline would be one of the safest pipelines built yet , and would reduce America dependence on politically vulnerable Middle Eastern oil imports .

282 12 Environmental Protection and Negative Not so fast , said its critics . The Keystone would be constructed over an enormous aquifer ( one of the largest in the world ) in the Midwest , and through an environmentally fragile area in Nebraska , causing great concern among environmentalists about possible destruction to the natural surroundings . They argued that leaks could taint valuable water sources and pipeline construction could disrupt and even harm indigenous species . Environmentalist groups fought government approval of the proposed pipeline construction , and in November 2015 , the Obama administration refused to grant the permit necessary to build the Keystone pipeline . In 2017 , the Trump administration sought to grant the necessary permit , and legal challenges emerged . In 2021 , President , on his first day in office , canceled the permit , effectively ending ( for now ) the Keystone pipeline . Environmental concerns matter when discussing issues related to economic growth . However , how much should economists factor in these issues when deciding policy ?

In the case of the pipeline , how do we know how much damage it would cause when we do not know how to put a value on the environment ?

Would the pipeline outweigh the opportunity cost ?

The issue of how to balance economic progress with unintended effects on our planet is the subject of this chapter . In 1969 , the River in Ohio was so polluted that it spontaneously burst into . Air pollution was so bad at that time that , Tennessee was a city where , as an article from Sports Illustrated put it the death rate from tuberculosis was double that of the rest of Tennessee and triple that of the rest of the United States , a city in which the in the air was so bad it melted nylon stockings legs , in which executives kept supplies of clean white shirts in their so they could change when a shirt became too gray to be presentable , in which headlights were turned on at high noon because the sun was eclipsed by the gunk in the sky . The problem arises for every economy in the world , whether or , and whether or . Every country needs to strike some balance between production and environmental quality . This chapter begins by discussing how may fail to take certain social costs , like pollution , into their planning if they do not need to pay these costs . Traditionally , policies for environmental protection have focused on governmental limits on how much of each pollutant could be emitted . While this approach has had some success , economists have suggested a range of more , policies that reduce pollution at a lower cost . We will consider both approaches , but first let see how economists frame and analyze these issues . The Economics of Pollution LEARNING OBJECTIVES By the end of this section , you will be able to Explain and give examples of positive and negative Identify equilibrium price and quantity Evaluate how can contribute to market failure From 1970 to 2020 , the population increased by 63 percent , and the size of the economy increased by more than . Since the , however , the United States , using a variety of policies , has made genuine progress against a number of pollutants . Table 121 lists the change in carbon dioxide emissions by energy users ( from residential to industrial ) according to the Energy Information Administration ( The table shows that emissions of certain key air pollutants declined substantially from 2007 to 2012 . They dropped 740 million metric tons ( a 12 reduction . This seems to indicate that there has been progress made in the United States in reducing overall carbon dioxide emissions , which contribute to the greenhouse effect . Access for free at

The Economics of Pollution 283 Year Coal Petroleum Total 1973 2007 2020 875 TABLE Carbon Dioxide Emissions from Energy Consumption , by Source ( Source Energy Review ) Despite the gradual reduction in emissions from fossil fuels , many important environmental issues remain . Along with the still high levels of air and water pollution , other issues include hazardous waste disposal , destruction and other wildlife habitats , and the impact on human health from pollution . Private markets , such as the cell phone industry , offer an way to put buyers and sellers together and determine what goods they produce , how they produce them and who gets them . The principle that voluntary exchange both buyers and sellers is a fundamental building block of the economic way of thinking . However , what happens when a voluntary exchange affects a third party who is neither the buyer nor the seller ?

As an example , consider a concert producer who wants to build an outdoor arena that will host country music concerts a from your neighborhood . You will be able to hear these outdoor concerts while sitting on your back perhaps even in your dining room . In this case , the sellers and buyers of concert tickets may both be quite with their voluntary exchange , but you have no voice in their market transaction . The effect of a market exchange on a third party who is outside or external to the exchange is called an externality . Because that occur in market transactions affect other parties beyond those involved , they are sometimes called . can be negative or positive . lfyou hate country music , then having it waft into your house every night would be a negative externality . If you love country music , then what amounts to a series of free concerts would be a positive externality . Pollution as a Negative Externality Pollution is a negative externality . Economists illustrate the social costs of production with a demand and supply diagram . The social costs include the private costs of production that a company incurs and the external costs that pass on to society . 122 shows the demand and supply for manufacturing refrigerators . The demand curve ( shows the quantity demanded at each price . The supply curve ( shows the quantity of refrigerators that all in the industry supply at each price assuming they are taking only their private costs into account and they are allowed to emit pollution at zero cost . The market equilibrium ( where quantity supplied equals quantity demanded , is at a price of 650 per refrigerator and a quantity refrigerators . Table this information in the three columns .

284 12 Environmental Protection and Negative social ( Price ( Refrigerators FIGURE Taking Social Costs into Account A Supply Shift If the firm takes only its own costs of production into account , then its supply curve will be , and the market equilibrium will occur at . Accounting for additional external costs of 100 for every unit produced , the supply curve will be . The new equilibrium will occur at . Price Quantity Quantity Supplied before Considering Quantity Supplied after Considering Demanded Pollution Cost Pollution Cost 600 650 700 750 800 850 900 TABLE A Supply Shift Caused by Pollution Costs However , as a of the metals , plastics , chemicals and energy that refrigerator manufacturers use , some pollution is created . Lets say that , if these pollutants were emitted into the air and water , they would create costs of 100 per refrigerator produced . These costs might occur because of adverse effects on human health , property values , or wildlife habitat , reduction of recreation possibilities , or because of other negative impacts . In a market with no restrictions , can dispose of certain wastes absolutely free . Now imagine that which produce refrigerators must factor in these external costs is , the have to consider not only labor and material costs , but also the broader costs to society of harm to health and other costs caused by pollution . If the is required to pay 100 for the additional external costs each time it produces a refrigerator , production becomes more costly and the entire supply curve shifts up by 100 . As Table and Figure illustrate , the will need to receive a price of 700 per refrigerator and produce a quantity the firms new supply curve will be . The new equilibrium will occur at Access for free at

The Economics of Pollution . In short , taking the additional external costs of pollution into account results in a higher price , a lower quantity of production , and a lower quantity of pollution . The following Work It Out feature will walk you through an example , this time with musical accompaniment . Identifying the Equilibrium Price and Quantity Table shows the supply and demand conditions for a that will play trumpets on the streets when requested . We measure output as the number of songs played . Price Quantity Quantity Supplied without paying the Quantity Supplied after paying the Demanded costs of the externality costs of the externality 20 10 18 15 12 10 TABLE Supply and Demand Conditions for a Firm Step . Determine the negative externality in this ion . To do this , you must think about the situation and consider all parties that might be impacted . A negative externality might be the increase in noise pollution in the area where the is playing . Step . Identify the initial equilibrium price and only taking private costs into account . Next , identify the new equilibrium taking into account social costs as we I as private costs . Remember that equilibrium is where the quantity demanded is equal to the quantity supplied . Step . Look down the columns to where the quantity ( the second column ) is equal to the quantity supplied without paying the costs of the externality ( third column ) Then refer to the first column of that row to determine the equilibrium price . In this case , the equilibrium price and quantity would be at a price of 10 and a quantity of five when we only take into account costs . Step . Identify the equilibrium price and quantity when we take into account the additional external costs . Look down the columns of quantity demanded ( the second column ) and the quantity supplied after paying the costs of the externality ( the fourth column ) then refer to the first column of that row to determine the equilibrium price . In this case , the equilibrium will be at a price of 12 and a quantity of four . Step . Consider how taking into account the affects the equilibrium price and quantity . Do this by comparing the two equilibrium situations . If the is forced to pay its additional external costs , then production of trumpet songs becomes more costly , and the supply curve will shift up . Remember that the supply curve is based on choices about production that make while looking at their marginal costs , while the demand curve is based on the that individuals perceive while maximizing utility . If no existed , private costs would be the same as the costs to society as a whole , and private would be the same as the to society as a whole . Thus , if no existed , the 285

286 12 Environmental Protection and Negative interaction of demand and supply will coordinate social costs and . However , when the externality exists , the supply curve no longer represents all social costs . Because represent a case where markets no longer consider all social costs , but only some of them , economists commonly refer to as an example of market failure . When there is market failure , the private market fails to achieve output , because either do not account for all costs incurred in the production of output consumers do not account for all obtained ( a positive externality ) In the case , at the market output , social costs exceed social to consumers , and the market produces too much of the product . We can see a general lesson here . If were required to pay the social costs of pollution , they would create less pollution but produce less of the product and charge a higher price . In the next module , we will explore how governments require to account for the social costs of pollution . Regulation LEARNING OBJECTIVES By the end of this section , you will be able to Explain regulation Evaluate the effectiveness of regulation When the United States started passing comprehensive environmental laws in the late and early , a typical law to companies how much pollution their smokestacks or could emit and imposed penalties if companies exceeded the limit . Other laws required that companies install certain example , on automobile or on reduce pollution . These types of laws , which specify allowable quantities of pollution and which also may detail which technologies companies must use , fall under the category of regulation . In effect , control regulation requires that increase their costs by installing equipment . Thus , are required to account for the social costs of pollution in deciding how much output to produce . regulation has been highly successful in protecting and cleaning up the environment . In 1970 , the Federal government created the Environmental Protection Agency ( to oversee all environmental laws . In the same year , Congress enacted the Clean Air Act to address air pollution . Just two years later , in 1972 , Congress passed and the president signed the Clean Water Act . These environmental laws , and their amendments and updates , have been largely responsible for America cleaner air and water in recent decades . However , economists have pointed out three with environmental regulation . First , regulation offers no incentive to improve the quality of the environment beyond the standard set by a particular law . Once meet the standard , polluters have zero incentive to do better . Second , regulation is . It usually requires the same standard for all polluters , and often the same technology as well . This means that regulation draws no distinctions between that would it easy and inexpensive to meet the pollution to reduce pollution even that might it and costly to meet the standard . Firms have no reason to rethink their production methods in fundamental ways that might reduce pollution even more and at lower cost . Third , legislators and analysts write the regulations , and so they are subject to compromises in the political process . Existing often argue ( and lobby ) that stricter environmental standards should not apply to them , only to new that wish to start production . Consequently , environmental laws are full of print , loopholes , and exceptions . Although critics accept the goal of reducing pollution , they question whether regulation is the best way to design policy tools for accomplishing that goal . A different approach is the use of market Access for free at

Environmental Tools 287 oriented tools , which we discussed in the next section . Environmental Tools LEARNING OBJECTIVES By the end of this section , you will be able to Show how pollution charges impact decisions Suggest other laws and regulations that could fall under pollution charges Explain the of marketable permits and property rights Evaluate which policies are most appropriate for various situations environmental policies create incentives to allow some in reducing pollution . The three main categories of approaches to pollution control are pollution charges , marketable permits , and property rights . All of these policy tools which we discuss , below , address the shortcomings of in different ways . Pollution Charges A pollution charge is a tax imposed on the quantity that a emits . A pollution charge gives a an incentive to determine ways to reduce its long as the marginal cost of reducing the emissions is less than the tax . For example , consider a small that emits 50 pounds per year of small particles , such as soot , into the air . This particulate matter causes respiratory illnesses and also imposes costs on and individuals . Figure illustrates the marginal costs that a faces in reducing pollution . The marginal cost reduction , like most marginal cost curves , increases with output , at least in the short run . Reducing the 10 pounds of particulate emissions costs the 300 . Reducing the second 10 pounds would cost 500 reducing the third ten pounds would cost 900 reducing the fourth 10 pounds would cost and the 10 pounds would cost . iis pattern for the costs of reducing pollution is common , because the can use the cheapest and easiest method to make initial reductions in pollution , but additional reductions in pollution become more expensive . Marginal cost ( of reducing particle emissions A Cost or Price ( Charge 900 500 A 300 A 10 20 30 40 50 Quantity That Particle Emissions Are Reduced ( pounds ) FIGURE A Pollution Charge If a pollution charge is set equal to , then the will have an incentive to reduce pollution by 30 pounds because the 900 cost of these reductions would be less than the cost of paying the pollution charge . Imagine the now faces a pollution tax of for every 10 pounds of particulates it emits . The has

288 12 Environmental Protection and Negative the choice of either polluting and paying the tax , or reducing the amount of particulates it emits and paying the cost of abatement as the shows . How much will the pollute and how much will the abate ?

The 10 pounds would cost the 300 to abate . This is substantially less than the tax , so the will choose to abate . The second 10 pounds would cost 500 to abate , which is still less than the tax , so it will choose to abate . The third 10 pounds would cost 900 to abate , which is slightly less than the tax . The fourth 10 pounds would cost , which is much more costly than paying the tax . As a result , the will decide to reduce pollutants by 30 pounds , because the marginal cost of reducing pollution by this amount is less than the pollution tax . With a tax of , the has no incentive to reduce pollution more than 30 pounds . A that has to pay a pollution tax will have an incentive to out the least expensive technologies for reducing pollution . Firms that can reduce pollution cheaply and easily will do so to minimize their pollution taxes whereas that wil incur high costs for reducing pollution will end up paying the pollution tax instead . If the pollution tax a to every source , then there are no special favoritism or loopholes for politically producers . For an example of a pollution charge at the household level , consider two ways of charging for garbage collection . One method is to a fee per household , no matter how much garbage a household produces . An alternative approach is to have several levels of fees , depending on how much garbage the household to offer lower or free charges for recyclable materials . As ( latest statistics available ) the had recorded over communities that have implemented pay as you throw programs . When people have a incentive to aut out less garbage and to increase recycling , they ways to make it happen . A number of environmental are really pollution charges , although they often do not travel under that name . For example , the federal government and many state governments impose taxes on gasoline . We can view this tax as a charge on 18 air pollution that cars generate as well as a source of funding for maintaining roads . Gasoline taxes are far in most other countries than in the United States . Similarly , the refundable charge of or 10 cents that only 10 states have for returning recyclable cans and bottles works like a pollution tax that provides an incentive to avoid littering or throwing bottles in the trash . Compared with regulation , a pollution tax reduces pollution in a more and cost effective way . LINK up Visit this website to see the current states with bottle bills and the states that have active campaigns for new bottle bills . You can also view current and proposed bills in Canada and other countries around the world . Marketable Permits When a city or state government sets up a marketable permit program ( it must start by determining the overall quantity it will allow as it tries to meet national pollution standards . Then , it divides a number of permits allowing only this quantity of pollution among the that emit that pollutant . The government can sell or provide these permits to pollute free to . Now , add two more conditions . Imagine that these permits are designed to reduce total emissions over time . For example , a permit may allow emission of 10 units one year , but only nine units the next year , then eight units the year after that , and so on down to some lower level . In addition , imagine that these are marketable permits , meaning that can buy and sell them . To see how marketable permits can work to reduce pollution , consider the four in Table . The table shows current emissions of lead from each . At the start of the marketable permit program , each receives permits to allow this level . However , these permits are shrinkable , and next year the Access for free at

Environmental Tools 289 permits allow the to emit only half as much pollution . Let say that in a year , Firm Gamma it easy and cheap to reduce emissions from 600 tons of lead to 200 tons , which means that it has permits that it is not using that allow emitting 100 tons of lead . Firm Beta reduces its lead pollution from 400 tons to 200 tons , so it does not need to buy any permits , and it does not have any extra permits to sell . However , although Firm Alpha can easily reduce pollution from 200 tons to 150 tons , it that it is cheaper to purchase permits from Gamma rather than to reduce its own emissions to 100 . Meanwhile , Firm Delta did not even exist in the period , so the only way it can start production is to purchase permits to emit 50 tons of lead . The total quantity of pollution will decline . However , buying and selling the marketable permits will determine exactly which reduce pollution and by how much . With a system of marketable permits , the that it least expensive to do so will reduce pollution the most . Firm Alpha Firm Beta Firm Gamma Firm Delta Current distributed 200 tons 400 tons 600 tons tons free for this amount How much pollution will these permits , 100 tons 200 tons 300 tons tons allow In one year ?

Actual emissions one year in the future 150 tons 200 tons 200 tons 50 tons ii I Buyer or Seller of marketable permit ?

or or for 50 tons sell permits 100 tons for 50 tons TABLE How Marketable Permits Work Another application of marketable permits occurred when the government amended the Clean Air Act in 1990 . The revised law sought to reduce sulfur dioxide emissions from electric power plants to half of the 1980 levels out of concern that sulfur dioxide was causing acid rain , which harms forests as well as buildings . In this case , the marketable permits the federal government issued were free of charge ( no pun intended ) to plants across the country , especially those that were burning coal ( which produces sulfur dioxide ) These permits were of the shrinkable type that is , the amount allowed by a given permit declined with time . Property Rights A and strengthened idea of property rights can also strike a balance between economic activity and pollution . Ronald ( who won the 1991 Nobel Prize in economics , offered a vivid illustration of an externality a railroad track running beside a farmers where the railroad locomotive sometimes emits sparks and sets the ablaze . asked whose responsibility it was to address this spillover . Should the farmer be required to build a tall fence alongside the to block the sparks , or should the railroad be required to place a gadget on the locomotive smokestack to reduce the number of sparks ?

pointed out that one can not resolve this issue until one clearly property is , the legal rights of ownership on which others are not allowed to infringe without paying compensation . Does the farmer have a property right not to have a burned ?

Does the railroad have a property right to run its own trains on its own tracks ?

If neither party has a property right , then the two sides may squabble endlessly , doing nothing , and sparks will continue to set the . However , the farmer or the railroad has a legal responsibility , then that party will seek out and pay for the least costly method of reducing the risk that sparks will hit the . The property right determines whether the farmer or the railroad pays the bills .

290 12 Environmental Protection and Negative The property rights approach is highly relevant in cases involving endangered species . The endangered species list includes about plants and animals , and about 90 of these species live on privately owned land . The protection of these endangered species requires careful thinking about incentives and property rights . The discovery of an endangered species on private land has often triggered an automatic reaction from the government to prohibit the landowner from using that land for any purpose that might disturb the imperiled creatures . Consider the incentives of that policy Ifyou admit to the government that you have an endangered species , the government effectively prohibits you from using your land . As a result , rumors abounded of landowners who followed a policy of shoot , shovel , and shut up when they found an endangered animal on their land . Other landowners have deliberately cut trees or managed land in a way that they knew would discourage endangered animals from locating there . CLEAR IT UP How effective are environmental policy tools ?

Environmentalists sometimes fear that environmental tools are an excuse to weaken or eliminate strict limits on pollution emissions and instead to allow more pollution . It is true that it pollution charges are set very low or if marketable permits do not reduce pollution by very much then tools will not work well . However , environmental laws can also be full of loopholes or have exemptions that do not reduce pollution by much , either . The advantage of environmental tools is not that they reduce pollution by more or less , but because of their incentives and flexibility , they can achieve any desired reduction in pollution at a lower cost to society . A more productive policy would consider how to provide private landowners with an incentive to protect the endangered species that they and to provide a habitat for additional endangered species . For example , the government might pay landowners who provide and maintain suitable habitats for endangered species or who restrict the use of their land to protect an endangered species . Again , an environmental law built on incentives and offers greater promise than a approach when trying to oversee millions of acres of privately owned land . Applying Environmental Tools environmental policies are a tool kit . policy tools will work better in some situations than in others . For example , marketable permits work best when a few dozen or a few hundred parties are highly interested in trading , as in the cases of oil that trade lead permits or electrical utilities that trade sulfur dioxide permits . However , for cases in which millions of users emit small amounts of as emissions from car engines or soda have no strong interest in trading , pollution charges will typically offer a better choice . We can also combine environmental tools . We can View marketable permits as a form of improved property rights . Alternatively , the government could combine marketable permits with a pollution tax on any emissions not covered by a permit . The Benefits and Costs of Environmental Laws LEARNING OBJECTIVES By the end of this section , you will be able to Evaluate the and costs of environmental protection Explain the effects of Apply marginal analysis to illustrate the marginal costs and marginal of reducing pollution Government economists have estimated that may pay more than 200 billion per year to comply with federal environmental laws . That is a sizable amount of money . Is the money well spent ?

Access for free at The and Costs of US . Environmental Laws 291 Benefits and Costs of Clean Air and Clean Water We can divide the of a cleaner environment into four areas ( people may stay healthier and live longer ( certain industries that rely on clean air and water , such as farming , and tourism , may ( property values may be higher and ( people may simply enjoy a cleaner environment in a way that does not need to involve a market transaction . Some of these , such as gains to tourism or farming , are relatively easy to value in economic terms . It is harder to assign a monetary value to others , such as the value of clean air for someone with asthma . It seems to put a monetary value on still others , such as the satisfaction you might feel from knowing that the air is clear over the Grand Canyon , even if you have never visited the Grand Canyon , but advanced techniques in economics allow one to generate estimates . Although estimates of environmental are not precise , they can still be revealing . For example , a study by the Environmental Protection Agency looked at the costs and of the Clean Air Act from 1970 to 1990 . It found that total costs over that time period were roughly 500 huge amount . However , it also found that a estimate of the health and other from cleaner air was 22 44 times higher than the costs . A more recent study estimated that the environmental to Americans from the Clean Air Act will exceed their costs by a margin of four to one . The estimated that in 2010 the of Clean Air Act programs will total about 110 billion . This estimate represents the value of avoiding increases in illness and premature death which would have prevailed . Saying that overall of environmental regulation have exceeded costs in the past , however , is very different from saying that every environmental regulation makes sense . For example , studies suggest that when breaking down emission reductions by type of contaminants , the of air pollution control outweigh the costs primarily for particulates and lead , but when looking at other air pollutants , the costs of reducing them may be comparable to or greater than the . Just because some environmental regulations have had much higher than costs does not prove that every individual regulation is a sensible idea . Making Environmentalism Pay The of is a little vague . Does it mean sleeping on the ground , eating roots , and getting close to wild animals ?

Does it mean in a helicopter to shoot anesthetic darts at African wildlife , or a little of both ?

The may be fuzzy , but tourists who hope to appreciate the ecology of their eco tourists the impetus to a big and growing business . The International Society estimates that international tourists interested in seeing nature or wildlife would take billion trips by 2020 . While prevented this from happening in 2020 , it is clear that there is a strong demand for . LINK up Visit The International Society website to learn more about The International Society , its programs , and tourism role in sustainable community development . Realizing the attraction of , the residents of countries may come to see that preserving wildlife habitats is more lucrative than , say , cutting down forests or grazing livestock . In South Africa , and Zimbabwe , for example , has given local communities an economic interest in protecting elephant and rhinoceros populations . Some of the leading destinations include Costa and Panama in Central America the Caribbean Malaysia , and other South destinations New Zealand the Serengeti in the Amazon rain forests and the Islands . In many of these countries and regions , governments have enacted policies whereby they share revenues from with local communities , to give people in those local communities a kind of property right that encourages them to conserve their local environment . needs careful management , so that the combination of eager tourists and local entrepreneurs does not destroy what the visitors are coming to see . And recent research indicates that wild animals that are

292 12 Environmental Protection and Negative continually exposed to tourists and vehicles exhibit stress and atypical behaviors . In general , however , well managed is viewed as a net positive , which provides an alternative to damaging the local environment . Marginal Benefits and Marginal Costs We can use the tools of marginal analysis to illustrate the marginal costs and the marginal of reducing pollution . Figure illustrates a theoretical model of this situation . When the quantity protection is low so that pollution is example , at quantity are usually numerous relatively cheap and easy ways to reduce pollution , and the marginal of doing so are quite high . At Qa , it makes sense to allocate more resources to pollution . However , as the extent of environmental protection increases , the cheap and easy ways of reducing pollution begin to decrease , and one must use more costly methods . The marginal cost curve rises . Also , as environmental protection increases , one achieves the largest marginal , followed by reduced marginal . As the quantity of environmental protection increases to , say , the gap between marginal and marginal costs narrows . At point the marginal costs will exceed the marginal . At this level protection , society is not allocating resources , because it is forfeiting too many resources to reduce pollution . Price Qa Environmental Protection FIGURE Marginal Costs and Marginal Benefits of Environmental Protection Reducing pollution is must resources . The marginal costs of reducing pollution are generally increasing , because one can make the least expensive and easiest reductions , more expensive methods for later . The marginal of reducing pollution are generally declining , because one can take the steps that provide the greatest , and steps that provide less can wait until later . As society draws closer to , some might argue that it becomes more important to use environmental tools to hold down the costs of reducing pollution . Their objective would be to avoid environmental rules that would provide the quantity of environmental protection at , where marginal costs exceed marginal . The following Clear It Up feature delves into how the measures its policies and the monetary value of our lives . CLEAR IT UP What a life worth ?

The Environmental Protection Agency ( must estimate the value of saving lives by reducing pollution against the additional costs . In measuring the of government environmental policies , the National Access for free at International Environmental Issues 293 Center for Environmental Economics ( values a sta human life at million ( in 2006 dollars , which corresponds to a little more than million in February 2022 . Economists value a human life on the basis of studies of he value that people actually place on human lives in their own decisions . For example , some jobs have a higher probability of death than others , and these jobs typically pay more to compensate for the risk . Examples are ocean as opposed to farming , and ice trucking in Alaska as opposed to truck driving in the lower states . Government regulators use estimates such as these when deciding what proposed regulations are reasonable , which means deciding which proposals have high to justify their cost . For example , when the Department of Transportation makes decisions about what safety systems should be required in cars or airplanes , it will approve rules only where the estimated cost per life saved is million or less . Resources that we spend on regulations crea a tradeoff . A study by Kip of Vanderbilt University estimated that when a regulation costs 50 million , it diverts enough spending in the rest of the economy from health care and safety expenditures that it costs a ife . This suggests that any regulation that costs more than 50 million per life saved actually costs lives , rather than . References Ryan , Dave . New Report Shows of 1990 Clean Air Amendments Outweigh Costs by Margin , press release , November 16 , 1999 . United States Environmental Protection Agency . Accessed December 19 , National Center for Environmental Economics ( Frequently Asked Questions on Mortality Risk United States Environmental Protection Agency . Accessed December 19 , World Tourism Organization , Tourism 2020 Accessed December 19 , Kip Fatal Public and Private Responsibilities for Risk . New York Oxford University Press , International Environmental Issues LEARNING OBJECTIVES By the end of this section , you will be able to Explain biodiversity Analyze the partnership of and countries in efforts to address international Many countries around the world have become more aware of the of environmental protection . Yet even if most nations individually took steps to address their environmental issues , no nation acting alone can solve certain environmental problems which spill over national borders . No nation by itself can reduce emissions of carbon dioxide and other gases by enough to solve the problem of global without the cooperation of other nations . Another issue is the challenge of preserving biodiversity , which includes the full spectrum of animal and plant genetic material . Although a nation can protect biodiversity within its own borders , no nation acting alone can protect biodiversity around the world . Global warming and biodiversity are examples of international . Bringing the nations of the world together to address environmental issues requires a set of negotiations between countries with different income levels and different sets of priorities . If nations such as China , India , Brazil , Mexico , and others are developing their economies by burning vast amounts of fossil fuels or by stripping their forest and wildlife habitats , then the world countries acting alone will not

294 12 Environmental Protection and Negative be able to reduce greenhouse gases . However , countries , with some understandable exasperation , point out that countries do not have much moral standing to lecture them on the necessities of putting environmental protection ahead of economic growth . After all , countries have historically been the primary contributors to greenhouse warming by burning fossil still are today . It is hard to tell people who are living in a country , where adequate diet , health care , and education are lacking , that they should an improved quality of life for a cleaner environment . Can rich and poor countries come together to address global environmental ?

At the initiative of the European Union and the most vulnerable developing nations , the climate conference in December 2011 launched negotiations to develop a new international climate change agreement that covers all countries . The outcome of these negotiations was the Paris Climate Agreement , passed in 2015 . The Paris Agreement committed participating countries to limits on emissions . To date , 196 entities have signed on , including the two biggest emitters of greenhouse and the United States . The contribution to the agreement was the Clean Power Plan , which planned to reduce power plant emissions across the by 17 to levels by 2020 , and to further reduce emissions by a cumulative 32 by 2030 . In early 2017 , the Trump Administration announced plans to back out of the Paris Climate Agreement . Trump opposed the Clean Power plan , opting instead to shift focus to the use of natural gas . This represented a blow to the success of the Paris Agreement . However , on his day in , President , on behalf of the United States , rejoined the Paris Climate Agreement . LINK IT UP Visit this website to learn more about the European Commission . If countries want countries to reduce their emission of greenhouse gases , then the countries may need to pay some of the costs . Perhaps some of these payments will happen through private markets . For example , some tourists from rich countries will pay handsomely to vacation near the natural treasures of countries . Perhaps some of the transfer of resources can happen through making modern technology available to poorer countries . The practical details ofwhat such an international system might look like and how it would operate across international borders are forbiddingly complex . However , it seems highly unlikely that some form government will impose a detailed system of environmental regulation around the world . As a result , a decentralized and approach may be the only practical way to address international issues such as global warming and biodiversity . The Tradeoff between Economic Output and Environmental Protection LEARNING OBJECTIVES By the end of this section , you will be able to Apply the production possibility frontier to evaluate the tradeoff between economic output and the environment Interpret a graphic representation of the tradeoff between economic output and environmental protection We can analyze the tradeoff between economic output and the environment with a production possibility frontier ( such as the one in Figure . At one extreme , at a choice like , a country would be selecting a high level of economic output but very little environmental protection . At the other extreme , at a choice like , a country would be selecting a high level of environmental protection but little economic output . According to the graph , an increase in environmental protection involves an opportunity cost of less economic output . No matter what their preferences , all societies should wish to avoid choices like , which are productively . requires that the choice should be on the production possibility frontier . Access for free at

The Tradeoff between Economic Output and Environmental Protection . Environmental Protection FIGURE The between Economic Output and Environmental Protection Each society will have to weigh its own values and decide whether it prefers a choice like with more economic output and less environmental protection , or a choice like with more environmental protection and less economic output . Economists do not have a great deal to say about the choice between , and in Figure 125 , all of which lie along the production possibility frontier . Countries with low per capita gross domestic product ( such as India , place a greater emphasis on economic in turn helps to produce nutrition , shelter , health , education , and desirable consumer goods . Countries with higher income levels , where a greater share ofpeople have access to the basic necessities of life , may be willing to place a relatively greater emphasis on environmental protection . However , economists are united in their belief that an choice such as is undesirable . Rather than choosing , a nation could achieve either greater economic output with the same environmental protection , as at point , or greater environmental protection with the same level of output , as at point The problem with environmental laws is that they sometimes involve a choice like environmental tools offer a mechanism for providing either the same environmental protection at lower cost , or providing a greater degree of environmental protection for the same cost . BRING IT HOME Keystone How would an economist respond to claims of environmental damage caused by the Keystone project ?

Clearly , we can consider the environmental cost of oil spills a negative externality , but how large would these external costs be ?

Furthermore , are these costs too high when we measure them against any potential for economic ?

As this chapter indicates , in deciding whether pipeline construction is a good idea , an economist would want to know not only about the marginal resulting from the additional pipeline construction , but also the potential marginal especially the pipeline marginal external costs . Typically these come in the form of environmental impact statements , which are usually required for such projects . For example , an impact statement , released in March 2013 by the Nebraska Department of State , considered the possibility of fewer pipeline miles going over the aquifer system and avoiding completely environmentally fragile areas . It indicated that pipeline construction would not harm most resources . As noted at the outset of this chapter , the Obama Administration declined to approve construction of the Keystone project . However , the Trump administration announced its willingness to do so , but as noted earlier , the administration effectively ended the project . While we may fairly easily quantify the economic of additional 295

296 12 Environmental Protection and Negative oil in the United States , the social costs are more challenging to measure . Consequently , different observers may reach different conclusions about the balance between estimates of economic and estimates of the social costs of the pipeline project . Access for free at

12 Key Terms 297 Key Terms additional external cost additional costs incurred by third parties outside the production process when a unit of output is produced biodiversity the full spectrum of animal and plant genetic material regulation laws that specify allowable quantities of pollution and that also may detail which technologies one must use externality a market exchange that affects a third party who is outside or external to the exchange sometimes called a spillover international that cross national borders and that a single nation acting alone can not resolve market failure When the market on its own does not allocate resources in a way that balances social costs and are one example of a market failure marketable permit program a permit that allows a to emit a certain amount of pollution with more permits than pollution can sell the remaining permits to other negative externality a situation where a third party , outside the transaction , suffers from a market transaction by others pollution charge a tax imposed on the quantity of pollution that a emits also called a pollution tax positive externality a situation where a third party , outside the transaction , from a market transaction by others property rights the legal rights of ownership on which others are not allowed to infringe without paying compensation social costs costs that include both the private costs incurred by and also additional costs incurred by third parties outside the production process , like costs spillover see externality Key Concepts and Summary The Economics of Pollution Economic production can cause environmental damage . This tradeoff arises for all countries , whether income or , and whether their economies are or . An externality occurs when an exchange between a buyer and seller has an impact on a third party who is not part of the exchange . An externality , which is sometimes also called a spillover , can have a negative or a positive impact on the third party . If those parties imposing a negative externality on others had to account for the broader social cost of their behavior , they would have an incentive to reduce the production is causing the negative externality . In the case of a positive externality , the third party obtains from the exchange between a buyer and a seller , but they are not paying for these . If this is the case , then markets would tend to under produce output because suppliers are not aware of the additional demand from others . Ifthe parties generating to others would somehow receive compensation for these external , they would have an incentive to increase production of whatever is causing the positive externality . Regulation regulation sets limits for pollution emissions technologies that must use . Although such regulations have helped to protect the environment , they have three shortcomings they provide no incentive for going beyond the limits they set they offer limited on where and how to reduce pollution and they often have loopholes . Environmental Tools Examples of environmental policies , also called cap and trade programs , include pollution charges , marketable permits , and property rights . environmental policies

298 12 Questions include taxes , markets , and property rights so that those who impose negative must face the social cost . The Benefits and Costs of Environmental Laws We can make a strong case , taken as a whole , that the of environmental regulation have outweighed the costs . As the extent of environment regulation increases , additional expenditures on environmental protection will probably have increasing marginal costs and decreasing marginal . This pattern suggests that the and cost savings of environmental policies will become more important . International Environmental Issues Certain global environmental issues , such as global warming and biodiversity , spill over national borders and require addressing with some form of international agreement . The Tradeoff between Economic Output and Environmental Protection Depending on their different income levels and political preferences , countries are likely to make different choices about is , the choice between economic output and environmental protection along the production possibility frontier . However , all countries should prefer to make a choice that shows productive is , the choice is somewhere on the production possibility frontier rather than inside it . Revisit Choice in a of Scarcity for more on these terms . Questions . Identify the following situations as an example of a negative or a positive externality a . You are a birder ( bird watcher ) and your neighbor has put up several in the yard as well as planting trees and that attract birds . Your neighbor paints his house a hideous color . Investments in private education raise your country standard of living . Trash dumped upstream downstream right past your home . Your roommate is a smoker , but you are a nonsmoker . 57 . Identify whether the market supply curve will shift right or left or will stay the same for the following a . Firms in an industry are required to pay a for their carbon dioxide emissions . Companies are sued for polluting the water in a river . Power plants in a city are not required to address the impact of their air quality emissions . Companies that use fracking to remove oil and gas from rock are required to clean up the damage . For each ofyour answers to Exercise , will equilibrium price rise or fall or stay the same ?

Access for free at 12 Questions 299 . Table provides the supply and demand conditions for a manufacturing . The third column represents a supply curve without accounting for the social cost of pollution . The fourth column represents the supply curve when the is required to account for the social cost . Identify the equilibrium before the social cost of production is included and after the social cost of production is included . Price Quantity Quantity Supplied without paying the Quantity Supplied after paying the Demanded cost of the pollution cost of the pollution 10 450 400 250 15 440 440 290 20 430 480 330 25 420 520 370 30 410 560 410 TABLE . Consider two approaches to reducing emissions of into the environment from manufacturing industries in the United States . In the approach , the US . government makes it a policy to use only predetermined technologies . In the second approach , the US . government determines which technologies are cleaner and subsidizes their use . Of the two approaches , which is the policy ?

Classify the following policies as or market incentive based . a . A state emissions tax on the quantity of carbon emitted by each . The federal government requires domestic auto companies to improve car emissions by 2020 . The sets national standards for water quality . A city sells permits to that allow them to emit a quantity . 951057 The federal government pays to preserve salmon . An emissions tax on a quantity of emissions from a is not a approach to reducing pollution . Why ?

300 12 Questions . Four called Elm , Maple , Oak , and Cherry , produce wooden chairs . However , they also produce a great deal of garbage ( a mixture of glue , varnish , sandpaper , and wood scraps ) The row of Table shows the total amount of garbage ( in tons ) that each currently produces . The other rows of the table show the cost of reducing garbage produced by the tons , the second tons , and so on . First , calculate the cost of requiring each to reduce the weight of its garbage by . Now , imagine that the government issues marketable permits for the current level of garbage , but the permits will shrink the weight of allowable garbage for each by . What will be the result of this alternative approach to reducing pollution ?

Elm Maple Oak Cherry Current production of garbage ( in tons ) 20 40 60 80 Cost of reducing garbage by tons Cost of reducing garbage by second tons Cost of reducing garbage by third tons Cost of reducing garbage by fourth tons Cost of reducing garbage by tons TABLE . The rows in Table show three tools for reducing pollution . The columns of the table show three complaints about regulation . Fill in the table by stating how each tool addresses each of the three concerns . Incentives to Go Beyond Flexibility about Where and How Pollution Will Be Reduced Political Process Creates Loopholes and Exceptions Pollution Charges Marketable Permits Property Rights TABLE Access for free at

12 Questions 301 10 . Suppose a city releases 16 million gallons of raw sewage into a nearby lake . Table shows the total costs of cleaning up the sewage to different levels , together with the total of doing so . include environmental , recreational , health , and industrial . Total Cost ( in thousands of dollars ) Total ( in thousands of dollars ) 16 million gallons Current situation Current situation 12 million gallons 50 800 million gallons 150 1300 million gallons 500 1650 gallons 1200 1900 TABLE a . Using the information in Table , calculate the marginal costs and marginal of reducing sewage emissions for this city . See Production Costs and Industry Structure ifyou need a refresher on how to calculate marginal costs . What is the optimal level of sewage for this city ?

Why notjust pass a law that can emit zero sewage ?

After all , the total of zero emissions exceed the total costs . 11 . The state of Colorado requires oil and gas companies who use fracking techniques to return the land to its original condition after the oil and gas extractions . Table shows the total cost and total ( in dollars ) of this policy . Land Restored ( in acres ) Total Cost Total 100 20 140 200 80 240 300 160 320 400 280 380 TABLE a . Calculate the marginal cost and the marginal at each quantity ( acre ) of land restored . See Production Costs and Industry Structure ifyou need a refresher on how to calculate marginal costs and . lfwe apply marginal analysis , what is the optimal amount of land to be restored ?

302 12 Questions 12 . 13 . Consider the case of global environmental problems that spill across international borders as a dilemma of the sort studied in Mono ) Competition and . Say that there are two countries , A and . Each country can choose whether to protect the environment , at a cost of 10 , or not to protect it , at a cost of zero . If one country decides to protect the environment , there is a of 16 , but the is divided equally between the two countries . If both countries decide to protect the environment , there is a of 32 , which is divided equally between the two countries . a . In Table 1210 , in the costs , and total payoffs to the countries of the following decisions . Explain why , without some international agreement , they are likely to end up with neither country acting to protect the environment . Country Protect Not Protect Protect Country A Not Protect TABLE A country called Sherwood is very heavily covered with a forest of trees . There are proposals to clear some of Sherwood forest and grow corn , but obtaining this additional economic output will have an environmental cost from reducing the number of trees . Table shows possible combinations of economic output and environmental protection . Combos Corn Bushels ( thousands ) Number of Trees ( thousands ) 30 20 40 10 TABLE a . Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis , measured by the number of trees , and the quantity of economic output , measured in corn , on the vertical axis . Which choices display productive ?

How can you tell ?

Which choices show ?

How can you tell ?

In the choice between and , decide which one is better . Why ?

In the choice between and , can you say which one is better , and why ?

Ifyou had to guess , which choice would you think is more likely to represent a environmental policy and which choice is more likely to represent a environmental policy , choice or ?

Why ?

Access for free at 12 Review Questions 303 Review Questions 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 23 . 24 . 25 . 26 . 27 . 28 . is an externality ?

Give an example of a positive externality and an example of a negative externality . Wiat is the difference between private costs and social costs ?

In a market without environmental regulations , will the supply curve for a account for private costs , external costs , both , or neither ?

Explain . Wiat is environmental regulation ?

Wiat are the three problems that economists have noted with regard to regulation ?

Wiat is a pollution charge and what incentive does it provide for a to take external costs into account ?

Wiat is a marketable permit and what incentive does it provide for a to account for external costs ?

Wiat are property rights and what incentive do they provide to account for external costs ?

As the extent of environmental protection expands , would you expect marginal costs protection to rise or fall ?

Why or why not ?

As the extent of environmental protection expands , would you expect the marginal of environmental protection to rise or fall ?

Why or why not ?

What are the economic between and countries in international conferences on global environmental damage ?

What arguments do countries make in international discussions of global environmental ?

In the economic output and environmental protection , what do the combinations on the protection possibility curve represent ?

What does a point inside the production possibility frontier represent ?

Critical Thinking Questions 29 . 30 . 31 . 32 . 33 . 34 . Suppose you want to put a dollar value on the external costs of carbon emissions from a power plant . What information or data would you obtain to measure the external not social cost ?

Would environmentalists favor policies as a way to reduce pollution ?

Why or why not ?

Consider two ways of protecting elephants from poachers in African countries . In one approach , the government sets up enormous national parks that have habitat for elephants to thrive and forbids all local people to enter the parks or to injure either the elephants or their habitat in any way . In a second approach , the government sets up national parks and designates 10 villages around the edges of the park as tourist centers that become places where tourists can stay and bases for guided tours inside the national park . Consider the different incentives of local often are living in each of these plans . Which plan seems more likely to help the elephant population ?

Will a system of marketable permits work with thousands of ?

Why or why not ?

Is zero pollution possible under a marketable permits system ?

Why or why not ?

Is zero pollution an optimal goal ?

Why or why not ?

304 12 Problems 35 . 36 . 37 . 38 . 39 . From an economic perspective , is it sound policy to pursue a goal of zero pollution ?

Why or why not ?

Recycling is a relatively inexpensive solution to much of the environmental contamination from plastics , glass , and other waste materials . Is it a sound policy to make it mandatory for everybody to recycle ?

Can extreme levels hurt the economic development of a country ?

Why or why not ?

How can countries from covering much of the cost of reducing pollution created by countries ?

Technological innovations shift the production possibility curve . Look at graph you sketched for Exercise 1213 . Which types of technologies should a country promote ?

Should clean technologies be promoted over other technologies ?

Why or why not ?

Problems 40 . 41 . 42 . Show the market for cigarettes in equilibrium , assuming that there are no laws banning smoking in public . Label the equilibrium private market price and quantity as and . Add whatever is needed to the model to show the impact of the negative externality from smoking . Hint In this case it is the consumers , not the sellers , who are creating the negative externality . Label the socially optimal output and price as Pe and Qe . On the graph , shade in the deadweight loss at the market output . Refer to Table . The externality created by the refrigerator production was 100 . However , once we accounted for both the private and additional external costs , the market price increased by only 50 . If the external costs were 100 why did the price only increase by 50 when we accounted for all costs ?

Table shows the supply and demand conditions for a that will play trumpets on the streets when requested . is the quantity supplied without social costs . is the quantity supplied with social costs . What is the negative externality in this situation ?

Identify the equilibrium price and quantity when we account only for private costs , and then when we account for social costs . How does accounting for the externality affect the equilibrium price and quantity ?

051 20 10 18 15 12 10 TABLE Access for free at 12 Problems 305 43 . A city currently emits 16 million gallons ( of raw sewage into a lake that is beside the city . Table shows the total costs ( in thousands of cleaning up the sewage to different levels , together with the total ( of doing so . include environmental , recreational , health , and industrial . 16 Current Current 12 50 800 150 1300 500 1850 1200 2000 TABLE a . Using the information in Table , calculate the marginal costs and marginal of reducing sewage emissions for this city . What is the optimal level of sewage for this city ?

How can you tell ?

44 . In the Land , there is only one form of pollution , called Table 1214 shows possible combinations output and reduction of gunk , depending on what kinds of environmental regulations you choose . Combos Eco Output Gunk Cleaned Up 800 10 500 30 600 40 400 40 100 90 TABLE a . Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis , measured by the percentage reduction of gunk , and with the quantity output on the vertical axis . Which choices display productive ?

How can you tell ?

Which choices show ?

How can you tell ?

In the choice between and , can you say which one is better and why ?

In the choice between and , can you say which one is better , and why ?

Ifyou had to guess , which choice would you think is more likely to represent a environmental policy and which choice is more likely to represent a environmental policy , choice or ?

Why ?