Principles of Microeconomics Scarcity and Social Provisioning Chapter 18 Environmental Protection and Negative Externalities

CHAPTER 18 . ENVIRONMENTAL PROTECTION AND NEGATIVE INTRODUCTION TO ENVIRONMENTAL PROTECTION AND NEGATIVE Figure . Environmental Debate . Across the country , countless people have protested , even risking arrest , against the Keystone Pipeline . Credit modification of image by Creative Commons ) KEYSTONE You might have heard about Keystone in the news . It is a pipeline system designed to bring oil from Canada to the refineries near the Gulf of Mexico , as well as to boost crude oil production in the United States . While a private company , will own the pipeline , government approval is required because of its size and location . The pipeline is being built in four phases , with the first two currently in operation , bringing oil from , Canada , east across Canada , south through the United States into Nebraska and Oklahoma , and northeast again to Illinois . The third and fourth phases of the project , known as Keystone , would create a pipeline southeast from straight to Nebraska , and then from Oklahoma to the Gulf of Mexico . Sounds like a great idea , right ?

A pipeline that would move much needed crude oil to the Gulf refineries would increase oil production for manufacturing needs , reduce price pressure at the gas pump , and increase overall economic growth . porters argue that the pipeline is one of the safest pipelines built yet , and would reduce America dependence on politically vulnerable Middle Eastern oil imports . Not so fast , say 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 about possible destruction to the natural surroundings . They argue that leaks could taint valuable water sources and construction of the pipeline could disrupt and even harm indigenous species . Environmentalist groups have fought approval of the proposed construction of the pipeline , and as of press time the pipeline projects remain stalled .

PRINCIPLES or ECONOMICS 483 Of course , environmental concerns matter when discussing issues related to economic growth . But how much should they factor in ?

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 benefits of 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 . TER OB ( Introduction to Environmental Protection and Negative In this chapter , you will learn about The Economics of Pollution Regulation Environmental Tools The Benefits and Costs of US . Environmental Laws International Environmental Issues The Tradeoff between Economic Output and Environmental Protection 11 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 filth in the air was so bad it melted nylon stockings off women legs , in which executives kept supplies of clean white shirts in their offices 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 The problem of pollution arises for every economy in the world , whether or income , and whether or . Every country needs to strike some between production and environmental quality . This chapter begins by discussing how firms 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 lets 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 firms can contribute to market failure rom 1970 to 2012 , the population increased by and the size of the economy more than doubled . Since the , however , the United States , using a variety of tion policies , has made genuine progress against a number of pollutants . Table lists the change in carbon dioxide emissions by users of energy ( 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 730 million metric tons ( a 12 reduction . This seems to indicate that progress has been made in the United States in reducing overall carbon dioxide emissions , which cause greenhouse gases . Primary Fossil Fuels Purchased Electric Power Total Primary Fossil Fuels Sector Coal Petroleum Natural Gas Residential ( 14 ) 31 ) 134 ) 179 ) Commercial ( 126 ) 136 ) Industrial ( 40 ) 62 ) 31 ( 118 ) 191 ) Transportation ( 228 ) 224 ) Power ( 464 ) 36 ) 122 ) Change ( 508 ) 342 ) 121 ( 378 ) 730 ) Table . US Carbon Dioxide ( Emissions from Fossil Fuels Consumed , Million Metric Tons ( per Year . Source Monthly 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 of wetlands and other wildlife habitats , and the impact on human health from pollution .

PRINCIPLES or ECONOMICS 485 Private markets , such as the cell phone industry , offer an efficient way to put buyers and sellers together and determine what goods are produced , how they are produced , and who gets them . The principle that voluntary exchange benefits both buyers and sellers is a fundamental building block of the economic way of thinking . But 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 try music concerts a from your neighborhood . You will be able to hear these outdoor 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 satisfied 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 side 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 . If you 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 incurred by the company and the external costs of pollution that are passed on to society . Figure 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 supplied by all the firms at each price if 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 and quantity demanded are equal , is at a price of 650 and a quantity of . This information is also in the first three columns of Table . 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 are used in manufacturing refrigerators , 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 injuries to human health , property values , wildlife habitat , reduction of recreation possibilities , or

486 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER 950 Sana 900 850 I 800 I I 750 I I ( 700 ' I 650 ! ED ( 600 . 550 I I I I 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 firms supply curve will be . The new equilibrium will occur at . because of other negative impacts . In a market with no restrictions , firms can dispose of certain wastes absolutely free . Now imagine that firms which produce refrigerators must factor in these external costs of is , the firms have to consider not only the costs of labor and materials needed to make a refrigerator , but also the broader costs to society of injuries to health and other values caused by pollution . If the firm is required to pay 100 for the additional external costs of pollution each time it produces a refrigerator , production becomes more costly and the entire ply curve shifts up by 100 . As illustrated in the fourth column of Table and in Figure , the firm will need to receive a price of 700 per refrigerator and produce a quantity of the firms new supply curve will be . The new equilibrium will occur at , 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 . IDENTIFYING THE EQUILIBRIUM PRICE AND QUANTITY Table shows the supply and demand conditions for a firm that will play trumpets on the streets when requested . Output is measured as the number of songs played .

PRINCIPLES or ECONOMICS 487 Price Quantity Quantity Supplied without paying the costs of the Quantity Supplied after paying the costs of the Demanded externality externality 20 . 10 Table . Supply and Demand Conditions for a Trumpet Playing Firm Ste ) Determine the negative externality in this situation . To do this , you must think about the situation described and consider all parties that might be impacted . A negative externality might be the increase in noise pollution in the area Where the firm is playing . Ste ) Identify the equilibrium price and quantity when only private costs are taken into account , and then when social costs are taken into account . Remember that equilibrium is Where the quantity demanded is equal to the quantity supplied . Ste ) Look down the columns to Where the quantity demanded ( the second column ) is equal to the quantity supplied Wit paying the costs of the externality ( the third column ) Then refer to the first column of that row to determine the equilibrium price . In this case , the equilibrium price and quantity when only private costs are taken into account would be at a price of 10 and a quantity of five . Ste ) Identify the equilibrium price and quantity when the additional external costs are taken into account . 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 will be at a price of 12 and a quantity of four . Ste ) Consider how taking the externality into account affects the equilibrium price and quantity . Do this by comparing the two equilibrium situations . If the firm 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 firms make while at their marginal costs , while the demand curve is based on the benefits 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 benefits would be the same as the benefits to society as a whole . Thus , if no existed , the interaction of demand and supply will coordinate social costs and benefits . However , when the externality of pollution 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 faiIs to achieve efficient output , because either firms do not account for all costs incurred in the production of output or consumers do not account for all benefits obtained ( a positive externality ) In the case of , at the market output , social costs of production exceed social benefits to consumers , and the market produces too much of the product . We can see a general lesson here . If firms were required to pay the social costs of , they would create less pollution but produce of the product and charge a higher price . In the next module , We explore how governments require firms to take the social costs of into account .

483 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER KEY CONCEPTS AND SUMMARY Economic production can cause environmental damage . This tradeoff arises for all countries , whether 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 take the broader social cost of their behavior into account , they would have an tive to reduce the production of whatever is causing the negative externality . In the case of a positive externality , the third party is obtaining benefits from the exchange between a buyer and a seller , but they are not paying for these benefits . If this is the case , then markets would tend to under produce output because suppliers are not aware of the additional demand from others . If the parties that are generating benefits to others would be somehow compensated for these external benefits , they would have an incentive to increase production of whatever is causing the positive externality . SELF CHECK 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 . 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 fine for their emissions of carbon dioxide . Companies are sued for polluting the water in a river . Power plants in a specific city are not required to address the impact of their emissions on the quality of air . Companies that use fracking to remove oil and gas from rock are required to clean up the damage . For each of your answers to Question , will equilibrium price rise or fall or stay the same ?

The supply and demand conditions for a manufacturing firm are given in Table . The third column represents a supply curve without taking the social cost of pollution into account . The fourth column represents the supply curve when the firm is required to take the social cost of pollution into account . Identify the equilibrium before the social cost of production is included and after the social cost of production is included .

PRINCIPLES OF ECONOMICS 489 Quantity Quantity Supplied without paying the cost of the Quantity Supplied after paying the cost of the Demanded pollution pollution Price 10 450 400 250 15 440 440 290 20 430 480 330 25 420 520 370 30 410 560 410 Table REVIEW QUESTIONS What is an externality ?

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

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

Explain . CRITICAL THINKING QUESTIONS 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 ?

PROBLEMS 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 social 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 production of refrigerators was 100 . However , once both the private and additional external costs were taken into consideration , the market price increased by only 50 . If the external costs were 100 why did the price only increase by 50 when all costs were taken into account ?

Table , shows the supply and demand conditions for a firm 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 only private costs are taken into account , and then when social costs are taken into account . How does taking the externality into account affect the equilibrium price and quantity ?

490 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER REFERENCES Johnson , Oscar William . Back on Track Earth Day Success Story The No Longer Spews Foul Sports Illustrated . April 30 , air . Energy Information Administration . Total Energy Monthly Energy Review US . Department of Energy . Accessed December 19 , additional external cost additional costs incurred by third parties outside the production process when a unit of output is produced externality a market exchange that affects a third party who is outside or external to the exchange sometimes called a spillover market failure When the market on its own does not allocate resources efficiently in a way that balances social costs and benefits are one example of a market failure negative externality a situation where a third party , outside the transaction , suffers from a market transaction by others positive externality a situation where a third party , outside the transaction , benefits from a market transaction by others social costs costs that include both the private costs incurred by firms and also additional costs incurred by third parties outside the production process , like costs of pollution spillover see externality SOLUTIONS Answers to Questions . positive externality . negative externality . positive externality . negative externality

PRINCIPLES OF ECONOMICS 491 negative externality supply shifts left supply shifts left supply stays the same supply shifts left price will rise price will rise price stays the same price will rise . The original equilibrium ( before the external social cost of pollution is taken into account ) is where the private supply curve crosses the demand curve . This original equilibrium is at a price of 15 and a quantity of 440 . After taking into account the additional external cost of pollution , the production becomes more costly , and the supply curve shifts up . The new equilibrium will be at a price of 30 and a quantity of 410 .

REGULATION LEARNING OBJECTIVES By the end of this section , you will be able to Explain regulation Evaluate the effectiveness of regulation hen the United States started passing comprehensive environmental laws in the late and early , a typical law specified how much pollution could be emitted out of a stack or a drainpipe and imposed penalties if that limit was exceeded . Other laws required the installation of 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 must be used , fall under the category of regulation . In effect , regulation requires that firms increase their costs by installing equipment firms are thus required to take the social costs of tion into account . regulation has been highly successful in protecting and cleaning up the environment . In 1970 , the Environmental Protection Agency ( was created to oversee all laws . In the same year , the Clean Air Act was enacted 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 difficulties with environmental regulation . First , regulation offers no incentive to improve the quality of the environment beyond the standard set by a particular law . Once the regulation has been , 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 control regulation draws no distinctions between firms that would find it easy and inexpensive to meet the pollution to reduce pollution even firms that might find 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 , regulations are written by legislators and the , and so they are

PRINCIPLES or ECONOMICS 493 subject to compromises in the political process . Existing firms often argue ( and lobby ) that stricter environmental standards should not apply to them , only to new firms that wish to start production . Consequently , environmental laws are full of fine 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 tools , which are discussed in the next section . KEY CONCEPTS AND SUMMARY regulation sets specific limits for pollution emissions or specific technologies that must be used . 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 . SELF CHECK QUESTIONS Consider two approaches to reducing emissions of into the environment from manufacturing industries in the United States . In the first 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 ?

REVIEW QUESTIONS . What is environmental regulation ?

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

CRITICAL THINKING QUESTIONS . 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 sufficient 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 official 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 very each of these plans . Which plan seems more likely to help the elephant population ?

494 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER regulation laws that specify allowable quantities of pollution and that also may detail which technologies must be used SOLUTIONS Answers to Questions The first policy is because it is a requirement that applies to all producers .

ENVIRONMENTAL TOOLS LEARNING OBJECTIVES By the end of this section , you will be able to Show how pollution charges impact firm decisions Suggest other laws and regulations that could fall under pollution charges Explain the significance of marketable permits and property rights Evaluate which policies are most appropriate for various situations environmental policies create incentives to allow firms 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 , discussed below , address the shortcomings of in different ways . POLLUTION CHARGES A pollution charge is a tax imposed on the quantity of pollution that a firm emits . A pollution charge gives a firm an incentive to figure out ways to reduce its long as the marginal cost of reducing the emissions is less than the tax . For example , consider a small firm that emits 50 pounds per year of small particles , such as soot , into the air . Particulate matter , as it is called , causes respiratory illnesses and also imposes costs on firms and individuals . Figure illustrates the marginal costs that a firm faces in reducing pollution . The marginal cost of pollution reduction , like most most marginal cost curves increases with output , at least in the short run . Reducing the first 10 pounds of particulate emissions costs the firm 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 fifth 10 pounds would cost . This pattern for the costs of reducing pollution is common , because the firm can use the cheapest and easiest method to make reductions in pollution , but additional reductions in pollution become more expensive . Imagine the firm now faces a pollution tax of for every 10 pounds of particulates emitted . The firm has the choice of either polluting and paying the tax , or reducing the amount of particulates they emit and paying the cost of abatement as shown in the figure . How much will the firm pollute and

496 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER cost ( of . 2500 emIssIons ) 1500 . A charge 500 ' 300 , IO 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 firm 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 . how much will the firm abate ?

The first 10 pounds would cost the firm 300 to abate . This is less than the tax , so they will choose to abate . The second 10 pounds would cost 500 to abate , which is still less than the tax , so they 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 firm 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 firm has no incentive to reduce pollution more than 30 pounds . A firm that has to pay a pollution tax will have an incentive to figure out the least expensive gies for reducing pollution . Firms that can reduce pollution cheaply and easily will do so to minimize their pollution taxes , whereas firms that will incur high costs for reducing pollution will end up ing the pollution tax instead . If the pollution tax applies to every source of pollution , then no special favoritism or loopholes are created 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 have a Hat 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 of 2006 ( latest statistics available ) the had recorded over communities that have implemented pay as you throw programs . When people have a financial incentive to put out less garbage and to increase cling , they find ways of doing so .

PRINCIPLES or ECONOMICS 497 Visit this website to learn more about programs , including viewing a map and a table that shows the number of communities using this program in each state . I . A number of environmental policies 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 the air pollution that cars generate as well as a source of funding for maintaining roads . Indeed , gasoline taxes are far higher in most other countries than in the United States . Similarly , the refundable charge of five 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 tion in a more and way . Visit this Website to see the current US . 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 . COLLEGE MARKETABLE PERMITS When a city or state government sets up a marketable permit program ( it must start by determining the overall quantity of pollution it will allow as it tries to meet national pollution standards . Then , a number of permits allowing only this quantity of pollution are divided among the firms that emit that pollutant . These permits to pollute can be sold or given to firms free . 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 of pollution 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 tion , imagine that these are marketable permits , meaning that firms can buy and sell them .

493 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER To see how marketable permits can work to reduce pollution , consider the four firms listed in Table . The table shows current emissions of lead from each firm . At the start of the marketable permit gram , each firm receives permits to allow this level of pollution . However , these permits are able , and next year the permits allow the firms to emit only half as much pollution . Lets say that in a year , Firm Gamma finds 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 finds 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 first 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 . But the buying and selling of the marketable permits will determine exactly which firms reduce pollution and by how much . With a system of marketable , the firms that find it least expensive to do so will reduce pollution the most . Firm Alpha Firm Beta Firm Gamma Firm Delta Current distributed 200 400 tons 600 tom tons free for this amount How much pollution will these permits 100 200 300 tom tons allow in one year ?

Actual emissions one year in the future 150 tons 200 tons 200 tons 50 tons Buys permits for Does buy or sell Sells permits for Buys permits for Buyer or seller of marketable permit ?

50 tons permits 100 tom 50 tons Table . How Marketable Permits Work Another application of marketable permits occurred when the Clean Air Act was amended 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 of pollution allowed by a given permit declined with time . PROPERTY RIGHTS A clarified and strengthened idea of property rights can also strike a balance between economic ity 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 field where the railroad locomotive sometimes gives off sparks and sets the field ablaze . asked whose responsibility it was to address this spillover . Should the farmer be required to build a tall fence alongside the field to block the sparks ?

Or should the railroad be required to put some gadget on the locomotive stack to reduce the number of sparks ?

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

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

If neither party has a property right , then the two PRINCIPLES or ECONOMICS 499 sides may squabble endlessly , nothing will be done , and sparks will continue to set the field . However , if either 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 field . The property right determines whether the farmer or the railroad pays the bills . 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 If you admit to the government that you have an endangered species , the government 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 . 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 if pollution charges are set very low or if marketable permits do not reduce pollution by very much then tools will not work well . But 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 , 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 find and to provide a habitat for additional endangered species . For example , the government might pay landowners who provide and maintain suitable tats 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 , which tries to oversee millions of acres of privately owned land . APPLYING ENVIRONMENTAL TOOLS environmental policies are a tool kit . Specific policy tools will work better in some situations than in others . For example , marketable permits work best when a few dozen or a few parties are highly interested in trading , as in the cases of oil refineries 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 . environmental tools can also be combined . Marketable permits can be viewed as a form of improved property rights . Or the government could combine marketable permits with a pollution tax on any emissions not covered by a permit .

500 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER KEY CONCEPTS AND SUMMARY Examples of environmental policies , also referred to as cap and trade programs , include pollution charges , marketable permits , and property rights . environmental policies include taxes , markets , and property rights so that those who impose negative must face the social cost . SELF CHECK QUESTIONS QUESTIONS . Classify the following policies as or market incentive based . A state emissions tax on the quantity of carbon emitted by each firm . a . 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 firms that allow them to emit a specified quantity of pollution . The federal government pays fishermen to preserve salmon . An emissions tax on a quantity of emissions from a firm is not a approach to reducing pollution . Why ?

Four firms 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 first row of Table shows the total amount of garbage ( in tons ) currently produced by each firm . The other rows of the table show the cost of reducing garbage produced by the first five tons , the second five tons , and so on . First , calculate the cost of requiring each firm to reduce the weight of its garbage by . Now , imagine that marketable permits are issued for the current level of garbage , but the permits will shrink the weight of allowable garbage for each firm 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 Cast of reducing garbage by five tans Cost of reducing garbage by second tans Cast of reducing garbage by third tons Cast of reducing garbage by fouth tons Cast 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 .

PRINCIPLES OF ECONOMICS 501 Incentives to Go Flexibility about Where and How Pollution Political Process Creates Loopholes and Beyond Will Be Reduced Exceptions Pollution Charges Marketable Permits Property Rights Table REVIEW QUESTIONS What is a pollution charge and what incentive does it provide for a firm to take external costs into account ?

What is a marketable permit and What incentive does it provide for a firm to take external costs into account ?

What are property rights and what incentive do they provide to take external costs into account ?

CRITICAL THINKING QUESTIONS Will a system of marketable permits work with thousands of firms ?

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 ?

REFERENCES Environmental Protection Agency . 2006 Accessed December 20 , marketable permit program a permit that allows a firm to emit a certain amount of pollution firms with more permits than pollution can sell the remaining permits to other firms pollution charge a tax imposed on the quantity of pollution that a firm emits also called a pollution tax property rights the legal rights of ownership on which others are not allowed to infringe without paying compensation SOLUTIONS Answers to Questions

502 ERIK DEAN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER mar mar mar Even though state or local governments impose these taxes , a company has the to adopt technologies will help it avoid the tax . First , if each firm is required to reduce its garbage output by , then Elm will reduce five tons at a cost of Maple will reduce 10 tons at a cost of Oak will reduce three tons at a cost of and Cherry will reduce four tons at a cost of . Total cost of this approach . If the system of mar permits is put in place , and those permits shrink the weight of allowable garbage by , tien pollution must still be reduced by the same overall amount . However , now the reduction in pollution will take place where it is least expensive . Reductions in Garbage Who does the reducing ?

At what cost ?

First tons Cherry Second tons Cherry Third tons Cherry Fourth tons Elm Fifth and sixth tons Elm and Cherry Seventh tons Maple Eighth tons Elm Ninth and tenth tons Elm and Cherry Table . each each Thus , the overall pattern of reductions here will be that Elm reduces garbage by 20 tons and has 15 tons of permits to sell . Maple reduces by five tons and needs to buy five tons of permits . Oak does not reduce garbage at all , and needs to buy 15 tons of permits . Cherry reduces garbage by 25 tons , which leaves it with five tons of permits to sell . The total cost of these reductions would be , a definite reduction in costs from the cost of the option . Incentives to Go Beyond Pollution Charges If you keep reducing pollution you reduce your charge If you reduce your pollution you can sell your extra pollution permits Permits The party that has to pay for the pollution has incentive to do so in a cost effect way Property Rights Table 10 . Flexibility about Where and How Pollution Will Be Reduced Reducing pollution by any method is fine Reductions of pollution will happen at firms where it is cheapest to do so , by the least expensive methods Reducing pollution by any method is fine Political Process Creates Loopholes and Exceptions If charge applies to all emissions of pollution then no loopholes If all polluters are required to have permits then there are no loopholes If the property rights are clearly defined , then it is not legally possible to avoid cleanup

THE BENEFITS AND COSTS OF ENVIRONMENTAL LAWS LEARNING OBJECTIVES By the end of this section , you will be able to Evaluate the benefits and costs of environmental protection Explain the effects of Apply marginal analysis to illustrate the marginal costs and marginal benefits of reducing pollution economists have estimated that firms may pay more than 200 billion per year to comply with federal environmental laws . That is big bucks . Is the money well spent ?

BENEFITS AND COSTS OF CLEAN AIR AND CLEAN WATER The benefits of a cleaner environment can be divided into four areas ( people may stay healthier and live longer ( certain industries that rely on clean air and water , such as farming , fishing , and tourism , may benefit ( 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 benefits , 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 impossible 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 . Although estimates of environmental benefits are not precise , they can still be revealing . For example , a study by the Environmental Protection Agency looked at the costs and benefits 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 benefits from cleaner air was 22 44 times higher than the costs . A more recent study by the estimated that the environmental benefits to Americans from the Clean Air Act will exceed their costs by a margin of four to one . The estimated that in 2010 the benefits 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 Saying that overall benefits of environmental tion 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 benefits of air pollution control outweigh the costs primarily for and lead , but when looking at other air pollutants , the costs of reducing them may be comparable

504 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER to or greater than the benefits . just because some environmental regulations have had benefits much higher than costs does not prove that every individual regulation is a sensible idea . MAKING ENVIRONMENTALISM PAY The definition 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 definition may be fuzzy , but tourists who hope to appreciate the of their eco tourists the impetus to a big and growing business . The Society estimates that international tourists interested in seeing nature or wildlife will take billion trips by 2020 . Visit The International Society website to learn more about The International Society , its grams , and tourism role in sustainable community development . I I I I 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 to survive . In South Africa , and Zimbabwe , for example , a substantial expansion of both and elephant populations is broadly credited to , which has given local an economic interest in protecting them . Some of the leading destinations include Costa and Panama in Central America the Caribbean Malaysia , and other South Pacific nations New Zealand the Serengeti in the Amazon rain forests and the Islands . In many of these countries and regions , governments have enacted policies whereby revenues from are shared 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 does not destroy what the visitors are coming to see . But whatever one qualms are about tain kinds of as the occasional practice of rich tourists shooting elderly lions with is worth remembering that the alternative is often that people in poor countries will damage their local environment in their effort to survive . MARGINAL BENEFITS AND MARGINAL COSTS We can use the tools of marginal analysis to illustrate the marginal costs and the marginal benefits of reducing pollution . Figure illustrates a theoretical model of this situation . When the quantity of environmental protection is low so that pollution is example , at quantity are usually a lot of relatively cheap and easy ways to reduce pollution , and the marginal benefits of doing

PRINCIPLES OF ECONOMICS 505 so are quite high . At Qa , it makes sense to allocate more resources to fight pollution . However , as the extent of environmental protection increases , the cheap and easy ways of reducing pollution begin to decrease , and more costly methods must be used . The marginal cost curve rises . Also , as protection increases , the largest marginal benefits are achieved first , followed by reduced marginal benefits . As the quantity of environmental protection increases to , say , the gap between marginal benefits and marginal costs narrows . At point the marginal costs will exceed the benefits . At this level of environmental protection , society is not allocating resources efficiently , because too many resources are being given up to reduce pollution . Marginal cost Price , Marginal benefits i QA Environmental Protection Figure . Marginal Costs and Marginal Benefits of Environmental Protection . Reducing pollution is must be sacrificed . The marginal costs of reducing pollution are generally increasing , because the least expensive and easiest reductions can be made first , leaving the more expensive methods for later . The marginal benefits of reducing pollution are generally declining , because the steps that provide the greatest benefit can be taken first , and steps that provide less benefit 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 benefits . The following Clear It Up feature delves into how the measures its policies and the monetary value of our lives . WHATS A LIFE WORTH ?

The US . Environmental Protection Agency ( must estimate the value of saving lives by reducing pollution against the 506 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER additional costs . In measuring the benefits of government environmental policies , the National Center for mental Economics ( values a statistical human life at million ( in 2006 dollars ) Economists value a human life on the basis of studies of the 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 for the risk . Examples are ocean fishery as opposed to fish 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 enough benefits 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 spent on regulations create 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 life . This finding suggests that any regulation that costs more than 50 million per life saved actually costs lives , rather than saving them . KEY CONCEPTS AND SUMMARY We can make a strong case , taken as a whole , that the benefits 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 will become more important . SELF CHECK QUESTIONS . Suppose a city releases 16 million gallons of raw sewage into a nearby lake . Table 11 shows the total costs of cleaning up the sewage to different levels , together with the total benefits of doing so . Benefits include environmental , recreational , health , and industrial benefits . Total Cast ( in thousands of dollars ) Total ( in thousands of dollars ) 16 million gallons Current situation Current situation 12 million gallons 50 800 million gallons 1300 million gallons 1650 gallons 1900 Table 11 . Using the information in Table 11 , calculate the marginal costs and marginal benefits of reducing sewage emissions for this city . See Cost and Industry Structure if you need a refresher on how to calculate marginal costs . What is the optimal level of sewage for this city ?

Why not just pass a law that zero sewage can be emitted ?

After all , the total benefits of zero emissions exceed the total costs . The state of Colorado requires oil and gas companies who use fracking techniques to return the land to its PRINCIPLES OF ECONOMICS 507 original condition after the oil and gas extractions . Table 12 shows the total cost and total benefits ( in dollars ) of this policy . Land Restored ( in acres ) Total Cost Total Calculate the marginal cost and the marginal benefit at each quantity ( acre ) of land restored . See Cost and Industry Structure if you need a refresher on how to calculate marginal costs and benefits . If we apply marginal analysis , what is the optimal amount of land to be restored ?

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

Why or why not ?

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

Why or why not ?

CRITICAL THINKING QUESTIONS 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 ?

PROBLEMS A city currently emits 16 million gallons ( of raw sewage into a lake that is beside the city . Table 13 shows the total costs ( in thousands of dollars of cleaning up the sewage to different levels , together with the total benefits ( of doing so . Benefits include environmental , recreational , health , and industrial benefits .

503 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER 16 Current Current 12 50 300 150 1300 500 1350 1200 2000 Table a . Using the information in Table 13 calculate the marginal costs and marginal benefits of reducing sewage emissions for this city . What is the optimal level of sewage for this city ?

How can you tell ?

REFERENCES Ryan , Dave . New Report Shows Benefits 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 , 1995 . SOLUTIONS Answers to Questions a . See the answers in the following table . The marginal cost is calculated as the change in total cost divided by the change in quantity . Total Cost ( in thousands of dollars ) Total ( in thousands of dollars ) marginal marginal cost benefit 16 million Current situation Current situation gallons 12 million gallons 50 50 800 300 million gallons 150 100 500 million gallons 500 350 350 gallons 700 150 Table 14 .

PRINCIPLES OF ECONOMICS 509 The optimal level of pollution is Where the marginal benefits of reducing it are equal to the marginal cost . This is at four million gallons . Marginal analysis tells us if the marginal costs of cleanup are greater than the marginal benefit , society could use those resources more efficiently elsewhere in the economy . See the next table for the answers , which were calculated using the traditional calculation of marginal cost equal to change in total cost divided by change in quantity . Land Restored ( in acres ) Total Cost marginal cost Total Benefit marginal 20 02 140 200 80 ( 16 240 300 160 ( 13 320 03 400 280 480 Table . The optimal amount of restored land is 300 acres . Beyond this quantity the marginal costs are greater than the marginal benefits .

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 any countries around the world have become more aware of the benefits 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 difficult 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 worlds income countries acting alone will not 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 sacrifice an improved quality of life for a cleaner environment . Can rich and poor countries come together to address global environmental ?

At the of the European Union and the most vulnerable developing nations , the climate in December 2011 launched negotiations to develop a new international climate change agreement that covers all countries . The agreement will take the form of an agreed upon outcome with legal force applicable to all parties . According to the EU , the goal is to adopt the plan in

PRINCIPLES OF ECONOMICS 511 2015 and implement it in 2020 . For the agreement to work , the two biggest emitters of greenhouse and the United have to sign on . Visit this Website to learn more about the European Commission . If countries want countries to reduce their emissions 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 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 of what such an international system might look like and how it would operate across international borders are forbiddingly complex . But it seems highly unlikely that some form of world government will impose a detailed system of environmental regulation around the world . As a result , a decentralized and approach may be the only cal way to address international issues such as global warming and biodiversity . KEY CONCEPTS AND SUMMARY Certain global environmental issues , such as global warming and biodiversity , spill over national ders and will need to be addressed with some form of international agreement . SELF CHECK QUESTIONS Consider the case of global environmental problems that spill across international borders as a prisoner dilemma of the sort studied in Monopolistic Competition and Oligopoly . 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 benefit of 16 , but the benefit is divided equally between the two tries . If both countries decide to protect the environment , there is a benefit of 32 , which is divided equally between the two countries . a . In Table 16 , fill in the costs , benefits , 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 .

512 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER Country Protect Not Protect Protect Country A Not Protect Table REVIEW QUESTIONS . 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 up ?

CRITICAL THINKING QUESTIONS Can extreme levels of pollution hurt the economic development of a country ?

Why or why not ?

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

REFERENCES European Union . Conference Delivers Breakthrough for Press release . December 11 , 2012 . Accessed December 19 , biodiversity the full spectrum of animal and plant genetic material international that cross national borders and that can not be resolved by a single nation acting alone SOLUTIONS Answers to Questions

PRINCIPLES OF ECONOMICS 513 Country Protect Not Protect Both A and have a cost of 10 and a benefit of 16 each A has a cost of 10 and a benefit of ( net ) has a cost of Protect country has net and a benefit of ( net ) Country A Not A has a cost of and a benefit of ( net ) has a cost of Both A and have a zero cost and a zero benefit each Protect 10 and a benefit of ( net ) country has net Table 17 . Country will reason this way If A protects the environment , then we will have benefits of if we act to protect the environment , but if we do not , so we will not protect it . If A is not protecting the environment , we will have losses of if We protect , but have zero if We do not protect , so again , we will not protect it . Country A will reason in a similar manner . The result is that both countries choose to not protect , even though they will achieve the largest social combined benefit of 12 for the two they both choose to protect . Environmental treaties can be Viewed as a way for countries to try to extricate themselves from this situation .

THE TRADEOFF BETWEEN ECONOMIC OUTPUT AND ENVIRONMENTAL PROTECTION LEARNING 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 he tradeoff between economic output and the environment can be analyzed with a production possibility frontier ( such as the one shown in Figure . At one extreme , at a choice like , a country would be selecting a high level of economic output but very little environmental . At the other extreme , at a choice like , a country would be selecting a high level of mental 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 inefficient . Efficiency requires that the choice should be on the production possibility frontier . Economists do not have a great deal to say about the choice between , and in Figure , all of which lie along the production possibility frontier . Countries with low per capita gross domestic product ( such as China , 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 of people have access to the basic necessities of life , may be ing to place a relatively greater emphasis on environmental protection . However , economists are united in their belief that an inefficient choice such as is undesirable . Rather than choosing , a nation could achieve either greater economic output with the same 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 times involve a choice like environmental tools offer a mechanism either for providing either the same environmental protection at lower cost , or providing a greater degree of environmental protection for the same cost .

PRINCIPLES or ECONOMICS 515 Economic Output Environmental Protection Figure . The Tradeoff 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 . KEYSTONE So how would an economist respond to claims of environmental damage caused by the Keystone project ?

Clearly the environmental cost of oil spills would be considered a negative externality , but how many external costs would arise ?

And are these costs too high when measured against any potential for economic benefit ?

As this chapter indicates , in deciding whether construction of the pipeline is a good idea , an economist would want to know not only about the marginal benefits resulting from the additional pipeline construction , but also the potential marginal especially the marginal external costs of the pipeline . Typically these come in the form of environmental impact statements , which are usually required for these kinds of projects . The most recent impact statement , released in March 2013 by the Nebraska Department of State , considered the possibility of fewer miles of pipeline going over the aquifer system and avoiding completely environmentally fragile areas it indicated that most resources would not be harmed by construction of the pipeline . As of press time , the Obama Administration has not approved construction of the Keystone project . While the nomic benefits of additional oil in the United States may be fairly easily quantified , the social costs are not . It seems that , in a period of economic expansion , people want to err on the side of caution and estimate the marginal costs to be greater than the marginal benefits of additional oil generation . Those estimates may change , however , if the price of gasoline to rise . KEY CONCEPTS AND SUMMARY Depending on their different income levels and political preferences , countries are likely to make choices about is , the choice between economic output and

516 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER mental 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 World of Scarcity for more on these terms . SELF CHECK QUESTIONS 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 18 shows possible combinations of economic output and environmental tion . Combos Corn Bushels ( thousands ) Number of Trees ( thousands ) 30 40 20 10 Table 18 . 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 efficiency ?

How can you tell ?

Which choices show efficiency ?

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 ?

If you 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 ?

REVIEW QUESTIONS . In the tradeoff between 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 Technological innovations shift the production possibility curve . Look at graph you sketched for Question Which types of technologies should a country promote ?

Should clean technologies be promoted over other ?

Why or why not ?

517 PRINCIPLES OF ECONOMICS PROBLEMS In the Land of Purity , there is only one form of pollution , called gunk . Table 19 shows possible combinations of nomic output and reduction of gunk , depending on what kinds of environmental regulations are chosen . Combos Eco Output Gunk Cleaned Up 800 500 30 600 40 400 40 100 90 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 of economic output on the vertical axis . Which choices display productive efficiency ?

How can you tell ?

Which choices show efficiency ?

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 ?

If you 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 ?

SOLUTIONS Answers to Questions . Of the choices provided , and demonstrate productive efficiency . These are the choices on the production possibility frontier . efficiency is determined by the this case by the preferences of society as expressed through government and other social institutions . Because you do not have information about these preferences , you really can not say much about efficiency . In the choice between and , should clearly be preferred , because it has both more corn and more trees . This answer illustrates Why productive efficiency is beneficial . Compared with choices inside the , it means more of one or both goods . In the choice between and , it is not possible to say which choice is better . True , is on the and is that only addresses the issue of productive efficiency . If a society has a strong preference for economic output and places a lower value on trees , then efficiency may lead to a choice of over Of course , the reverse could also be true , leading to a choice of Without information on preferences to judge efficiency , this question can not be answered . Compared with policies , policies allow either more output with the same environmental protection or more environmental protection with the same level of more

513 ERIK DEAN , JUSTIN , MITCH GREEN , BENJAMIN WILSON , AND SEBASTIAN BERGER Economic Output ( bushels of corn ) 01234567810 Environmental Quality ( number of trees ) Figure of both environmental protection and output . Thus , a choice like inside the is more likely to represent a policy demand than a choice like on the frontier of the .