Introduction. Learning Objectives. Chapter 32. Environmental Economics

Transcription

1 Copyright 2011 by Pearson Education, Inc. Chapter 32 Environmental Economics All rights reserved. Introduction Market activities in China currently generate about 200 million tons of solid waste annually. Yet, only about 30% of China s solid waste is incinerated or buried in sequestered landfills, as compared with 90% in the United States. Why are residents of China willing to tolerate so much pollution? Will ongoing economic growth continue to contribute to even more pollution in China? After reading this chapter, you will be prepared to contemplate these questions Learning Objectives Distinguish between private costs and social costs Understand market externalities and possible ways to correct externalities Explain how economists can conceptually determine the optimum quantity of pollution 32-3

2 Learning Objectives (cont'd) Contrast the roles of private and common property rights in alternative approaches to addressing the problem of pollution Describe how many of the world s governments are seeking to reduce pollution by capping and controlling the use of pollution generating resources Discuss how the assignment of property rights may influence the fates of endangered species 32-4 Chapter Outline Private versus Social Costs Correcting for Externalities Pollution Common Property Reducing Humanity s Carbon Footprint: Restraining Pollution-Causing Activities Wild Species, Common Property and Tradeoffs 32-5 Did You Know That... The Portland, Oregon-based Bonneville Power Administration has over the past three decades spent more than $9 billion trying to increase the U.S. salmon population. The agency has discovered that fish are succumbing to several dangers in addition to navigating the human-made dams administered by the Bonneville Power Administration. 32-6

3 Did You Know That (cont d) The economic way of thinking about potentially endangered species, including certain fish species such as salmon, requires considering the costs of protecting endangered species. As you will see, every decision made in favor of the environment involves a trade-off Private versus Social Costs Private Costs Costs borne solely by the individuals who incur them Also called internal costs 32-8 Private versus Social Costs (cont'd) Social Costs The full costs borne by society whenever a resource use occurs Measured by adding internal to external costs 32-9

4 Private versus Social Costs (cont'd) Environmental issues occur when social costs exceed private cost. The cost of polluted air consider both private and social costs Question What if you had to pay the social cost of driving a car? Private versus Social Costs (cont'd) Externality A situation in which a private cost (or benefit) diverges from a social cost (or benefit) A situation in which the costs (or benefits) of an action are not fully borne (or gained) by the two parties engaged in a scarce-resource-using activity Correcting for Externalities An externality arises when there is a divergence between private cost and social cost. The remedy is to change the signal for decision making. In the case of industrial pollution, the firm must be forced to internalize the cost of the environmental damage

5 Figure 32-1 Reckoning with Full Social Costs Correcting for Externalities (cont'd) The polluters choice 1. Install pollution abatement equipment or change production techniques 2. Reduce pollution-causing activity 3. Pay the price to pollute Correcting for Externalities (cont'd) Is a uniform tax appropriate? It may be appropriate to levy a uniform tax, as external costs might vary from location to location. We must establish the amount of economic damages; we have to come up with a measure of economic costs

6 Policy Example: Passive Smoking Effects of Smoking Bans versus Cigarette Taxes By studying data on concentrations of cotinine, a by-product of nicotine, that shows up in people s blood samples, economists have found that bans on public cigarette smoking have mixed effects. Certainly, such bans have reduced the cigarette-smoke inhalation by non-smokers in public areas. On the other hand, these bans encourage more smoking at home, exposing non-smokers who live with smokers to even more smoke Policy Example: Passive Smoking Effects of Smoking Bans versus Cigarette Taxes (cont d) In contrast, higher cigarette taxes reduce exposure to smoke among all non-smokers, including family members of smokers. Thus, imposing higher uniform taxes on cigarettes may be more effective at shielding nonsmokers from cigarette smoke than bans on public smoking Pollution Question How much pollution is too much? Answer The optimal quantity is determined by a comparison of marginal costs and benefits

7 Pollution (cont'd) Optimal Quantity of Pollution The level of pollution for which the marginal benefit of one additional unit of pollution abatement just equals the marginal cost of that additional unit Figure 32-2 The Optimal Quantity of Air Pollution The optimal quantity of pollution occurs where MC = MB Common Property Private Property Rights Exclusive rights of ownership that allow the use, transfer, and exchange of property 32-21

8 Common Property (cont'd) Common Property Property that is owned by everyone and therefore by no one Examples are air and water Common Property (cont'd) Question What do you think: Why does pollution occur when property rights are poorly defined? Answer When no one owns a particular resource, no one has any incentive (conscience aside) to consider misusing it Common Property (cont'd) Voluntary agreements and transactions costs Is it possible for externalities to be internalized via voluntary agreement? What are the costs incurred by the parties who seek to negotiate an agreement? 32-24

9 Common Property (cont'd) Voluntary agreements and transactions costs Voluntary agreements: contracting Opportunity cost always exists, whoever has property rights Common Property (cont'd) Voluntary agreements and transactions costs Transaction Costs All costs associated with making, reaching, and enforcing agreements Must be low relative the expected benefits Common Property (cont'd) Changing property rights Closing the gap between private costs and social costs Taxation Subsidization Regulation 32-27

10 Reducing Humanity s Carbon Footprint: Restraining Pollution-Causing Activities In light of the costs arising from spillovers that polluting activities create, one solution might seem to be for governments to try to stop them from taking place. Why don t more governments simply require businesses and households to cut back on pollution-causing activities? Reducing Humanity s Carbon Footprint: Restraining Pollution-Causing Activities (cont d) The Kyoto Protocol (1997) aims to reduce overall emissions of greenhouse gases by 2020 by as much as 20% below 1990 levels. The EU s Emissions Trading Scheme (2005) Each EU nation is established an allowance of emissions that a company can release. If a company exceeds its limit, it must purchase additional allowances (at the market clearing price) from companies who are not emitting their quota International Policy Example: EU Governments Get Serious About Emissions Or Do They? There are numerous examples of how serious EU governments have become about inducing average citizens to cut back on activities that yield greenhouse gas emissions. EU governments are also using taxpayer funds to finance projects aimed at reducing methane-gas emissions created by farming rice, a staple food for an estimated 2 billion people

11 International Policy Example: EU Governments Get Serious About Emissions Or Do They? (cont'd) Nevertheless, some observers question the depth of the EU governments commitment to reducing their countries carbon emissions. Because the EU governments insist on having meetings in both France and Belgium, thousands of legislators and their staff assistants fly between the two countries each month. The exhaust from the jet engines creates an additional 20,000 tons of additional carbon dioxide emissions each year Reducing Humanity s Carbon Footprint: Restraining Pollution-Causing Activities (cont'd) Are there alternatives to pollution-causing resource use? Why aren t we shifting to solar panels and electric cars? The plain fact is that the cost of generating solar power in many circumstances is much higher than generating that same power through conventional means. In addition, the manufacturing of solar panels could itself cause pollution Wild Species, Common Property, and Trade-Offs One of the most distressing common property problems involves endangered species. Virtually all species not endangered are private property (dogs, cats, cattle, sheep and horses). Endangered species (spotted owls, bighorn sheep and condors) are typically common property

12 Wild Species, Common Property, and Trade-Offs (cont'd) In 1973, the federal government passed the Endangered Species Act in an attempt to keep species from dying out. As more and more species were put on the endangered list, a trade-off became apparent Policy Example: Determining Whether Species Are Distinct Can Have a Dollar Value Every once in a while, scientists cannot agree on whether one species is different from another. For instance, in the mid-2000s, biologists studying jungle life in Southeast Asia announced that they had found a new species of rock rat Policy Example: Determining Whether Species Are Distinct Can Have a Dollar Value (cont d) In Colorado, another issue has arisen regarding the status of a rodent called the Preble s meadow jumping mouse. The U.S. government has classified the Colorado mouse as an endangered species. Why do you suppose that there is a growing demand for the skills of biologists who can help prove or disprove whether a group of distinguishable animals is a subset of a broad species or constitutes its own, narrow, endangered species? 32-36

13 Issues and Applications: The Economics of Pollution in China Present and Future Estimates indicate that arsenic taints groundwater that serves as the source of drinking water of more than 2 million people in China. China s pollution problems are present in the nation s air as well as in its water. Air quality is unhealthful in more than 350 of the nation s cities. Some of China s air pollution makes its way to Korea and Japan, and even the United States Issues and Applications: The Economics of Pollution in China Present and Future (cont d) The most apparent factor contributing to China s growing pollution problem is the nation s striking rate of economic growth. Accompanying this growth have been spillover effects onto the environment. Another factor that has contributed to China s pollution problems is a common property problem Issues and Applications: The Economics of Pollution in China Present and Future (cont d) In recent years, China s government has adopted new property rights guarantees for its residents. Private ownership is becoming much more commonplace. How does China s government s ownership of so many of the nation s resources contribute to the nation s pollution problem? 32-39

14 Summary Discussion of Learning Objectives Private costs versus social costs Private costs are borne solely by those who use resources. Social costs are the full costs that society bears when resources are used. Market externalities and ways to correct externalities Tax those who create externalities Summary Discussion of Learning Objectives (cont'd) Determining the optimal amount of pollution The level of pollution at which the marginal benefit of pollution abatement equals the marginal cost of pollution abatement Private and common property rights and the pollution problem Private property rights permit exchange and use of a resource. Common property is owned by everyone and thus by no one Summary Discussion of Learning Objectives (cont'd) Restraining Pollution-Causing Activities Through Caps and Allowances The EU has established the Emissions Trading Scheme Each EU nation s government establishes an overall target level of greenhouse gas emissions and distributes allowances, granting companies the right to emit a certain amount of gases. If exceeded, the company must purchase more allowances from firms emitting less than their quota

15 Summary Discussion of Learning Objectives (cont'd) Endangered species and the assignment of property rights Animals that are privately owned (e.g., dogs and livestock are abundant) Owners have incentives to take care of these animals. Wild animals are common property resources and many are endangered because no one has an incentive to protect these animals