Lecture Introduction to economics: Social issues and economic thinking: Chapter 16 - Wendy A. Stock

Chapter 16 - Pollution, the environment, and global warming. After completing this unit, you should be able to: Describe the benefits and costs of pollution, model the externalities associated with pollution, describe the policy responses to pollution,...

Introduction to Economics: Social Issues and Economic Thinking

Wendy A Stock

PowerPoint Prepared by

Z Pan

Chapter 16

Pollution, The Environment,

and Global Warming

Ø Describe the benefits and costs

of pollution

Ø Model the externalities

associated with pollution

Ø Describe the policy responses

Ø Pollution is contamination of the environment

that causes instability, harm, or disruption to

ecosystems Pollution can be naturally occurring

or human-induced

what is pollution?

Ø There are many benefits of pollution:

Ø Using cars, trains, and airplanes generates such benefits as faster transportation, face-to-face

communication, and increased ability to trade goods and services with others.

Ø TV sets, refrigerators, Washing machines

powered by electricity generation

Benefits of pollution?

Marginal benefits of electricity generation

Ø Costs of pollution include:

Ø negative health impacts

Ø climate change

Ø changes in wildlife habitat

Ø various costs of generating electricity

costs of pollution

Marginal Costs from Electricity Generation

The Optimal Level of Pollution

Ø Externalities occur when some of the costs or benefits of a trade are imposed on people

outside the trade People outside a trade are

called third parties to the trade

Ø Negative Externalities are costs imposed on

third parties

Ø Positive Externalities are benefits bestowed on third parties

EXTERNALITIES

Ø Private Marginal Costs are marginal costs that accrue only to the producers of a good or

service

Ø Social Marginal Costs are marginal costs that accrue to society as a whole

MC social = MC private + Negative Externality

Impacts of power generation

Impacts of power generation

Ø Command-and-control

Command-and-control methods of pollution reduction involve direct government regulation of pollution

through taxes or emissions limits.

Environmental policies

Ø Taxes and Fees

Taxes and fees increase production costs so that

producers take negative externalities into account

when making their production decisions.

Ø Emissions Limits

Emissions Limits place controls or restrictions on specific sources of pollutants

Command-and-control

Impact of a Pollution Tax

Impact of Emissions Limits

Ø Common Property Resources are resources

that are collectively owned Examples: public

lands and parks, air, oceans, and wildlife

Ø Tragedy of the Commons describes how

collective ownership of a resource can lead to overuse and destruction of the resource

property resources: e.g “fishing derby”, ITQ

Assignment of Property Rights

Ø Cap and Trade System – Polluters can buy

tradable pollution rights that give the right to emit

a specific amount of pollutant The amount of

tradable pollution rights issued is capped at the desired pollution level

Tradable Pollution Rights

Ø Assuming two polluting firms A and B

An Illustration of cap and trade

Firm A Firm B

1) Under Standard Emission Limits:

Total Costs = 200 x $100 + 200 x $200 = $60,000

Total Costs = 400 x $100 = $40,000

Cap and Trade is more efficient

An Illustration of cap and trade

Firm A Firm B

Ø Kyoto Protocol, 1992 (not ratified by U.S.)

Ø Clean Air Act, early 1990s

Ø Carbon Offsets are reductions in emissions of carbon dioxide in one place that off set or

replace emissions of carbon dioxide elsewhere

Environmental policies in the United

States

1 “Fair-trade” coffee is sold with a

certification that the coffee growers receive a “fair” price for their coffee crop

In order to pay growers more, fair trade coffee is sold at higher prices than

“regular” coffee Using a demand and supply model, describe the tradeoffs associated with fair trade coffee.

2 What are some of the costs and benefits

of recycling as a means of environmental preservation?

Key Concepts

• Pollution

• Negative externalities

• Positive externalities

• Private marginal costs

• Social marginal costs

• Command-and-control

• Emissions limits

• Common property resources

• Tragedy of the commons

• Cap and trade system