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Marginal Analysis. Thinking at the margin…some examples. Environmental decisions. How much time and money should be spent to make the water cleaner? At what point is it clean enough?. The Case of the Polluted Lake Middletown had a problem. The town council was receiving more and
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Marginal Analysis Thinking at the margin…some examples
Environmental decisions How much time and money should be spent to make the water cleaner? At what point is it clean enough?
The Case of the Polluted Lake Middletown had a problem. The town council was receiving more and more complaints from concerned citizens about the pollution in Lake Lemon, on which Middletown was located. For years nobody complained much about the problem, but as the population grew and as new industries developed near or on the lake, the pollution problem clearly became worse. Fish populations diminished, and swimmers also complained about the dirtiness of the water. An environment firm hired to analyze the situation concluded that the waste water ejected into the lake by a local plastics factory was responsible for most of the pollution. Unfortunately, this plastics factory was the main employer in the town. If the factory closed down or was forced to restrict its production, many people would lose their jobs. The economic health of the town was at stake. Some citizens, out of a real fear of losing their jobs, suggested doing nothing. Strict environmentalists in town wanted the factory shut down, regardless of the economic consequences. Some citizens wanted the council to set strict limits on the amount of pollution that could be put into the lake. Still others wanted to levy a tax on the number of plastic products produced by the factory and use the tax revenues for lake cleanup. Some citizens said it would be better to tax the amount of waste ejected into the lake, not the plastic products. What should the town council do?
Chevy Malibu A jury fined General Motors $4.9 billion in punitive damages (July 1999) – for THINKING AT THE MARGIN!
GM’s private calculation: MC to fix the faulty fuel tank: $8.69 per car. MB to fix the faulty fuel tank: $2.40 per car. (savings from wrongful death and disfigurement lawsuits @ $200,000 on average) The “efficient” solution was chosen NOT to fix the faulty fuel tank. Does this seem ethical??? Source: http://www.safetyforum.com/gmft/. The punitive damages against GM were later lowered by a judge to $1 billion.
Problem You are the leaders of a third world country. You have a major problem: You do not have enough resources to feed and take care of the healthcare needs of your people. You must make decisions. Who do you feed or provide healthcare for?
Who do you feed or provide healthcare for? You cannot exceed 100%, You have a population of 1 million.
Diminishing returns Your satisfaction diminishes with each unit added. At some point, your satisfaction is negative. It is true…..you can have too much of a good thing!
A Problem in Centerville Suppose that industries in Centerville have so polluted the local river that it is now useless for drinking, swimming, or fishing and is possibly a serious health hazard. While most people would agree that some cleanup is necessary, they may not agree on exactly how much cleanup. Fortunately, the concept of marginalism helps students analyze these difficult kinds ofproblems. In economics, marginal simply means “next” or “incremental.” This rather simple concept can help us solve the river problem. Suppose all citizens in Centerville agree that some cleanup is necessary. They hire an environmental firm to analyze the situation and report back to the city council.
