Balancing Economic Interests and Environmental Protection

1. Chapter 32 Environmental Economics

2. Most people would agree that there is great value in protecting the habitats of endangered species around the world. But sometimes the economic interests of one region will threaten a critical environment. Could economic incentives be used to protect fragile habitats? Introduction

3. Learning Objectives • Distinguish between private costs and social costs • Understand market externalities and possible ways to correct externalities • Describe how economists can conceptually determine the optimum quantity of pollution

4. Learning Objectives • Explain the roles of private and common property rights in alternative approaches to addressing the problem of pollution • Discuss how the assignment of property rights may influence the fates of endangered species • Contrast the benefits and costs of recycling scarce resources

5. Chapter Outline • Private versus Social Costs • Externalities • Correcting for Externalities • Pollution • The Optimal Quantity of Pollution

6. Chapter Outline • Common Property • Recycling

7. Did You Know That... • There are potential environmental benefits in converting to electronic payment systems from the current model of predominant bill paying by mail? • People will more readily switch to environmentally-friendly methods of conducting their daily lives if they have a personal incentive to do so?

8. Private versus Social Costs • Private Costs (internal costs) • Costs borne solely by the individuals who incur them

9. Private versus Social Costs • Social Costs • The full costs borne by society whenever a resource use occurs • Measured by adding internal to external costs

10. Private versus Social Costs • Environmental issues occur when social costs exceed private cost • The cost of polluted air • How would you alter your transportation demand if you had to pay the social cost of driving a car?

11. Externalities • Externality • A situation in which a private cost or benefit diverges from a social cost • A situation in which the costs or benefits of an action are not fully borne or gained by the two parties engaged in scarce-resource-using activity

12. S (including externalities) 2 S1 = S MC (excluding externalities) E P 2 2 P E 1 1 D Q Q 2 1 Reckoning with Full Social Costs Price of Good X per Unit Quantity of Good X per Time Period Figure 32-1

13. 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.

14. Correcting for Externalities • The polluters’ choice • Install pollution abatement equipment or change production techniques • Reduce pollution-causing activity • Pay the price to pollute

15. Correcting for Externalities • Is a uniform tax appropriate? • Consider • The social cost of a given amount of water pollution varies from location to location • A uniform tax might make sense when administrative costs are relatively high

16. Policy Example:Why Diesel Engines are Catching On • Diesel engines are more fuel efficient than gasoline engines. • Vehicle manufacturers, who must meet federal fuel economy standards, are looking to diesel engines as a means of satisfying these requirements. • Recent technological improvements have also reduced the pollutants arising from the use of diesel fuel.

17. Pollution • Question • How much pollution is too much? • The optimal quantity is determined by a comparison of costs and benefits.

18. Marginal benefit E P 0 Marginal cost Q 100 0 The OptimalQuantity of Air Pollution Marginal Cost and Benefit of Pollution Abatement ($) 0 Figure 32-2 Degree of Air Cleanliness (%)

19. Marginal benefit E P 0 Marginal cost Q 100 0 The OptimalQuantity of Air Pollution Marginal Cost and Benefit of Pollution Abatement ($) The optimal quantity of pollution occurs where MC = MB 0 Figure 32-2 Degree of Air Cleanliness (%)

20. Pollution • Optimal Quantity of Pollution • The level of pollution for which the marginal benefit of one additional unit of clean air just equals the marginal cost of that additional unit of clean air

21. Common Property • Private Property Rights • Exclusive rights of ownership that allow the use, transfer, and exchange of property

22. Common Property • Common Property • Property that is owned by everyone and therefore by no one • Examples are air and water

23. Common Property • What do you think? • Why does pollution occur when property rights are poorly defined? • No one has recourse to damages to the property from misuse

24. Common Property • Voluntary agreement 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?

25. Common Property • Voluntary agreement and transactions costs • Voluntary agreements: contracting • Opportunity cost always exists, whoever has property rights

26. Common Property • Voluntary agreement and transactions costs • Transaction Costs • All costs associated with making, reaching, and enforcing agreements • Must be low relative the expected benefits

27. Common Property • Changing property rights • Closing the gap between private costs and social costs • Taxation • Subsidization • Regulation

28. Policy Example: Laying Claim to Trees that Sop Up Pollution • A good portion of the carbon dioxide emitted into the atmosphere comes from electric power plants. • One way to address this problem is to plant trees which absorb carbon dioxide from the air.

29. Policy Example: Laying Claim to Trees that Sop Up Pollution • In finding the optimal number of trees to plant, decision-makers must know how much carbon dioxide can actually be absorbed this way. • As with any economic decision, a good choice in this instance involves comparing costs with benefits.

30. Common Property • Are there alternatives to using resources in a way that creates environmental damage? • Why aren’t we shifting to solar panels and electric cars? • Could manufacturing solar panels cause pollution?

31. Example: Solar Power is Fine, but Not in My Neighborhood • Solar energy can be very efficient in areas that experience a good measure of sunshine, such as many parts of Arizona. • However, many homeowners associations in the state restrict the use of solar panels on the grounds that they detract from the neighborhood appearance.

32. Example: Solar Power is Fine, but Not in My Neighborhood • An Arizona law forbids neighborhood associations from restricting the use of solar panels. • But some Arizona homeowners have found that the legal expenses incurred in enforcing their rights have exceeded the cost savings of using the sun’s energy.

33. Wild Species, Common Property, and Trade-Offs • Question • Dogs, cats, cows, and pigs are numerous, but spotted owls, bighorn sheep, and rhinoceros are endangered. • What role does private property play in explaining why some animals are endangered?

34. International Example: How Chinese Fish Farming Helps Wild Fish Populations • As more fish are cultivated in small freshwater ponds and sea inlets in China, there is less of a need to harvest fish from oceans and rivers. • The population of fish in these natural habitats is now less threatened by commercial fishing.

35. Recycling • Recycling • The reuse of raw materials derived from manufactured products • Fewer resources are used • Are total resources necessarily saved?

36. Recycling • Recycling’s invisible costs • Costs include • resources used in recycling • pollution created during recycling

37. Recycling • Landfills • An alternative to recycling • Expansion of solid waste disposal sites is outpacing demand increases

38. Recycling • Should we save scarce resources? • Resource may not be getting scarcer • The inflation-corrected price of most resources has been falling for decades

39. Issues and Applications:Protecting the Komodo Islands • The Komodo Islands of Indonesia are home to some rare species of turtles and to the unique Komodo dragon. • Their habitats have been damaged by commercial fishing. • By encouraging the development of separate fish and turtle farms, the Indonesian government has been able to protect these natural habitats.

40. Issues and Applications:Protecting the Komodo Islands • The development of nature parks in these fragile environments has also provided incentives for their protection. • The economies of the Komodo islands have benefited from employment provided by the fish farms and by tourism generated by the parks. • And animal populations in the natural habitat are recovering.

41. 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

42. Summary Discussion of Learning Objectives • 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

43. Summary Discussion of Learning Objectives • 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.

44. Summary Discussion of Learning Objectives • Benefits and costs of recycling • Benefits • Limits use of natural resources • Costs • Recycling uses resources • Could entail a reduction in the incentive to preserve forests that are currently used for paper products

45. End of Chapter 32 Environmental Economics