Public policy and safety (Chapter 16)

1. Public policy and safety (Chapter 16) • With perfect information, the law of supply and demand would produce the “right” amount of protection from dangerous goods and jobs. • Since there is not perfect information and products and jobs are growing in complexity we accept government intervention to compel businesses to take precautions. • Have we strike the right balance.

2. Two approaches • Incentives: • Fear of litigation (tort system) • Fear of increase insurance cost (workers compensation) • Direct regulation • Consumer protection agencies such as the FDA • Workers safety agencies such as the OSHA

3. Pollution and resource conservation • Two highly connected global problems • Government intervention is granted because the market on its own would not internalize the cost of polluting or overusing natural resources • Two approaches: • Incentives • Direct government intervention.

4. Pollution • Air, water, and soil pollution can have point sources (a pipe, stack, or other distinct place of origin) or nonpoint sources (like chemical runoff from farms and roads) • Some pollutants are biodegradable. They break down into harmless substances and are reabsorbed into the natural environment. • Some undesirable byproducts of human activity can be recycled. • Not all pollutants threaten people with disease some such as wind mills simply unpleasing, e.g. visual or noise pollution. • Frequently the victims of pollution are also not human.

5. Resource depletion • Using up of the earth’s natural wealth. Some resources are renewable (e.g. forests) but nature’s restorative powers cannot work if people are impatient. • Since the mid 70s, Americans have been intermittently uneasy and complacent about their dependence on fossil fuel. Now we are going one of those uneasy cycles and oil prices are once again breaking price records. • There has been much progress regarding alternative forms of energy but frequently the most promising replacements create environmental problems of their own, e.g. nuclear power.

6. The tragedy of the commons • The natural environment is not a public good because there is depletion when people use it. • It is an externality. People who have not participated in the transaction gets hurt. • It is also a common good in need of protection. People take much worse care of common than private goods.

7. Behaviors and policies to solve the problem • Educate people to pollute less and to use less resources (environmental ethics). Problems: • Too complex (paper or plastic?) • Disenchantment • NIMBY • Government intervention • Environmental Protection Agency (EPA) • Since the 1970s • It is very independent from business • Approaches • Imposing direct limits on pollution • Taxation and subsidies • Incorporating the market

8. Which approach strikes the best cost – benefit balance • Imposing direct limits (an engineering perspective) – There are risks of over-regulation • Taxation – There are strong groups against taxation but other countries seem to be using it rather effectively • Creating a market so people can buy and sell the right to pollute. Continues to look very promising and people has wanted to expand it internationally.

9. The battle is not always public interest against businesses • Energy efficiency has been use as a good competitive strategy by foreign car manufacturers. • The need to invest on clean technologies can be used as a barrier of entry for competition.