Economics for Leaders

1. Economics for Leaders Lesson 7: Economics & The Environment

2. Joke Of The Day A woman hears from her doctor that she has 6 months to live. The doctor advises her to marry an economist and to live in South Dakota. The woman asks: will this cure my illness? The doctor replies: No, but the 6 months will seem PRETTY LONG.

3. Joke Of The Day Q: Did you hear about the guy who lost his left arm and left leg in a car crash? A:He's ALL RIGHT now!

4. Who Said This? This is Ohio…..Cleveland….it rains and then stops all the time!

5. Who Said This? This is Ohio…..Cleveland….it rains and then stops all the time! ACE!

7. Can we can use economic reasoning to think about environmental issues? YES!

8. Institutions Matter • Institutions -- rules of the game/incentives • Opportunity costs – alternatives, what is given up • Socially desirable outcome

9. How do we manage our scarce resources? • Markets • Buyers & Sellers • Voluntary Transactions • The Invisible Hand • Efficient, Maximize Well-Being

10. How do we manage our scarce resources? • D = MB = WTP (private value/benefit) • S = MC = WTS (private production cost) • What happens when the private costs or benefits do not equal the social costs or benefits from an activity? • Market Failure = EXTERNALITY

11. Negative Externalities • Automobile exhaust • Factory pollution • Cigarette smoking • Barking dogs (loud pets) • Airplanes (landing/take-off) • Landfills • Chicken litter • Over-fishing/grazing/driving

12. Coal-Fired Power Plant • The owner of the plant bears the costs of the labor, land, concrete, steel, etc… used in production but does NOT pay for the clean air used. • People also agree to buy electricity (electric bill). • Social Cost > Private Cost • Price does not reflect true cost! • Over Do It!

13. A Voluntary Exchange between a willing buyer and seller But…..

14. Although the car owner has paid for the gasoline, he has NOT paid for the clean air used as he drives. • Social Value < Private Value • Price does not reflect true cost! • Over Do it! . . . COSTS that spill over onto people who don’t receive the benefits. . . . COSTS that spill over onto people who don’t receive the benefits.

15. Property Rights • The incentives are not correct! • Auto/factory pollution could be addressed….. • tailpipe • smokestack

16. How do we address negative externalities through policy? • Two Helpful Tools: • Markets & Property Rights • Common Resources • Air • Water • Highways • Microwave ovens

17. Two Examples • Chicken Litter • Arkansas vs. Oklahoma • Ft. Lauderdale Airport • Neighborhood vs. Airlines • Costs and Benefits are difficult to determine • litigation and transaction costs are the norm

18. The Story Of The Citrus Farmer And The Fisherman

19. Optimal Clean-up? citrus farmer fisherman profits per week profits per week high output low output

20. Optimal Clean-up? citrus farmer fisherman profits per week profits per week high output = $2,100 low output = $900

21. Optimal Clean-up? citrus farmer fisherman profits per week profits per week high output = $2,100 low output = $900 MC = $1,700 MB = $500 Optimal Outcome: Do Not Clean Up

22. Optimal Clean-up? citrus farmer fisherman profits per week profits per week high output low output

23. Optimal Clean-up? citrus farmer fisherman profits per week profits per week high output = $2,100 low output = $6,300

24. Optimal Clean-up? citrus farmer fisherman profits per week profits per week high output = $2,100 low output = $6,300 MC = $1,700 MB = $5,000 Optimal Outcome: Do Clean Up

25. What is the CORRECTamount of pollution? Captain Planet, he's our hero, Gonna take pollution down to zero. He's our powers magnified, and he's fighting on the planet's side. Captain Planet, he's our hero Gonna take pollution down to zero Captain Planet

27. Phasing out the human race by voluntarily ceasing to breed will allow Earth's biosphere to return to good health. Crowded conditions and resource shortages will improve as we become less dense. Source: http://www.vhemt.org/

28. How should we power our society?

35. “And then one day some wise men realized that it didn’t matter what happened to the environment so long as we wore these nice shiny suits!”

36. Policy Conundrum There are no SOLUTIONS. There are just TRADE-OFFS & OPPORTUNITY COSTS!