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NATURAL RESOURCES, THE
ENVIRONMENT, AND CLIMATE CHANGE
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CHAPTER OUTLINE
Using Natural Resources
How Clean Is Clean Enough?
The Externalities Approach
The Property Rights Approach to the Environment and Natural Resource
Environmental Problems and Their Economic Solutions
Summary
LEARNING OBJECTIVES
LO1: Apply the principles of present value to natural resource development.
LO2: Apply marginal analysis to answer the question of how clean is clean enough.
LO3: Apply the concept of externalities to explain why pollution warrants government intervention in the market.
LO4: Demonstrate why pollution is much more likely to occur on publicly owned property than on private
property.
LO5: Summarize the variety of environmental problems that exist in the world as well as the economic solutions
that exist to address these problems.
KEY TERMS
Limited natural resources- Resources that cannot be replaced.
Renewable natural resources- Resources that can be replaced.
Stewardship- The management of resources in a fashion that weighs their value through time.
Sustainability- The idea that you should only use renewable resources at the rate at which they can be replaced.
Externalities- Effects of a transaction which hurt or help people who are not a part of that transaction.
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Social cost- The true cost of production and consumption of a good that includes the effects on innocent
bystanders.
Common property- Property that is not owned by any individual but is owned by government or has some other
collective ownership.
Cap-and-trade- The method of reducing a pollutant whereby the government gives to polluters, or auctions, a
capped amount of pollution permits and then allows those permits to be sold in a market.
DISCUSSION QUESTIONS
1. Use the concepts of marginal benefit and marginal cost to explain at what point the environment is “clean
enough.”
2. Assume that there are no externalities connected with a good, so that its consumption, production, or sale
affects no one other than the buyers and sellers. Use the concepts of consumer surplus and producer surplus to
explain why the purchase of this product is a win/win situation for the buyers and sellers.
3. What is an external cost, and what is the social cost? If a product creates an external cost, is the free market
equilibrium an optimal solution?
4. Discuss the differences between private property and common property. Why is it that private individuals
leave the pollution on common property untouched?
5. Review the various environmental problems that we face in the United States.
6. What are the external costs associated with pollution?
7. What are the alternatives for solving the environmental problems we face?
8. What are the economic solutions that can be applied to pollution?
9. What is Coase’s Theorem and how has it been applied in the Clean Air Act of 1990?
10. Explain why the pollution permit system will create an economically efficient clean up of pollution.
11. Why are international agreements to deal with international environmental issues so difficult to achieve and
enforce?
12. By how much must the price of carbon-based energy increase to achieve a 25% reduction in GHG in the
short-run? What about in the long-run?
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Natural Resources, the Environment,
and Climate Change
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THE WEB-BASED QUESTION
A wealth of information is available about the current condition of your personal environment. The Green Media
Toolshed, an environmental group dedicated to supporting the communication infrastructure for the
environmental movement, maintains a website, www.scorecard.org. At their website, you can enter your zip code
and learn about toxic chemical exposure, air quality, and water quality in your county. There is also an
environmental justice report, which examines whether the exposure to pollutants in your community is equal
across racial/ethnic groups and income levels.
The Environmental Protection Agency also maintains a website with information on your local watershed. Visit
the EPA website, “Surf Your Watershed” at http://cfpub.epa.gov/surf/locate/index.cfm, and “Locate Your
Watershed.” Enter your zip code, and learn about the quality of your local waterways, the pollutants, and the
businesses that are the source of your local pollution. Learn about environmental hazards, which create external
costs to you personally. Consider becoming active in one of the local citizen-based action groups working to clean
up your environment. Record the information you find below.
Envirofacts Warehouse
Learn about environmental facts and review the listings of polluters in your area.
The Name of Your Watershed: ________________________________________________________________
Wastes
Superfund Sites
List any superfund site in your area. _______________________________________________________
Hazardous Wastes
List one business in your area that discharges hazardous wastes. __________________________
Toxic Releases
List a facility in your area that releases a toxic substance. ______________________________
Water
Water Polluters in Your Area
List one of the businesses in your watershed that has been issued a permit to discharge wastewater into
the local rivers. _______________________________________________________
Assessment of Watershed Health
Use “Quick Start” and “Window to my Environment” to see a map of the local area. By looking at the
“water features,” you can identify any impaired streams and/or water bodies. List two of your local rivers
and/or streams and the pollutants found in them.
_______________________________
_______________________________
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Flood Zones
Use the map feature of “Quick Start” and “Window to my Environment” to see if there are any special
flood hazard areas or any moderate flood hazard areas in your locale. If any exist, identify a waterway
that floods and causes problems in your neighborhood. _______________________________
River Corridors and Wetlands Restoration Efforts
List any restoration effort in your area. ____________________________________________________
Air
Air Polluters in Your Area
List one of the businesses in your watershed that pollutes the air. ________________________________
People
Environmental website
List the name of two of your local environmental groups. ______________________________________
__________________________________________________________________
Citizen-Based Groups at work in your watershed
List the names of two local action groups. __________________________________________________
____________________________________________________________________________________
Water Use:
Total Population of the Area: _______________ thousands
Per Capita Use: ____________________ gallons per day (Look under Public Supply for per capita use.)
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Natural Resources, the Environment,
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ANSWERS TO STUDY QUESTIONS
SUGGESTED ANSWERS TO THE DISCUSSION QUESTIONS
1. The environment is “clean enough” when marginal benefit of cleaning is just equal to the marginal cost of
cleaning. Any additional work will cost society more than the value we place on the slightly cleaner
environment.
2. If there are no externalities connected with a good, the purchase of this product is a win/win situation for both
the buyers and sellers. The benefits to social welfare are the sum of the consumer surplus and the producer
surplus. The consumer surplus, which is represented by the triangular area between the price line and the
demand curve, is the value to the consumer that is in excess of what the consumer paid. The producer
surplus, which is represented by the triangle between the supply curve and the price line, is the value of the
money received by the producer that is in excess of the firm’s marginal costs.
3. An external cost is a cost to a third party, who has no part of the transaction. The social cost is the total cost to
society, which is the combination of the private and external costs.
If a product creates an external cost, the free market solution is no longer optimal. At the free market
equilibrium, the marginal social cost would be greater than the marginal social benefit (the demand curve).
The price would be too low, and it would not cover the social cost. The quantity would be too high, and the
product would be overproduced. The optimal price and output is where the marginal social cost curve
intersects the demand curve, which is the marginal social benefit.
4. A specific individual or group, who possess the property rights to this asset, owns private property. People
protect their own private property and do not diminish its value by polluting it. However, common property is
not owned by any individual, but is owned by the government or some other collective group. People do not
maintain common property because the benefit to the individual from its maintenance is less than the personal
cost.
5. We face many environmental problems, including air pollution, water pollution, environmental habitats that
are so polluted that animal and plant species are endangered, high levels of sulfur emissions that cause acid
rain, landfills that are filling up with garbage, and rising global temperatures that will cause climatic changes.
6. Pollution in our environment damages our health, reduces our quality of life, make us less productive,
shortens our lives, damages our property, causes the extinction of animals and plants, and increases global
temperatures, which will cause major climatic changes.
7. We can solve the environmental problems we face by:
(1) passing legislation that regulates or prohibits pollution.
(2) setting a tax, which is equal to the external cost of the pollution.
8. Two economic solutions can be applied to pollution.
(1) A tax that is equal to the external cost could be imposed on the pollution, and the market
equilibrium would move to the socially optimal output level. The output of the polluting item
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would be reduced, and the price to the consumers would increase and cover the cost of the
pollution. The tax revenue could be used to compensate the injured parties or to fund research.
(2) The government could determine the acceptable pollution level, and then issue an appropriate
number of permits to the polluting producers. The permits give the owners the right to pollute, and
the producers are allowed to trade them.
9. Coase’s Theorem is the idea that markets with externalities can be made to function efficiently by assigning
property rights to the externality and allowing the few parties involved to negotiate a settlement. (The theory
assumes that bargaining costs are approximately equal to zero.)
Coase’s Theorem has been applied in the Clean Air Act of 1990 by the distribution of a limited number of
permits for sulfur emissions. Sulfur emissions from coal-burning power plants create sulfur dioxide in the
atmosphere, which causes acid rain.
10. The pollution permit system creates an economically efficient clean up of the pollution. Producers, who can
clean up the pollution inexpensively, will sell the permits. If the pollution is expensive to clean up, the
producer will buy the permits from the other producers. Only the pollution that is very expensive to clean up
will continue.
11. International agreements to deal with environmental problems are difficult to achieve and enforce because (a)
there is little economic motivation for a single country to impose high cost on itself and (b) there is no world
government to impose those high costs on everyone.
12. The price of carbon-based energy would have to quadruple in the short-run or double in the long-run to
achieve a 25% reduction in GHG.
SUGGESTED ANSWER TO THE WEB-BASED QUESTION
Students’ answers will vary according to their location.
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