Chapter 32

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Chapter 32
Environmental
Economics
Introduction
Many people see wild horses as a living
symbol of the nation’s natural beauty,
while others regard them as pests.
One thing is certain: U.S. taxpayers
spend more than $50 million per year on
more than 50,000 wild horses and 5,000
of their cousins, wild burros.
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32-2
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
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32-3
Learning Objectives (cont'd)
• 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
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32-4
Chapter Outline
• Private versus Social Costs
• Correcting for Externalities
• Pollution
• Common Property
• Wild Species, Common Property
and Tradeoffs
• Recycling
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32-5
Did You Know That...
• Every decision involving the environment
involves a tradeoff?
• The economic way of thinking about
endangered species requires considering
the costs of protecting them?
• Economists want to help us opt for informed
policies that have maximum net benefits?
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Private versus Social Costs
• Private Costs
 Costs borne solely by the individuals who
incur them
 Also called internal costs
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Private versus Social Costs (cont'd)
• Social Costs
 The full costs borne by society whenever a
resource use occurs
 Measured by adding internal to
external costs
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Private versus Social Costs (cont'd)
• Environmental issues occur when
social costs exceed private cost.
• The cost of polluted air—consider both
private and social costs
• Question
 What if you had to pay the social cost of
driving a car?
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Private versus Social Costs (cont'd)
• Externality
 A situation in which a private cost
(or benefit) diverges from a social cost
(or benefit)
 A situation in which the costs (or benefits)
of an action are not fully borne (or gained)
by the two parties engaged in a scarceresource-using activity
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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.
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Figure 32-1
Reckoning with Full Social Costs
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32-12
Correcting for Externalities (cont'd)
• The polluters’ choice
1. Install pollution abatement equipment or
change production techniques
2. Reduce pollution-causing activity
3. Pay the price to pollute
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32-13
Correcting for Externalities (cont'd)
• Is a uniform tax appropriate?
 It may be appropriate to levy a uniform tax,
as external costs might vary from location
to location.
 We must establish the amount of
economic damages; we have to come up
with a measure of economic costs.
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32-14
Policy Example: Belgian Governments
Forgo a Uniform Tax and Kill Off Jobs
• In 2004, DHL announced plans to expand
its operations in Brussels.
• The expansion correlated with an increase
in late-night flights.
• National and regional Belgian
governments objected.
• DHL moved 1,300 jobs to Leipzig, Germany.
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32-15
Pollution
• Question
 How much pollution is too much?
• Answer
 The optimal quantity is determined by a
comparison of marginal costs and benefits.
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Figure 32-2
The Optimal Quantity of Air Pollution
The optimal quantity
of pollution occurs
where MC = MB
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32-17
Pollution (cont'd)
• Optimal Quantity of Pollution
 The level of pollution for which the
marginal benefit of one additional unit of
pollution abatement just equals the
marginal cost of that additional unit
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32-18
International Policy Example:
Canada Confronts a High Marginal Cost
of Pollution Abatement
• Under the Kyoto protocol, Canada
promised that it would reduce
emissions of global warming gasses.
• Since signing the treaty, Canada’s
emissions have actually increased by
1.5% per year.
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32-19
International Policy Example:
Canada Confronts a High Marginal Cost
of Pollution Abatement (cont'd)
• Canada’s government continues to
promise that the nation will reach its
promised level of emissions.
• Although the estimated explicit and
opportunity costs to the entire Canadian
economy would be at least $30 billion
per year.
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32-20
Common Property
• Private Property Rights
 Exclusive rights of ownership that allow the
use, transfer, and exchange of property
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Common Property (cont'd)
• Common Property
 Property that is owned by everyone and
therefore by no one
 Examples
are air and water
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32-22
Common Property (cont'd)
• Question
 What do you think: Why does
pollution occur when property rights
are poorly defined?
• Answer
 When no one owns a particular resource,
no one has any incentive (conscience
aside) to consider misusing it.
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32-23
Common Property (cont'd)
• 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?
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32-24
Common Property (cont'd)
• Voluntary agreement and
transactions costs
 Voluntary agreements: contracting
 Opportunity cost always exists, whoever
has property rights.
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32-25
Common Property (cont'd)
• Voluntary agreement and
transactions costs
 Transaction Costs
 All
costs associated with making, reaching, and
enforcing agreements

Must be low relative the expected benefits
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32-26
Common Property (cont'd)
• Changing property rights
 Closing the gap between private costs and
social costs
 Taxation
 Subsidization
 Regulation
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32-27
Common Property (cont'd)
• Are there alternatives to pollutioncausing resource use?
 Why aren’t we shifting to solar panels and
electric cars?
 Could manufacturing solar panels
cause pollution?
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32-28
Example: Profiting by Generating
Electricity from Thin Air in Ireland
• The northern portion of Ireland abounds
with farmland.
• Although the extreme northern tip of the
country is too rugged to farm.
• Yet numerous landowners in this part of
Ireland generate revenues.
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32-29
Example: Profiting by Generating
Electricity from Thin Air in Ireland (cont'd)
• The source of the landowner’s earnings
is not the land itself, but the steady
winds that blow across it.
• Several companies now harness
the winds to power turbines that
generate electricity.
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32-30
Wild Species, Common Property,
and Trade-Offs
• One of the most distressing common
property problems involves endangered
species.
• Virtually all species not endangered are
private property (dogs, cats, cattle, sheep
and horses).
• Endangered species (spotted owls,
bighorn sheep and condors) are typically
common property.
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32-31
Wild Species, Common Property,
and Trade-Offs (cont'd)
• In 1973, the federal government passed
the Endangered Species Act in an
attempt to keep species from dying out.
• As more and more species were put
on the endangered list, a trade-off
became apparent.
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32-32
Recycling
• Recycling
 The reuse of raw materials derived from
manufactured products
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32-33
E-Commerce Example: Boom Times
in Personal Computer Recycling
• In a typical year, owners of more than 2
billion pounds of unwanted electronic
equipment pay 400 companies nearly
$1 billion to find something to do with it.
• Recycling firms profit from charging
businesses and individuals to collect
their computers, remove data, refurbish
and resell them.
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32-34
Recycling (cont'd)
• Recycling’s invisible costs
 Costs include
 Resources
 Pollution
used in recycling
created during recycling
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32-35
Recycling (cont'd)
• Landfills
 An argument in favor of recycling is to
avoid using landfills.
 Data indicate we are not running out of
solid waste landfill sites.
 Expansion of solid waste disposal sites
may be outpacing demand.
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32-36
Recycling (cont'd)
• Should we save scarce resources?
 Some resources may not be getting
scarcer at all.
 The inflation-corrected price of most
resources has been falling for decades.
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32-37
Issues and Applications:
The Government’s Climbing Costs
to Protect Wild Horses
• The common property problem
• Confronting transaction costs in caring
for wild horses
• Turning again to the private sector
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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
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32-39
Summary Discussion
of Learning Objectives (cont'd)
• 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.
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32-40
Summary Discussion
of Learning Objectives (cont'd)
• 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.
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32-41
Summary Discussion
of Learning Objectives (cont'd)
• Benefits and costs of recycling
 Benefits
 Limits
use of natural resources
 Costs
 Recycling
uses resources
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32-42
End of
Chapter 32
Environmental
Economics
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