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Transcript of 20 Externalities, the Environment, and Natural Resources Environmental taxes are perhaps the most...
20Externalities, the
Environment, and Natural Resources
Environmental taxes are perhaps the most powerful
tool societies have for forging economies that protect
human and environmental health.DAVID MALIN ROODMAN, WORLDWATCH INSTITUTE
● Part 1: The Economics of Environmental Protection♦ Externalities: A Critical Shortcoming of the
Market Mechanism
♦ Supply-Demand Analysis of Environmental Externalities
♦ Basic Approaches to Environmental Policy
♦ Two Cheers for the Market
● Part 1: The Economics of Environmental Protection♦ Externalities: A Critical Shortcoming of the
Market Mechanism
♦ Supply-Demand Analysis of Environmental Externalities
♦ Basic Approaches to Environmental Policy
♦ Two Cheers for the Market
ContentsContents
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
● Part 2: The Economics of Natural Resources♦ Economic Analysis: The Free Market and
Pricing of Depletable Resources
♦ Actual Resource Prices in the 20th Century
● Part 2: The Economics of Natural Resources♦ Economic Analysis: The Free Market and
Pricing of Depletable Resources
♦ Actual Resource Prices in the 20th Century
Contents (continued)Contents (continued)
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Part I: The Economics of Environmental
Protection
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Externalities: Shortcoming of the Market MechanismExternalities: Shortcoming of the Market Mechanism
● Remember that the market tends to create an undesired abundance of damaging externalities.
● In this chapter we focus on one of the most publicized externalities--pollution.
● Remember that the market tends to create an undesired abundance of damaging externalities.
● In this chapter we focus on one of the most publicized externalities--pollution.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Externalities: Shortcoming of the Market MechanismExternalities: Shortcoming of the Market Mechanism
● The Facts: Is the World Really Getting Steadily More Polluted?♦ Our society faces serious environmental
problems.
♦ However, we should realize that many of our environmental problems have improved significantly in recent years.
● The Facts: Is the World Really Getting Steadily More Polluted?♦ Our society faces serious environmental
problems.
♦ However, we should realize that many of our environmental problems have improved significantly in recent years.
FIGURE 20-1 National Long-Term Air Quality Trends, 1975-1999
FIGURE 20-1 National Long-Term Air Quality Trends, 1975-1999
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
NAAQS 24-hour standard = 0.14 parts per million
NAAQS standard = 50 micrograms per cubic meter
’99
’99
’99
’99
’99
NAAQS standard = 1.5 micrograms per
cubic meter
’95 ’90 ’85 ’80 1975 0
0.4
0.8
1.2
1.6
Mic
rog
ram
s p
er
Cu
bic
Me
ter
Lead
Old NAAQS 1-hour standard = 0.12 ppm
New NAAQS 8-hour standard = 0.08 ppm
0.030
0.025
0.020
0.015
0.010
0.005
0.16
’95 ’90 ’85 ’80 1975 0
0.04
0.08
0.12
Par
ts p
er M
illi
on
Ozone (Smog)
Sulfur Dioxide
NAAQS annual standard = 0.03 parts per million
’99 ’95 ’90 ’85 ’80 1975 0
Par
ts p
er M
illi
on
NAAQS 8-hour standard = 9 parts per million
’95 ’90 ’85 ’80 1975 0
4
8
16
12
Par
ts p
er M
illi
on
Carbon Monoxide
NAAQS annual standard = 0.053 parts per million
0.08
’90 ’95 ’85 ’80 1975
1975
0
0.02
0.04
0.06
Par
ts p
er M
illi
on
Nitrogen Dioxide
Particulate Matter
80
’95 ’90 ’85 ’80 0
20
40
60
Mic
rog
ram
s p
er
Cu
bic
Me
ter
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
● The Facts: Is the World Really Getting Steadily More Polluted?♦ Not all pollution can be attributed to modern
industrialization■Medieval cities were littered w/garbage and stank
of rotting wastes■The automobile was hailed as an improvement in
cleanlines over problems regarding horse dung
● The Facts: Is the World Really Getting Steadily More Polluted?♦ Not all pollution can be attributed to modern
industrialization■Medieval cities were littered w/garbage and stank
of rotting wastes■The automobile was hailed as an improvement in
cleanlines over problems regarding horse dung
Externalities: Shortcoming of the Market Mechanism Externalities: Shortcoming of the Market Mechanism
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
● The Facts: Is the World Really Getting Steadily More Polluted?♦ Air quality in most U.S. cities has improved
over last 30 years
♦ 100% decrease in ambient concentrations of lead
● The Facts: Is the World Really Getting Steadily More Polluted?♦ Air quality in most U.S. cities has improved
over last 30 years
♦ 100% decrease in ambient concentrations of lead
Externalities: Shortcoming of the Market Mechanism Externalities: Shortcoming of the Market Mechanism
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
● The Facts: Is the World Really Getting Steadily More Polluted?♦ Although environmental problems are neither
new nor confined to capitalist, industrialized economies, we continue to inflict damage on ourselves and our surroundings.
● The Facts: Is the World Really Getting Steadily More Polluted?♦ Although environmental problems are neither
new nor confined to capitalist, industrialized economies, we continue to inflict damage on ourselves and our surroundings.
Externalities: Shortcoming of the Market Mechanism Externalities: Shortcoming of the Market Mechanism
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
● The Law of Conservation of Matter and Energy♦ Nothing can disappear completely.
♦ Once a material is used, it must be recycled or become a waste product.
● The Law of Conservation of Matter and Energy♦ Nothing can disappear completely.
♦ Once a material is used, it must be recycled or become a waste product.
Externalities: Shortcoming of the Market MechanismExternalities: Shortcoming of the Market Mechanism
FIGURE 20-2 Annual Mean Global Surface Air Temperature
FIGURE 20-2 Annual Mean Global Surface Air Temperature
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
2001 1980 1960 1940 1920 1900 1880 0
13.4
13.6
13.8
14.0
14.2
14.4
14.6
14.8
Tem
per
atu
re (
°C)
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Externalities: Shortcoming of the Market MechanismExternalities: Shortcoming of the Market Mechanism
● The Role of Individuals and Governments in Environmental Damage♦ Firms create pollution, but so do private
individuals and governments.
● The Role of Individuals and Governments in Environmental Damage♦ Firms create pollution, but so do private
individuals and governments.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Externalities: Shortcoming of the Market MechanismExternalities: Shortcoming of the Market Mechanism
● Environmental Damage as an Externality♦ Environmental damage is usually an
externality because people do not pay directly for the damage they impose.
♦ Therefore, the unconstrained market system generates too much pollution.
● Environmental Damage as an Externality♦ Environmental damage is usually an
externality because people do not pay directly for the damage they impose.
♦ Therefore, the unconstrained market system generates too much pollution.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Supply-Demand Analysis of Environmental ExternalitiesSupply-Demand Analysis of Environmental Externalities
● Supply and demand curves for pollutants can be constructed.
● The supply curve represents the real costs to society.
● The problem is that since the cost is external, people behave as if it were zero.
● Supply and demand curves for pollutants can be constructed.
● The supply curve represents the real costs to society.
● The problem is that since the cost is external, people behave as if it were zero.
FIGURE 20-3 Free Dumping of Pollutants
FIGURE 20-3 Free Dumping of Pollutants
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
S
S
0 25 20 15 10
P
Pri
ce p
er T
on
per
Yea
r o
f G
arb
age
Rem
ove
d
5 Quantity of Garbage
T T
D
A
E
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Basic Approaches to Environmental PolicyBasic Approaches to Environmental Policy
● Voluntarism--this has proved to be unreliable
● Direct controls --these have been the chief instruments of environmental policy in the U.S.
● Taxes on pollution emissions--imposing penalties on polluters
● Voluntarism--this has proved to be unreliable
● Direct controls --these have been the chief instruments of environmental policy in the U.S.
● Taxes on pollution emissions--imposing penalties on polluters
Industrial Discharge of Heavy Metals, Netherlands, 1976-1994
Industrial Discharge of Heavy Metals, Netherlands, 1976-1994
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Mercury
Cadmium
Copper
1994 1992 1988 1984 1980 1976 0
25
50
75
100
Lead 120
150
Ind
ex (
1976
= 1
00) Zinc
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
● Emissions Taxes versus Direct Controls♦ Problems of direct controls:
■Enforcement issues■Inefficiencies in the clean up
● Emissions Taxes versus Direct Controls♦ Problems of direct controls:
■Enforcement issues■Inefficiencies in the clean up
Basic Approaches to Environmental PolicyBasic Approaches to Environmental Policy
●Enforcement Issues♦ Enforcement of direct controls requires
vigilance and enthusiasm by the regulatory agency.
♦ It also requires speed and rigor on the part of the court system.
●Enforcement Issues♦ Enforcement of direct controls requires
vigilance and enthusiasm by the regulatory agency.
♦ It also requires speed and rigor on the part of the court system.
Emissions Taxes versus Direct ControlsEmissions Taxes versus Direct Controls
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
●Enforcement Issues♦ Direct controls work only if the legal system
imposes significant penalties on violators.
♦ In contrast, pollution taxes are automatic and certain.
♦ The only sure way for the polluter to avoid paying pollution charges is to pollute less.
●Enforcement Issues♦ Direct controls work only if the legal system
imposes significant penalties on violators.
♦ In contrast, pollution taxes are automatic and certain.
♦ The only sure way for the polluter to avoid paying pollution charges is to pollute less.
Emissions Taxes versus Direct ControlsEmissions Taxes versus Direct Controls
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
●Efficiency in Cleanup♦ A second important advantage of emissions
taxes is that they tend to cost less than direct controls.
♦ Only polluters who can reduce emissions cheaply and efficiently can afford to take advantage of the built-in loophole--the opportunity to save on taxes by reducing emissions.
●Efficiency in Cleanup♦ A second important advantage of emissions
taxes is that they tend to cost less than direct controls.
♦ Only polluters who can reduce emissions cheaply and efficiently can afford to take advantage of the built-in loophole--the opportunity to save on taxes by reducing emissions.
Emissions Taxes versus Direct ControlsEmissions Taxes versus Direct Controls
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
●Advantages and Disadvantages♦ An emission is so dangerous that it must be
prohibited altogether
♦ A sudden change in circumstances calls for prompt and substantial changes in conduct
♦ Where effective and dependable pollution metering devices have not been invented or are too costly to install and operate.
●Advantages and Disadvantages♦ An emission is so dangerous that it must be
prohibited altogether
♦ A sudden change in circumstances calls for prompt and substantial changes in conduct
♦ Where effective and dependable pollution metering devices have not been invented or are too costly to install and operate.
Emissions Taxes versus Direct ControlsEmissions Taxes versus Direct Controls
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
● Another way for the government to control pollution is to sell or auction emissions permits.
● Emissions permits in many ways work like a tax--they make it too expensive for firms to continue polluting as much as before.
● Another way for the government to control pollution is to sell or auction emissions permits.
● Emissions permits in many ways work like a tax--they make it too expensive for firms to continue polluting as much as before.
Financial Device to Protect the Environment: Emissions PermitsFinancial Device to Protect the Environment: Emissions Permits
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
● One advantage of the permit approach over taxes is that it reduces uncertainty about the quantity of pollution that will be emitted.
● One advantage of the permit approach over taxes is that it reduces uncertainty about the quantity of pollution that will be emitted.
Financial Device to Protect the Environment: Emissions PermitsFinancial Device to Protect the Environment: Emissions Permits
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Two Cheers for the MarketTwo Cheers for the Market
● Through appropriate legislation, the forces of the market can be harnessed to correct the market’s own failings.
● Through appropriate legislation, the forces of the market can be harnessed to correct the market’s own failings.
Part 2: The Economics of Natural Resources
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Economic AnalysisEconomic Analysis
● A reliable indicator of the availability of depletable resources is the price of the resource.
● A reliable indicator of the availability of depletable resources is the price of the resource.
Past Petroleum Prophecies (and Realities)
Past Petroleum Prophecies (and Realities)
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Economic AnalysisEconomic Analysis
● Scarcity and Rising Prices♦ Resource scarcity prices
♦ Hotelling theorem ■Shows that the price of a depletable resource must
rise at the rate of interest■Assumes perfect competition■Assumes the costs of transportation and extraction
are negligible
● Scarcity and Rising Prices♦ Resource scarcity prices
♦ Hotelling theorem ■Shows that the price of a depletable resource must
rise at the rate of interest■Assumes perfect competition■Assumes the costs of transportation and extraction
are negligible
The Price of Economite Over Four Years
The Price of Economite Over Four Years
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
$121 $133.10 $146.41
2 Years Later 3 Years Later 4 Years Later
$110
1 Year Later
$100
Initial Date
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Economic AnalysisEconomic Analysis
● Supply-Demand Analysis and Consumption♦ The ever-rising prices accompanying
increasing scarcity of a depletable resource discourage consumption (encourage conservation).
♦ Even if quantity demanded grows, it will grow less rapidly than if prices were not rising.
● Supply-Demand Analysis and Consumption♦ The ever-rising prices accompanying
increasing scarcity of a depletable resource discourage consumption (encourage conservation).
♦ Even if quantity demanded grows, it will grow less rapidly than if prices were not rising.
FIGURE 20-4 Consumption over Time of a Depletable Resource
FIGURE 20-4 Consumption over Time of a Depletable Resource
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
(b) (a)
120 110
D1
D1
$121
A
100
100
110
0
Pri
ce p
er T
on
Quantity Demanded
100 95 88
100
110
D
D 0
Pri
ce p
er T
on
Quantity Demanded
$121
D2
D2
G
F
C
A
B
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Actual Resource Prices in the Twentieth CenturyActual Resource Prices in the Twentieth Century
♦ In fact, the real prices of natural resources have grown much slower than the rate of interest, if at all.
♦ In fact, the real prices of natural resources have grown much slower than the rate of interest, if at all.
FIGURE 20-5 Real Prices of Lead, Zinc, and Copper, 1900-2000
FIGURE 20-5 Real Prices of Lead, Zinc, and Copper, 1900-2000
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
Pri
ce
pe
r P
ou
nd
(in
Co
ns
tan
t 1
98
2 C
en
ts)
160
180
0
20
40
60
80
100
120
140
2000 1930 1940 1990 1980 1970 1920 1950 1910 1900 1960
Zinc
Copper
Lead
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Actual Resource Prices in the Twentieth CenturyActual Resource Prices in the Twentieth Century
● Interferences with Price Patterns♦ Unexpected discoveries of reserves whose
existence was previously not suspected
♦ Invention of new methods of mining and refining that may significantly reduce extraction costs
♦ Price controls that hold prices down or decrease them
● Interferences with Price Patterns♦ Unexpected discoveries of reserves whose
existence was previously not suspected
♦ Invention of new methods of mining and refining that may significantly reduce extraction costs
♦ Price controls that hold prices down or decrease them
FIGURE 20-6 Price Effects of a Discovery of Additional Reserves
FIGURE 20-6 Price Effects of a Discovery of Additional Reserves
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
0
After discovery
Before discovery
Pri
ce p
er T
on
Quantity in Millions of Tons
S1
S1
P2
P1
S2
S2 D
D
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Actual Resource Prices in the Twentieth CenturyActual Resource Prices in the Twentieth Century
● Is Price Interference Justified?♦ Market sets quantity demanded = quantity
supplied even if a finite resource is undergoing rapid depletion.
♦ Reason: price adjustments
♦ Any shortage must be artificial due to a decision to prevent the price mechanism from doing its job.
● Is Price Interference Justified?♦ Market sets quantity demanded = quantity
supplied even if a finite resource is undergoing rapid depletion.
♦ Reason: price adjustments
♦ Any shortage must be artificial due to a decision to prevent the price mechanism from doing its job.
FIGURE 20-7 Controls on the Price of a Resource
FIGURE 20-7 Controls on the Price of a Resource
Copyright © 2003 South-Western/Thomson Learning. All rights reserved.
5 4 2 0
Pri
ce p
er T
on
Quantity in Millions of Tons
D
D
P*
P
S
S
A B
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Actual Resource Prices in the Twentieth CenturyActual Resource Prices in the Twentieth Century
● On the Virtues of Rising Prices♦ Rising prices help to control resource depletion
■Promote conservation■Stimulate more efficient use■Encourage the discovery of alternate resources and
techniques
● On the Virtues of Rising Prices♦ Rising prices help to control resource depletion
■Promote conservation■Stimulate more efficient use■Encourage the discovery of alternate resources and
techniques
Copyright© 2003 Southwestern/Thomson Learning All rights reserved.
Growing Reserves of Exhaustible ResourcesGrowing Reserves of Exhaustible Resources
● Over time, the known reserves of many resources have actually increased, probably because rising prices induced exploration and discovery.
● Over time, the known reserves of many resources have actually increased, probably because rising prices induced exploration and discovery.
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