Chapter 31 Powerpoint

Chapter 31
Environmental
Economics

Introduction
“Cap and trade” is an approach to air-pollution control
under which governments place a limit on allowed
emissions, create rights to emit polluting substances,
and permit firms to trade those rights in a free market.
A cap and trade program applied to sulfur dioxide
emissions from electrical plants in the U.S. has reduced
polluting emissions by one-half.
This program recently collapsed, however. What can
be learned from the breakdown of this program?
You will explore this question in Chapter 31.

Copyright ©2014 Pearson Education, Inc. All rights reserved.

31-2

Learning Objectives
• Distinguish between private costs and social
costs
• Understand market externalities and
possible ways to correct externalities
• Explain how economists can conceptually
determine the optimum quantity of pollution


31-3

Learning Objectives (cont'd)
• Contrast the roles of private and common
property rights in alternative approaches to
addressing the problem of pollution
• Describe how many of the world’s
governments are seeking to reduce
pollution by capping and controlling the use
of pollution generating resources
• Discuss how the assignment of property
rights may influence the fates of
endangered species

31-4

Chapter Outline
•
•
•
•
•

Private versus Social Costs
Correcting for Externalities
Pollution
Common Property
Reducing Humanity’s Carbon Footprint:
Restraining Pollution-Causing Activities
• Wild Species, Common Property and
Tradeoffs


31-5

Did You Know That ...
• By 2025, the Environmental Protection Agency
(EPA) will require all passenger vehicles to operate
at an average of 54.5 miles per gallon?
• This improvement in fuel economy will translate
into a 10 percent increase in the average price of a
vehicle.
• Economists want to help policymakers and citizens
opt for informed policies that have the maximum
possible net benefits.
• As you will see, every decision made in favor of
“the environment” involves a trade-off.


31-6

Private versus Social Costs
• Private Costs
– Costs borne solely by the individuals who incur
them
– Also called internal costs


31-7

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


31-8

• 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?


31-9

• 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 scarce-resource-using
activity


31-10

Figure 31-1 Reckoning with Full Social
Costs


31-11

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


31-12

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


31-13

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


31-14

Pollution
• Question
– How much pollution is too much?

• Answer
– The optimal quantity is determined by a
comparison of marginal costs and benefits.


31-15

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


31-16

Figure 31-2 The Optimal Quantity of
Air Pollution


31-17

Policy Example: Raising the Marginal Cost
of U.S. Air Pollution Abatement
• Coal-fired plants generate nearly half of all
electricity produced in the United States
each year.
• The Environmental Protection Agency has
issued regulations that require 20 percent of
these plants to shut down or be retro-fitted
with scrubbers in 2015.


31-18

Policy Example: Raising the Marginal Cost
of U.S. Air Pollution Abatement (cont’d)
• Estimates indicate that the additional cost to
the electrical power industry and its
customers of complying with this
requirement will be about $30 billion per
year through the end of the 2010s.
• Thus, attaining a hoped-for higher degree of
air cleanliness will entail a higher marginal
cost of pollution abatement for society.


31-19

Common Property
• Private Property Rights
– Exclusive rights of ownership that allow the use,
transfer, and exchange of property


31-20

Common Property (cont'd)
• Common Property
– Property that is owned by everyone and
therefore by no one
• Examples are air and water


31-21

• 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.


31-22

• Voluntary agreements 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?


31-23

costs
– Voluntary agreements: contracting
– Opportunity cost always exists, whoever has
property rights


31-24

costs
– Transaction Costs
• All costs associated with making, reaching, and
enforcing agreements
– Must be low relative the expected benefits


31-25

• Changing property rights
– Closing the gap between private costs and social
costs
• Taxation
• Subsidization
• Regulation


31-26

Restraining Pollution-Causing Activities

• Mixing government controls and market
processes: cap and trade
– In light of the costs arising from spillovers that
polluting activities create, one solution might
seem to be for governments to try to stop them
from taking place
– Why don’t more governments simply require
businesses and households to cut back on
pollution-causing activities?


31-27

Restraining Pollution-Causing Activities (cont’d)
• Kyoto Protocol (1997) aims to reduce overall
emissions of greenhouse gases by 2020 by as much
as 20% below 1990 levels
• The EU’s Emissions Trading Scheme (2005)
– Each EU nation is established an allowance of emissions
that a company can release
– If a firm exceeds its limit, it must purchase additional
allowances (at the market clearing price) from companies
who are emitting less than their quota


31-28

Policy Example: California Dreaming: A Western
Cap-and-Trade Pact?

• Preceding implementation of California’s
cap-and-trade program, state officials tried
to persuade governments of other western
states to enter into a “regional cap-andtrade pact.”
• Every state that California officials
approached said no, however, as the
induced reduction in the energy supply
would bring about higher energy prices.


31-29

Policy Example: California Dreaming: A Western
Cap-and-Trade Pact? (cont’d)

• Most estimates indicate the costs will
amount to hundreds of dollars per
household per year.
• Businesses will face significant cost
increases as well, which may decrease
employment.
• Some California firms may respond to
higher energy costs by moving their
operations to other western states.


31-30

International Example: Passengers Help
to Pay for Emissions on EU Airline Routes
• In 2012, the European Union implemented a
new, independently administered cap-andtrade program aimed at reducing carbon
emissions from airplane engines.
• The EU allocated pollution total allowances
to each airline operating at EU airports.
• To exceed its limit, an airline can purchase
allowances from another airline that has
total emissions below its allowances.


31-31

Restraining Pollution-Causing Activities (cont'd)

• Are there alternatives to pollution-causing
resource use?
– Why aren’t we shifting to solar panels and
electric cars?
– The plain fact is that the cost of generating solar
power in many circumstances is much higher
than generating that same power through
conventional means
– In addition, the manufacturing of solar panels
could itself cause pollution


31-32

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


31-33

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


31-34

What If . . . Governments allowed people
to own endangered animals as private
property?
• If endangered animals could be owned as
private property, some of them undoubtedly
would be mishandled.
• Nevertheless, they are also scarce resources
that have positive values in private markets.
• This would provide incentives for the life of
these animals and health of the species to
be preserved.


31-35

You Are There: A Mayor Faces the Grimy
Economics of Trash Removal
• For Chicago mayor Rahm Emanuel, how to go about
moving trash for disposal or recycling has become a
substantial economic issue.
• Currently, the trash removal system in Chicago is
different for each one of the city’s 50 wards.
• Emanuel examines a study that proposes a
reorganization of the city’s trash removal
procedures. The study suggests that switching to a
more efficient citywide system for trash disposal
and recycling could accomplish the same task each
year with 25 percent fewer workers and at an
annual cost savings of $40 million.

31-36

Issues & Applications: The New Sulfur
Dioxide “Cap and Fade” Program
• For years, coal-fired electrical-power-generating
plants in Midwestern states emitted smoke
containing sulfur dioxide. These emissions have
contributed to a phenomenon known as “acid rain”.
• In 1995, the U.S. government placed a cap on
emissions of sulfur dioxide states.
• A fixed number of emission allowances were
handed out to the electric utilities. If firms reduced
emissions by switching to low-sulfur coals or by
adding emission-control equipment, they could sell
unused allowances to other electrical-power
producers.

31-37

Issues & Applications: The New Sulfur
Dioxide “Cap and Fade” Program
• By 2005, the equilibrium price of a sulfur-dioxideemission allowance had reached $1,600. This price
was sufficiently high to induce many firms to
reduce their emissions.
• In 2008, however, the EPA began ordering plant
operators to cut back directly on their emissions.
The EPA also decided not to allow firms to purchase
allowances to avoid the new emissions restrictions.
• Since then, the equilibrium price of a sulfur
dioxide-emission allowance has “faded away” to
zero—hence the new “cap and fade” term used to
describe the program.

31-38

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


31-39

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


31-40

Objectives (cont'd)
• Restraining pollution-causing activities
through caps and allowances
– The EU has established the Emissions Trading
Scheme
– Each EU nation’s government establishes an
overall target level of greenhouse gas emissions
and distributes allowances, granting companies
the right to emit a certain amount of gases
– If exceeded, the company must purchase more
allowances from firms emitting less than their
quota

31-41

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


31-42

Chapter 31 Powerpoint

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (18)

Destacado

Destacado (20)

Similar a Chapter 31 Powerpoint

Similar a Chapter 31 Powerpoint (20)

Más de Malcolm Harrison

Más de Malcolm Harrison (20)

Último

Último (20)

Chapter 31 Powerpoint