Chapter 4 Pollution Problems: Must We Foul Our Own Nests?

4 - 3 McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. What Is Pollution? The Environment and Its Services -Exhaustible resources -Replaceable resources -Waste disposal Recycling Wastes and the Concept of Pollution -Pollution occurs when recycling processes fail to prevent wastes from accumulating in the environment

4 - 4 McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Common Forms of Pollution Air Pollution -Carbon monoxide -Sulfur dioxides -Nitrogen oxides -Hydrocarbons -Particulates Water pollution -Level of dissolved oxygen -Materials and matter Land pollution -Dumping of wastes -Tearing up Earth’s surface

4 - 5 McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Demand and Marginal Private Benefit $ Quantity of pizza D = MPB 14

4 - 6 McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Externality in Consumption $ HIV vaccine MPB MSB 14 MSB = MPB ± Externality

4 - 7 McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Supply and Marginal Private Cost $ Quantity of pizza 11 S = MPC

4 - 8 McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Externality in Production $ Quantity of pizza 11 MSC MSC = MPC ± Externality S = MPC

4 - 9 McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Market Equilibrium without Externalities $ Quantity of pizza D = MPB 14 S = MPC 3.5 7

McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Why Polluters Pollute Property rights in the environment either nonexistent or not enforced Much of environment’s services shared by entire population

McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Pollution and Resource Allocation Reams per day Price $ D = MPB = MSB S = MPC MSC r1r1 r0r0 A B C

McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Pollution and Resource Allocation Kilowatt-hours per day Price $ D = MPB = MSB S = MPC MSC r1r1 r0r0 A B C

McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Appropriate Level of Pollution Control (1)(2)(3)(4)(5)(6)(7) Pollution Control or Eliminated Stench Total Social Cost of Control ($000) Marginal Social Cost of Control ($000) Per-Person Marginal Benefit of Control Marginal Social Benefit of Control ($000) Total Social Benefit of Control ($000) Net Social Benefit of Control ($000) 1 st 10% nd 10% rd 10% th 10% th 10% th 10% th 10% th 10% th 10% th 10%

McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. What Can Be Done About Pollution? Direct Controls Assumes regulatory agency can determine economically desirable level of pollution Achieving efficient allocation of permissible pollution among polluters

McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. What Can Be Done About Pollution? Indirect Controls Pollution control 100%10% C* Z T2T2 T1T1 T* MB = MPB = MSB MC = MPC = MSC Dollars per unit

McGraw-Hill/Irwin Economics of Social Issues, 17/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. What Can Be Done About Pollution? Creation of Pollution Rights Markets Pollution rights license Pollution rights market Clean Air Act of 1990