Economics for Leaders Lesson 7: Economics & The Environment

Economics for Leaders Joke Of The Day A woman hears from her doctor that she has 6 months to live. The doctor advises her to marry an economist and to live in South Dakota. The woman asks: will this cure my illness? The doctor replies: No, but the 6 months will seem PRETTY LONG.

Economics for Leaders Joke Of The Day Q: Did you hear about the guy who lost his left arm and left leg in a car crash? A: He's ALL RIGHT now!

Economics for Leaders Can we can use economic reasoning to think about environmental issues? YES!

Economics for Leaders Institutions Matter Institutions -- rules of the game/incentives Opportunity costs – alternatives, what is given up Socially desirable outcome

Economics for Leaders How do we manage our scarce resources? Markets Buyers & Sellers Voluntary Transactions The Invisible Hand Efficient, Maximize Well-Being

Economics for Leaders How do we manage our scarce resources? D = MB = WTP (private value/benefit) S = MC = WTS (private production cost) What happens when the private costs or benefits do not equal the social costs or benefits from an activity? Market Failure = EXTERNALITY

Economics for Leaders Negative Externalities Automobile exhaust Factory pollution Cigarette smoking Barking dogs (loud pets) Airplanes (landing/take-off) Landfills Chicken litter Over-fishing/grazing/driving

Economics for Leaders Coal-Fired Power Plant The owner of the plant bears the costs of the labor, land, concrete, steel, etc… used in production but does NOT pay for the clean air used. People also agree to buy electricity (electric bill). Social Cost > Private Cost Price does not reflect true cost! Over Do It!

Economics for Leaders A Voluntary Exchange between a willing buyer and seller But…..

Economics for Leaders Although the car owner has paid for the gasoline, he has NOT paid for the clean air used as he drives. Social Value < Private Value Price does not reflect true cost! Over Do it! COSTS that spill over onto people who don’t receive the benefits.

Economics for Leaders Property Rights The incentives are not correct! Auto/factory pollution could be addressed….. tailpipe smokestack

Economics for Leaders How do we address negative externalities through policy? Two Helpful Tools: Markets & Property Rights Common Resources Air Water Highways Microwave ovens

Economics for Leaders Two Examples Chicken Litter – Arkansas vs. Oklahoma Ft. Lauderdale Airport – Neighborhood vs. Airlines Costs and Benefits are difficult to determine – litigation and transaction costs are the norm

The Story Of The Citrus Farmer And The Fisherman

Economics for Leaders Optimal Clean-up? $2,000$100 $300$600 citrus farmer fisherman profits per week high output low output

Economics for Leaders Optimal Clean-up? $2,000$100 $300$600 citrus farmer fisherman profits per week high output low output = $2,100 = $900

Economics for Leaders Optimal Clean-up? $2,000$100 $300$600 citrus farmer fisherman profits per week high output low output MC = $1,700 MB = $500 Optimal Outcome: Do Not Clean Up = $2,100 = $900

Economics for Leaders Optimal Clean-up? $2,000$1,000 $300$6,000 citrus farmer fisherman profits per week high output low output

Economics for Leaders Optimal Clean-up? $2,000$1,000 $300$6,000 citrus farmer fisherman profits per week high output low output = $2,100 = $6,300

Economics for Leaders Optimal Clean-up? $2,000$1,000 $300$6,000 citrus farmer fisherman profits per week high output low output MC = $1,700 MB = $5,000 Optimal Outcome: Do Clean Up = $2,100 = $6,300

Economics for Leaders Captain Planet Captain Planet, he's our hero, Gonna take pollution down to zero. He's our powers magnified, and he's fighting on the planet's side. Captain Planet, he's our hero Gonna take pollution down to zero What is the CORRECT amount of pollution?

How should we power our society?

Policy Conundrum There are no SOLUTIONS. There are just TRADE-OFFS & OPPORTUNITY COSTS!