1. Economics for Leaders
Lesson 7: Economics &
The Environment

2. 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. 

3. Joke Of The Day A: He's ALL RIGHT now!
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!

4. Can we can use economic reasoning to think about environmental issues?
YES!

5. Institutions Matter Institutions – rules of the game/incentives
Opportunity costs – alternatives, what is given up
Socially desirable outcome

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

7. 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

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

9. 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!

10. A Voluntary Exchange between a willing buyer and seller
But…..

11. Social Value < Private Value
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.
. . . COSTS that spill over onto people who don’t receive the benefits.

12. Property Rights The incentives are not correct!
Auto/factory pollution could be addressed…..
tailpipe
Smokestack
B.O.

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

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

15. The Story Of The
Citrus Farmer And
The Fisherman

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

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

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

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

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

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

22. What is the CORRECT amount of pollution?
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
Captain Planet
Capt Planet doesn’t understand marginal analysis

30. “And then one day some wise men realized that it didn’t matter what
happened to the environment so long as we wore these nice shiny suits!”

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