1. Introduction to Economics: Social Issues and Economic Thinking Wendy A. Stock PowerPoint Prepared by Z. Pan CHAPTER 16 POLLUTION, THE ENVIRONMENT, AND GLOBAL WARMING Copyright © 2013 John Wiley & Sons, Inc. / ©RelaxFoto.de/iStockphoto

2.  Describe the benefits and costs of pollution  Model the externalities associated with pollution  Describe the policy responses to pollution  Assess methods to address pollution problems Copyright © 2013 John Wiley & Sons, Inc. 2 AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:

3.  Pollution is contamination of the environment that causes instability, harm, or disruption to ecosystems. Pollution can be naturally occurring or human-induced. Copyright © 2013 John Wiley & Sons, Inc. 3 WHAT IS POLLUTION?

4.  There are many benefits of pollution:  Using cars, trains, and airplanes generates such benefits as faster transportation, face-to- face communication, and increased ability to trade goods and services with others.  TV sets, refrigerators, Washing machines powered by electricity generation Copyright © 2013 John Wiley & Sons, Inc. 4 BENEFITS OF POLLUTION?

5. Copyright © 2013 John Wiley & Sons, Inc. 5 MARGINAL BENEFITS OF ELECTRICITY GENERATION

6.  Costs of pollution include:  negative health impacts  climate change  changes in wildlife habitat  environmental degradation  changes in property values  various costs of generating electricity Copyright © 2013 John Wiley & Sons, Inc. 6 COSTS OF POLLUTION

7. Copyright © 2013 John Wiley & Sons, Inc. 7 MARGINAL COSTS FROM ELECTRICITY GENERATION

8. Copyright © 2013 John Wiley & Sons, Inc. 8 THE OPTIMAL LEVEL OF POLLUTION

9.  Externalities occur when some of the costs or benefits of a trade are imposed on people outside the trade. People outside a trade are called third parties to the trade.  Negative Externalities are costs imposed on third parties.  Positive Externalities are benefits bestowed on third parties. Copyright © 2013 John Wiley & Sons, Inc. 9 EXTERNALITIES

10.  Private Marginal Costs are marginal costs that accrue only to the producers of a good or service.  Social Marginal Costs are marginal costs that accrue to society as a whole. MC social = MC private + Negative Externality Copyright © 2013 John Wiley & Sons, Inc. 10 IMPACTS OF POWER GENERATION

11. Copyright © 2013 John Wiley & Sons, Inc. 11 IMPACTS OF POWER GENERATION

12.  Command-and-control Command-and-control methods of pollution reduction involve direct government regulation of pollution through taxes or emissions limits.  Assigning Property Rights Copyright © 2013 John Wiley & Sons, Inc. 12 ENVIRONMENTAL POLICIES

13.  Taxes and Fees Taxes and fees increase production costs so that producers take negative externalities into account when making their production decisions.  Emissions Limits Emissions Limits place controls or restrictions on specific sources of pollutants. Copyright © 2013 John Wiley & Sons, Inc. 13 COMMAND-AND-CONTROL

14. Copyright © 2013 John Wiley & Sons, Inc. 14 IMPACT OF A POLLUTION TAX

15. Copyright © 2013 John Wiley & Sons, Inc. 15 IMPACT OF EMISSIONS LIMITS

16.  Common Property Resources are resources that are collectively owned. Examples: public lands and parks, air, oceans, and wildlife  Tragedy of the Commons describes how collective ownership of a resource can lead to overuse and destruction of the resource.  From common property resources to private property resources: e.g. “fishing derby”, ITQ Copyright © 2013 John Wiley & Sons, Inc. 16 ASSIGNMENT OF PROPERTY RIGHTS

17.  Cap and Trade System – Polluters can buy tradable pollution rights that give the right to emit a specific amount of pollutant. The amount of tradable pollution rights issued is capped at the desired pollution level. Copyright © 2013 John Wiley & Sons, Inc. 17 TRADABLE POLLUTION RIGHTS

18.  Assuming two polluting firms A and B  Goal: reduce emissions from 800 to 400 tons  Two approaches: 1)Standard Emission Limits (each limited to 200 tons/day) 2)Cap and Trade (total limited to 400, allow trade) Copyright © 2013 John Wiley & Sons, Inc. 18 AN ILLUSTRATION OF CAP AND TRADE Firm A Firm B

19. 1)Under Standard Emission Limits: Total Costs = 200 x $100 + 200 x $200 = $60,000 2)Under Cap and Trade: Total Costs = 400 x $100 = $40,000 Cap and Trade is more efficient. Copyright © 2013 John Wiley & Sons, Inc. 19 AN ILLUSTRATION OF CAP AND TRADE Firm A Firm B

20.  Kyoto Protocol, 1992 (not ratified by U.S.)  Clean Air Act, early 1990s  The Chicago Climate Exchange  Carbon Offsets are reductions in emissions of carbon dioxide in one place that off set or replace emissions of carbon dioxide elsewhere. Copyright © 2013 John Wiley & Sons, Inc. 20 ENVIRONMENTAL POLICIES IN THE UNITED STATES

21. QUESTIONS/DISCUSSIONS Copyright © 2013 John Wiley & Sons, Inc. 21 1.“Fair-trade” coffee is sold with a certification that the coffee growers receive a “fair” price for their coffee crop. In order to pay growers more, fair trade coffee is sold at higher prices than “regular” coffee. Using a demand and supply model, describe the tradeoffs associated with fair trade coffee. 2.What are some of the costs and benefits of recycling as a means of environmental preservation?

22. Copyright © 2013 John Wiley & Sons, Inc. 22 KEY CONCEPTS Pollution Negative externalities Positive externalities Private marginal costs Social marginal costs Command-and-control Emissions limits Common property resources Tragedy of the commons Cap and trade system Tradable pollution rights Carbon offsets