12-Negative Externalities and the Environment

  1. Environmentalists see the Free Market as the enemy.
    1. However, poor countries with weak economies have environmental problems that are worse than rich countries
    2. Countries that have tried to eliminate market forces(e.g. USSR, Eastern Europe)have had terrible subsequent environmental problems
    3. The U.S., as its grown in size, has gotten cleaner mostly due to innovation
  2. An externality is a third party that is affected by a transaction he was not apart of
    1. In the free market, two or more parties voluntarily do business with one another, but if a third party is effected by the transaction the market the market doesn’t explicitly account for that
    2. Example, you are at dinner and the table next to you hired a guitarist to play and sing for the lady
      1. If you like the song and enjoy the performance it may not mind you
      2. But if you don’t like it, it’s a negative externality and could be considered pollution
    3. Pollution is any spillover from production and/or consumption and are not apart of the market transaction
  3. Goods with negative externalities have higher social costs
    1. Social costs are felt privately, so producers tend to produce too much of it
    2. If the couple with the guitarist had to pay those around them for the inconvenience they may think twice
  4. Public policies are available to bring private and social costs into line
    1. Command and control policies specifies how much one may pollute
      1. Have been effective in the past


      Screen clipping taken: 5/20/2011, 9:41 AM



      1. Companies/industries can gain favor by lobbying
      2. Stifle innovation, as there is no reason to go any lower than the regulated amount
      3. May say how you have to lower pollution
    2. Pollution tax
      1. Taxed per/unit of pollution
      2. Gives incentive for lower pollution emitted, however,
      3. A tax is not a publicly attractive term
      4. It provides cash for the Gov’t
    3. Marketable permits
      1. Often times the amount of pollution allowed is decreased over tie
      2. Marketable means it can be traded or sold.
      3. Worked well with lead and gasoline
      4. Sounds a lot like cap and trade
    4. Property rights and pollution
      1. No one has a property right to clean air
      2. Ronald Coase has a classic example of a train passing a farmers, emitting sparks which catch the fields on fire. We could either look at it as the train was in the wrong and has to protect against it or the farm has to be proactive, understand the threat of fire and protect against it
  5. Greenhouse warming is great to illustrate how these ideas may work
    1. Kyoto protocol was a worldwide pact to reduce emissions(based on 1990’s emissions)
      1. According to Bush-41 it exempted 80% of the world including China, Japan, South Africa, Pacific Islands, etc)
      2. Neither Clinton nor Bush signed the treaty
      3. The U.S. and others want to enforce a successor(cap and trade)
    2. At a minimum even if there’s a 10% chance of global warming then we may want to have an insurance policy
  6. Zero pollution is not a realistic goal, as we breathe out carbon dioxide. Most industries have to pollute to create their product. Since, plants and trees breathe in carbon dioxide zero pollution would literally mean nothing living was on earth.




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