ENVIRONMENT Chapter 9

AL POLICY
PUBLIC GOODS
• Cause by absence of property rights
• Leads to free rider problem
• Two key characteristics:
1. Nonrival in consumption
2. Nonexclusive
• E.g. national defense, public parks, police services
 • Consumers have no incentive to pay
• They cannot be excluded if they do not
• Incentive to be free-riders
• This results in market failure

THE FREE-RIDER
PROBLEM
PUBLICLY PROVIDED GOODS
• Public goods are not the same as publicly provided goods
• Public goods are normally publicly provided
• Services are valuable, but private firms cannot make money
• Even when publicly provided, it is hard to determine the right amount
• Best level of government is the one that coincides with the geographical scope
 This Photo by Unknown Author is licensed under CC BY

EXAMPLE: PBS
 EXAMPLE:
WIKIPEDIA

This Photo by Unknown Author is licensed under CC BY-SA

EXAMPLE: STRATA
BUILDINGS
PLANETARY
PUBLIC GOOD
• Most environmental problems are global in scope
• Many are related to the idea of public goods
• Clean air is a planetary public good
• Keeping the air clean requires coordinate action
• But people can free riders
• You can breath even if you pollute
ACTIVITY:
ASTEROID DEFENSE
A NASA report estimated a 1-in-10,000 chance during “our
lifetime” that an asteroid measuring at least one-third of a mile wide
will hit Earth, destroy food crops and “possibly end civilization as
we know it.” The good news is that asteroid strikes are a type of
natural disaster that we do know how to prevent. With enough
warning, we do have the technology to deflect the course of an
asteroid. To do that, we need to be able to detect such asteroids long
before they near the earth. Physicists believe that they have the
answer. At a cost of $500 million, the earth could build a telescope
to orbit the sun. Such a telescope would be able to see asteroids that
are headed for earth’s orbit in time to deflect them. The problem is
that no one has been able to raise the funds necessary to build such
a telescope.
How can you explain the failure to develop an asteroid protection
system in terms of public goods and the free rider problem?
 • Why has the private market
not responded?
• Is asteroid defense a
planetary public good?
Why?
• Does the free-rider
problem apply here?

DEBRIEF: ASTEROID
DEFENSE
EXTERNALITIES
Represent the key to understanding enviro policy
Direct affects from the economic activities of others
Markets do not price the effects
Can be positive or negative
POSITIVE EXTERNALITIES
• Direct, uncompensated, beneficial impact
• Impact is on a third party or bystander
• Will be underprovided without government
NEGATIVE
EXTERNALITIES
• Economic activity has a direct, negative effect on
third parties
• Adverse impact is uncompensated
• Without government, negative externalities will be
overprovided
ACTIVITY: EXTERNALITIES
• Discuss whether the following produce positive and/or negative externalities?
1. Your neighbor has a dog that barks at passersby
2. Your neighbor is a beekeeper with a beehive next door
3. A nightclub opens in an economically depressed area
• Discuss how the government might address such situations.
 MARKET
FAILURE &
INEFFICIEN
CY
TECHNOLOGICA
L VS
PECUNIARY
EXTERNALITIES
CAUSES OF EXTERNALITIES

1. High transaction costs

2. Incomplete property rights

THE COASE THEOREM
• If: property rights are clearly
defined/enforced and no transaction costs
The theorem: • Then: economically rational parties will
reach efficient outcome

Rarely applicable in
practice because of
lack of property and
transaction costs
POLICY SOLUTIONS

Internalization of the externality

Quantity controls and standards

Taxes and subsidies

Cap and trade systems

SOLUTION #1: INTERNALIZING
EXTERNALITIES
• Agent causing externality buys the organizations or assets impacted
• Creates incentive for single owner to avoid externalities
• Rarely feasible
SOLUTION #2:
CONTROLS AND
STANDARDS
• Most common solution to externalities
• Companies restrict emissions
• Does not provide incentive to improve
• Enforcement is difficult
• Determining standard is difficult
SOLUTION #3: TAXES AND
SUBSIDIES
• Easier to set than standards
• Taxes activities that generate negative externalities
• Gives polluters an incentive to reduce pollution
• Revenue can be used to pay for environmental programs
• Subsidizes activities that generate positive externalities
• Gives provider of positive externalities an incentive to do more
SOLUTION #4: CAP
AND TRADE
• Combines quantity controls and standards with
economic incentives of taxes
• Involves a cap on the maximum allowable emissions
(quantity control)
• Divides the cap into permits that grant the right to emit a
certain amount
• Holders can sell, buy, or trade permits (incentive)
THE POSITIVE THEORY
OF ENVIRONMENTAL
POLICY
MILLER
CHAPTER 21:
“THE FIGHT
OVER
GENETICALL
Y MODIFIED
FOODS”
CHAPTER 21 QUESTIONS
1. How do the potential (environmental and economic) costs of
transgenic crops differ from most of the traditional costs
associated with agriculture (such as tractors and labor)? Hint: Who
bears the costs: the farmer or others in society? Does this
difference mean that we should think and act differently regarding
these costs?
2. How can the tools discussed in Chapters 1 through 3 help us
understand some of the policy issues involved with GMOs?
3. Suppose one accurately took into account all of the costs and
benefits of developing transgenic crops. Could you be sure that the
economically efficient path to follow would be to permit the
development of GMOs?
CHAPTER 21 QUESTIONS
4. Suppose there are great benefits from transgenic crops, including improved nutrition,
longer life spans, reduced infant mortality, and the like. But also assume there are
environmental costs, e.g., in the form of some species that are made extinct because
they cannot compete with the new transgenic species. Should the existence of some
environmental costs outweigh all other benefits combined, regardless of how great
those benefits are?
5. The costs of GMO-free foods are said to be higher because these foods must be isolated
from GMO crops during both growing and processing. But GMO crops also enable food to
be grown on much less land than would otherwise be the case, thus reducing the price of
that land. Is it possible that, on balance, the presence of GMO foods actually makes it
cheaper to grow GMO-free crops?
6. GMO-free soybeans cost about $2 per bushel more than GMO soybeans. How many hours
does someone have to work to pay that premium in the United States, where average
wages are about $25 per hour? How many hours does someone have to work to pay that
premium in those African nations where average wages are about 25 cents per hour? Are
attitudes toward GMO-free crops likely to be different in Africa and the United States?
CHAPTER 25: GREENHOUSE
ECONOMICS
 1. Why will voluntary actions, undertaken at the individual
level, be unlikely to bring about significant reductions in
greenhouse gases such as CO2? Does this mean that
individuals are powerless over greenhouse gases?
2. Does the fact that the CO2 produced by one nation
CHAPTER results in adverse effects on other nations have any
bearing on the likelihood that CO2 emissions will be
25 reduced to the optimal level? Would the problem be
easier to solve if all the costs and benefits were
QUESTIO concentrated within a single country? Within a single
elevator or office?

NS 3. The policy approach to greenhouse gases will almost

certainly involve limits on emissions rather than taxes
on emissions. Can you suggest why limits rather than
taxes are likely to be used? (Hint: Under which system
does a firm that emits one million tons of CO2 pay more
taxes? How will this affect the firm’s lobbying efforts in
Congress?)
 4. It costs about $100,000 per acre to create
wetlands. How reasonable is this number as
an estimate of what wetlands are worth?

CHAPTER 5. Suppose the United States decides to

discourage CO2 emissions by imposing a tax on
25 them. How large should the tax on CO2
emissions be?
QUESTIO 6. Human-caused (anthropogenic) emissions of
NS CO2 are only about 3 percent of total CO2
emissions each year. (Oceans are the biggest
emitters.) Why is so much attention directed at
anthropogenic emissions of CO2?
 CAP AND
TRADE
ACTIVITY
A Pollution Solution
A POLLUTION SOLUTION: THE
PROBLEM
In the process of producing goods and services valued by people throughout the region, 3
companies in your town emit into the air a total of 90,000 tons of Yuk annually.
All 3 companies have reputations for quality products.
All 3 employ large numbers of local citizens and pay taxes that represent a substantial portion
of the budgets of local governments.
The recent federally-legislated allowable level of Yuk emissions for your region is 45,000
tons/yr.
Yuk emissions are monitored and measured by the AQCC, and penalties, including fines and
production shutdowns, are imposed on non-compliant regions.
The Air Quality Control Commission (AQCC), organized by local government officials and
business owners, is responsible for ensuring compliance with the 45,000 ton limit in your
region.
A POLLUTION
SOLUTION: THE AQCC
PLAN
The AQCC has decided that the fairest method is to make each business
responsible for reducing pollution by one-half. To do this, the Commission
issued 45,000 credits for the emission of 1 Ton of Yuk and gave each
company credits equal to ½ of its current Yuk emissions level.

Companies must have one credit for each ton of Yuk they emit or face fines
or possible plant shut down. Companies may pollute up to the level of
credits they hold without penalty. Companies may hold more credits than
they were originally allocated.

Allocation of emission credits by company:

Company A – 7,500 ton credits

Company B – 15,000 ton credits

Company C – 22,500 ton credits

 Budgeted Cost To Clean Up 50%:
Company A $ 7,500
Company B $ 30,000
Company C $ 67,500
Total cost = $105,000

POTENTIAL
CLEAN UP COSTS
A POLLUTION SOLUTION: THE
CHALLENGE
The Challenge: Can you clean up the Yuk to 45,000 Tons at a lower cost than budgeted (prev. slide)?
Rules:
All companies must voluntarily agree to the solution. The use of any form of coercion will result in the
factory being permanently shut down and the firm losing.
Companies are under no obligation to share the information on their cards, but may do so if they choose to.
Each company has property rights to (owns) the emissions certificates they are issued.
The Goal: Lower total clean-up cost without making any company worse off.
Incentive:
If the AQCC standard of 45,000 tons for the region is not met, then all companies will be shut down and no
payments will be made.
DEBRIEF
DISCUSSION: CAP AND
TRADE
DISCUSSION QUESTIONS
1. What was the least-cost method of meeting the required pollution
standards generally speaking? Why?
2. What incentivizes the firms?
3. Why do you suppose some groups might not reach a solution in
this context?
4. What is the significance of property rights in this activity? What
is the property and who has them here?
5. What are the key features necessary for an emissions cap-and-
trade program to work?