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 Pollution
• Waste that is not recycled
• Examples:
– Carbon monoxide, sulfur oxides, nitrogen oxides, and
other hazardous compounds released by motor
vehicles and industrial plants
– Carbon dioxide released by the burning of fossil fuels
– Deforestation
– Chlorofluorocarbons (CFCs)
– Industrial wastes, leaking septic tanks and landfills,
and pesticides

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 Externalities
• Pollution is the classic example of an
economic externality
– The cost or benefit of an economic activity
that spills over onto the rest of society
• Externalities can be positive or negative
– Pollution is a negative externality

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 Spillover Costs
• A negative externality in which costs are
shifted from the private market onto society
– Involve costs created by an economic activity
that are shifted to other firms or individuals
– Spillover costs are created by both businesses
and individuals
– Examples:
• Environmental pollution
• Noise pollution
• Congestion

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 Spillover Benefits
• A positive externality in which benefits are
shifted from the private market onto
society
– Examples:
• Education
• Immunization of children

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 Inefficient Resource Allocation
• Externalities can cause resources to be
inefficiently allocated
– We produce and consume too much of a
product (overallocate resources to its
production) if negative externalities are
present
– We produce and consume too little of a
product (underallocate resources to its
production) if positive externalities are present

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The Effects of Pollution in a Single Market

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 Costs of Production
• Social costs of production
– Total costs of production, including private
costs to the producer and spillover costs
borne by society
• When markets base output decisions on
costs of production, do so on the basis of
private costs of production only, not on full
costs of production
– Socially optimal level of output is based on full
social costs of production

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The Effects on One Market of
Pollution in Another Market

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Overallocation and Underallocation
of Resources
• Overallocation of resources
– The production of more than the socially
optimum amount of a good or service
• Underallocation of resources
– The production of less than the socially
optimum amount of a good or service

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 Environmental Policies and Politics
• Three factors explain why the environmental
movement is both recent and a product of
affluent, economically advanced countries:
1. Growth in population, accompanied by increases in
output, has greatly increased amounts of pollutants
released into air and water
2. Degree of peril occasioned by pollutants is greater
today than in preceding centuries
3. We have become more affluent, and the demand for
environmental quality has increased markedly

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 Environmental Legislation
• Spillover costs and misallocation of resources
result from externalities unless government
takes an active role in controlling the situation
• Federal government did not become involved in
air pollution control until 1950s
– Air Pollution Act of 1955
– Clean Air Act of 1963 (1970, 1977, and 1980)
• Environmental Protection Agency (EPA) was
formed by executive order in 1970 to administer
environmental laws
– Federal Water Pollution Act of 1972

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Which Level of Government?
• Pollution control policy is administered by
federal, as well as state and local,
governments
– Federal level may be the more appropriate to
regulate the environment because:
• Whatever the source of air and water pollution, the
problem affects neighboring communities, states,
and even countries
• Local communities, acting in their own perceived
self-interest, may be lax in setting standards to
control air and water pollution
• States have widely differing resources
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 Methods of Regulation
• Government agencies, at any level, use
the following methods to limit adverse
environmental effects:
1. Standards
2. Pollution fees
3. Pollution permits

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 The Standards Approach
• Maximum acceptable levels of pollutants
are established
– Firms that exceed these levels are punished,
usually by fines
• Standards may be classified as:
– Performance standards
• Specify required level of performance but not
means of compliance
– Design standards
• Specify both required level of performance and
means of compliance
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 Pollution Fees
• Two types:
– Effluent fees
• Taxes on production causing water pollution
– Emissions fees
• Taxes on production causing air pollution

• If pollution fee is at least equal to social spillover

cost, imposition of tax will correct overallocation
of resources that results from pollution
– Gives firms incentive to change behavior
• Can either pay fee or find new process of production less
harmful to environment

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 Marketable Pollution Permits
• Maximum level of pollution acceptable to
society is divided into units
• Government issues permits that allow
business firms to produce these units of
pollution in their production process
– Permits can be bought and sold
– Eventually wind up in the hands of firms with
highest costs of reducing pollution
• Result in lowest cost to society (producers and
consumers) of pollution control
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 Which Method Is Better?
• Given problems with standards approach,
many economists favor pollution fees or
pollution permits
– Both more flexible than standards and rely on
marketplace to control pollution more
efficiently
– Both less expensive than standards regulation
and do not stifle technological change

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World Carbon Dioxide Emissions

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United States Carbon Dioxide Emissions

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World Petroleum Consumption

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United States Petroleum Consumption

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 OPEC
• Organization of Petroleum Exporting Countries
– Members: 13 oil exporting countries
– Controls supply of petroleum by setting quotas on oil exports of
each member country

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United States Petroleum Prices

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United States Retail Motor Gasoline Prices

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 Other International Environmental Problems

• Aside from global warming and use of

finite energy, other global issues include:
– Ozone depletion
– Deforestation
– Loss of biodiversity
– Desertification

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Evaluation of Environmental Policies
• Cost-benefit analysis
– Compares costs and benefits of a policy or program
• Environmental protection costs are the total of all costs
incurred by government, businesses, or households
• Benefits of environmental protection are improvements
in environmental quality that result
– Some are quantifiable
– Many cannot be calculated in monetary terms
• In reconciling costs with benefits of environmental
protection, must consider monetary and nonmonetary
benefits and benefits to future as well as current
generations

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 Economics of Conservation
• Market can act as mechanism to encourage conservation
– Taxes or subsidies (payments from government for some given action)
increase market prices and therefore lead efforts to conserve

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 Economics of Recycling
• Examples of recyclable products:
– Aluminum
– Newspapers
– Cardboard
– Magazines
– Tin cans
– Glass
– Plastics
– Scrap metal
– Used oil
• Popular alternative to landfilling
• Two most pressing problems of recycling:
1. Motivating consumers and businesses to recycle
2. Developing markets for recyclable goods
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 Effects of Environmental Policy
on U.S. Economy
• Some critics argue that environmental regulation
has increased costs of American business and
causes adverse effects on the U.S. economy:
– Inflation
– Reduction in national output, which leads to:
• Increased unemployment
• Slowdown in economic growth

• Others argue that employment has actually

increased as a result of environmental regulation
because decrease in jobs in polluting firms is
offset by increase in jobs at firms formerly
harmed by pollution
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 Criticism of U.S. Environmental Policy
• George W. Bush has been strongly criticized by
environmentalists for his environmental policies
– Wants voluntary restraint by businesses that contribute to global
warming, rather than mandatory controls
– Widespread use of hydrogen fuel cells—the centerpiece of Bush
energy plan—might not be as environmentally friendly as he
wants to believe
– Supported approval of federal dump for nuclear waste at Yucca
Mountain in Nevada
– Proposed drilling for oil and gas in Arctic National Wildlife
Refuge
– Reversed prior policy in many areas, including logging and
mining
– Favors reducing federal government’s role in pollution control

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International Aspects of Pollution Control

• Two major international environmental

summits
– Rio Earth Summit (Brazil, 1992)
• Climate Change Convention
• Biodiversity Convention
– World Summit on Sustainable Development
(Johannesburg, 2002)

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 The Economic Left and the Economic Right
• THE ECONOMIC
LEFT (Liberal)
– Support active government
role in protecting
environment
– May favor standards
regulation, as well as
policies drafted at national
and international levels
– May take position that we
should do whatever it takes
to get the job done and not
worry about government’s
expanding role in the
economy
• THE ECONOMIC
RIGHT (Conservative)
– More likely to oppose
environmental regulation
– More likely to favor pollution
fees and marketable
pollution permits over
regulation of pollution by
means of standards
– May also prefer state and
local solutions to
environmental problems
over policies developed at
federal and international
levels
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