1. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/eO’Sullivan/Sheffrin Prepared by: Fernando Quijano and Yvonn Quijano CHAPTERCHAPTER 17 Environmental Policy

2. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Environmental Policy Just as the government has a role in markets with spillover benefits, the government also plays a role in markets with spillover costs.Just as the government has a role in markets with spillover benefits, the government also plays a role in markets with spillover costs. Spillover PRINCIPLE For some goods the costs or benefits associated with producing or consuming those goods are not confined to the person or organization producing or consuming them.

3. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Pollution Tax Versus Regulation A pollution tax is the tax or charge equal to the spillover cost per unit of waste.A pollution tax is the tax or charge equal to the spillover cost per unit of waste. The economist’s response to a pollution problem is to impose a pollution tax.The economist’s response to a pollution problem is to impose a pollution tax. A pollution tax forces firms to pay for the waste they generate, which causes firms to produce less of the polluting good and also encourages firms to spend money to abate pollution.A pollution tax forces firms to pay for the waste they generate, which causes firms to produce less of the polluting good and also encourages firms to spend money to abate pollution.

4. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Firm’s Response to a Pollution Tax Pollution abatement is subject to diminishing returns.Pollution abatement is subject to diminishing returns. As firms continue to decrease the volume of waste it produces, it becomes progressively more expensive to decrease it further.As firms continue to decrease the volume of waste it produces, it becomes progressively more expensive to decrease it further. The firms will question whether to continue to generate waste and pay taxes, or to spend some money to reduce waste.The firms will question whether to continue to generate waste and pay taxes, or to spend some money to reduce waste. The marginal principle can be used to make these decisions.The marginal principle can be used to make these decisions.

5. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Firm’s Response to a Pollution Tax Marginal PRINCIPLE Increase the level of an activity if its marginal benefit exceeds its marginal cost; reduce the level of an activity if its marginal cost exceeds its marginal benefit. If possible, pick the level at which the activity’s marginal benefit equals its marginal cost.

6. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Cost per Ton of Paper with Varying Amounts of Pollution Waste per Ton (Gallons) Average Production Cost per Ton Tax Cost per Ton Average Total Cost per Ton 5 $ 60 $20 $ 80 4 $ 61 $16 $ 77 3 $ 64 $12 $ 76 2 $ 71 $ 8 $ 79 1 $ 86 $ 4 $ 90 0$116 $ 0 $116 As the firm decreases the volume of waste, it becomes progressively more expensive to decrease it further.As the firm decreases the volume of waste, it becomes progressively more expensive to decrease it further.

7. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Market Effects of a Pollution Tax The pollution tax affects the total volume of waste dumped in two ways:The pollution tax affects the total volume of waste dumped in two ways: Abatement: there is less waste per ton of paper—3 gallons instead of 5 gallons per ton.Abatement: there is less waste per ton of paper—3 gallons instead of 5 gallons per ton. Lower output: the industry produces less paper—80 instead of 100 tons per day.Lower output: the industry produces less paper—80 instead of 100 tons per day.

8. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Traditional Regulation: Command and Control An alternative to a pollution tax is a system of regulations that control the amount of pollution generated by each firm and control the firm’s production process by forcing the firm to use a particular pollution-control technology.An alternative to a pollution tax is a system of regulations that control the amount of pollution generated by each firm and control the firm’s production process by forcing the firm to use a particular pollution-control technology. The label for a traditional regulatory policy is a command-and-control policy.The label for a traditional regulatory policy is a command-and-control policy.

9. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Traditional Regulation: Command and Control A problem with the regulatory policy is that the mandated abatement technology is unlikely to be the most efficient for two reasons:A problem with the regulatory policy is that the mandated abatement technology is unlikely to be the most efficient for two reasons: A single abatement technology is likely to be efficient for some firms but not for others.A single abatement technology is likely to be efficient for some firms but not for others. There is no incentive to cut the volume of waste below the maximum volume, or develop better abatement technologies.There is no incentive to cut the volume of waste below the maximum volume, or develop better abatement technologies.

10. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Traditional Regulation: Command and Control Because a command-and-control policy causes firms to use inefficient abatement technology, the policy will increase the firm’s costs by a large amount.Because a command-and-control policy causes firms to use inefficient abatement technology, the policy will increase the firm’s costs by a large amount.

11. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Marketable Pollution Permits A government-run system of marketable pollution permits works as follows:A government-run system of marketable pollution permits works as follows: Pick a target pollution level for a particular area.Pick a target pollution level for a particular area. Issue just enough pollution permits to meet the pollution target.Issue just enough pollution permits to meet the pollution target. Allow firms to buy and sell the permits.Allow firms to buy and sell the permits.

12. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Marketable Permits Allowing firms to sell their permits decreases the total cost of achieving any abatement target.Allowing firms to sell their permits decreases the total cost of achieving any abatement target. The government exploits the differences in abatement costs, relying on firms with low abatement cost to do the abatement.The government exploits the differences in abatement costs, relying on firms with low abatement cost to do the abatement. As a result, we can achieve the same volume of pollution abatement at a lower cost.As a result, we can achieve the same volume of pollution abatement at a lower cost.

13. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Experiences with Marketable Permits The first pollution permit was sold in 1977, and thousands of exchanges have occurred since then.The first pollution permit was sold in 1977, and thousands of exchanges have occurred since then. Duquesne Light Company paid $3,750,000 to Wisconsin Power and Light for the rights to dump 15,000 tons of sulfur dioxide. In this transaction, the price of a ton of sulfur dioxide emissions was $250.Duquesne Light Company paid $3,750,000 to Wisconsin Power and Light for the rights to dump 15,000 tons of sulfur dioxide. In this transaction, the price of a ton of sulfur dioxide emissions was $250.

14. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Experiences with Marketable Permits Mobil Oil Corporation paid $3,000,000 for the rights to dump 900 pounds of reactive vapors per day. Mobil paid this sum to the city of Torrence, California, which had earlier acquired the pollution rights from General Motors.Mobil Oil Corporation paid $3,000,000 for the rights to dump 900 pounds of reactive vapors per day. Mobil paid this sum to the city of Torrence, California, which had earlier acquired the pollution rights from General Motors. A firm in Los Angeles installed a new incinerator that decreased its hydrocarbon emissions by 100 tons per year and offered to sell the rights to emit 100 tons of hydrocarbons for $400,000.A firm in Los Angeles installed a new incinerator that decreased its hydrocarbon emissions by 100 tons per year and offered to sell the rights to emit 100 tons of hydrocarbons for $400,000.

15. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Causes of Global Warming Carbon dioxide is by far the most important greenhouse gas.Carbon dioxide is by far the most important greenhouse gas. In the last century, we have blown out more carbon than plants have been able to suck in, and the volume of carbon dioxide in the atmosphere has increased by 25%.In the last century, we have blown out more carbon than plants have been able to suck in, and the volume of carbon dioxide in the atmosphere has increased by 25%.

16. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Causes of Global Warming The destruction of tropical rain forests affects the volume of carbon dioxide in the atmosphere because:The destruction of tropical rain forests affects the volume of carbon dioxide in the atmosphere because: When trees and plants are burned, the carbon stored in these plants is converted into carbon dioxide.When trees and plants are burned, the carbon stored in these plants is converted into carbon dioxide. Once the forest is cleared, there is less plant material to convert carbon dioxide into stored carbon.Once the forest is cleared, there is less plant material to convert carbon dioxide into stored carbon.

17. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Consequences of Global Warming A doubling of atmospheric carbon dioxide in about 60 years will increase global temperatures, although it is unclear by how much.A doubling of atmospheric carbon dioxide in about 60 years will increase global temperatures, although it is unclear by how much. Scientists expect total rainfall to increase, with some areas getting more and others less with a likely negative effect on agricultural.Scientists expect total rainfall to increase, with some areas getting more and others less with a likely negative effect on agricultural. Glaciers will melt, raising sea levels and inundating the amount of land available for agriculture or living space.Glaciers will melt, raising sea levels and inundating the amount of land available for agriculture or living space.

18. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin A Carbon Tax The economist’s response to the accumulation of greenhouse gases is to impose a tax on fossil fuels.The economist’s response to the accumulation of greenhouse gases is to impose a tax on fossil fuels. The carbon tax for a particular fuel would be determined by the fuel’s carbon content.The carbon tax for a particular fuel would be determined by the fuel’s carbon content.

19. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin A Carbon Tax The decrease in greenhouse emissions by 43% is the result of three types of changes:The decrease in greenhouse emissions by 43% is the result of three types of changes: An increase in the price of energy and the cost of producing energy-intensive goods.An increase in the price of energy and the cost of producing energy-intensive goods. Some energy producers will switch to noncarbon energy sources.Some energy producers will switch to noncarbon energy sources. Energy producers will improve the efficiency of carbon-based fuels.Energy producers will improve the efficiency of carbon-based fuels.

20. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin The Kyoto Agreement and Developing Nations In 1997, the Kyoto Agreement to reduce carbon dioxide emissions was established by industrial nations at the Kyoto Conference on global warming.In 1997, the Kyoto Agreement to reduce carbon dioxide emissions was established by industrial nations at the Kyoto Conference on global warming. The largest industrial nations pledged to reduce emissions to just below the 1990 levels by the year 2008.The largest industrial nations pledged to reduce emissions to just below the 1990 levels by the year 2008. In 2001, the United States government announced that it would not participate in the plan.In 2001, the United States government announced that it would not participate in the plan.

21. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Other Environmental Problems The primary culprit of ozone depletion is a family of chemicals called chlorofluorocarbons (CFCs).The primary culprit of ozone depletion is a family of chemicals called chlorofluorocarbons (CFCs). Under the Montreal Protocol of 1990, the production of these chemicals will stop by 2010.Under the Montreal Protocol of 1990, the production of these chemicals will stop by 2010. The ban on CFCs will increase the equilibrium prices of the goods that were produced with these chemicals.The ban on CFCs will increase the equilibrium prices of the goods that were produced with these chemicals.

22. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Other Environmental Problems Acid rain is precipitation with an acidic combination of sulfur dioxides (SO 2 ) and nitrogen oxides.Acid rain is precipitation with an acidic combination of sulfur dioxides (SO 2 ) and nitrogen oxides. A system of marketable pollution permits for SO 2 was established by the Clean Air Act of 1990.A system of marketable pollution permits for SO 2 was established by the Clean Air Act of 1990. The permit system will decrease SO 2 by about 10 million tons per year, a reduction of about 40%.The permit system will decrease SO 2 by about 10 million tons per year, a reduction of about 40%.

23. © 2003 Prentice Hall Business PublishingEconomics: Principles and Tools, 3/e O’Sullivan/Sheffrin Other Environmental Problems Urban smog is a persistent environmental problem. The smog is made up of several pollutants including nitrogen oxides, sulfur dioxides, and volatile organic compounds.Urban smog is a persistent environmental problem. The smog is made up of several pollutants including nitrogen oxides, sulfur dioxides, and volatile organic compounds. The automobile is the biggest source of the pollutants that lead to smog.The automobile is the biggest source of the pollutants that lead to smog.