1. To Accompany “Economics: Private and Public Choice 10th ed.” James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson Slides authored and animated by: James Gwartney, David Macpherson, & Charles Skipton Full Length Text — Micro Only Text — Part: Special Topic: Next page Copyright 2003 South-Western Thomson Learning. All rights reserved. Economics and the Environment 614 5 11

2. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Economic Principles and Environmental Decisions

3. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Economic Principles and Environmental Decisions Even though environmental decisions are often made outside a market context, the basic principles of economics still apply. Incentives matter. Values are subjective. Secondary effects of decisions are important. Absence of clearly defined & securely enforced property rights and the resulting lack of markets and decision-maker accountability are at the heart of pollution and other environmental problems.

4. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Is Economic Growth Harmful to the Environment?

5. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Economic Growth and the Environment? Environmental quality and economic growth tend to go together. The demand for environmental quality is positively and strongly linked to income levels, spurring the demand of citizens for environmental goods provided through markets, and government action to improve environmental quality through regulation. The technological change associated with growth is another factor that improves the environment as market players use advanced technology to get more value from a smaller amount of a costly resource.

6. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Source: National Air Quality, 2000: Status and Trends. (Washington: EPA, Sept. 2001). U.S. Air Emissions: 1970 vs. 2000 Between 1970 and 2000 output grew substantially. At the same time, air pollution declined. 1970 2000 Air Emissions, 1970 vs. 2000 (millions of tons) Particulate matter Sulfur dioxide Volatile organic compounds Nitrogen oxides Carbon monoxide 5 20 25 90 15 30 20 130

7. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. 1,00010,000100 40 60 80 100 Income per-capita (dollars, log scale) 20 0 Source: World Bank, World Development Report, 1992, p.11. Share of the Population Without Safe Drinking Water Pollution as National Income Rises The graphs on the following three pages demonstrate relationships established using cross-country regression analysis (statistical analysis) of data from the 1980s. Note that as income per capita increases, the share of the population without safe water steadily decreases.

8. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. 1,00010,000100 1,200 1,800 600 0 Income per-capita (dollars, log scale) Urban Concentration of Particulate Matter (micrograms per cubic meter of air) Source: World Bank, World Development Report, 1992, p.11. Pollution as National Income Rises Note that initially as income per capita increases from very low levels, air pollution worsens. But, as incomes increase above these low levels, heavily used roads are paved and industrial processes become more efficient and emit smaller amounts of waste. As a result, particulate air pollution will eventually fall as per capita income increases.

9. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. 1,00010,000100 400 600 200 0 Source: World Bank, World Development Report, 1992, p.11. Income per-capita (dollars, log scale) Municipal Wastes Per Capita (Kilograms) Pollution as National Income Rises Unfortunately, the amount of solid waste generated increases with economic development, though proper disposal facilities can minimize some of the negative effects of this problem.

10. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Property Rights and the Environment

11. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Property Rights and the Environment Where property rights and market exchange are missing, both resource conservation and environmental quality suffer. The former Soviet Union and the Eastern European nations illustrate the importance of property rights. Environmental disasters occurred there despite the presence of good technical capabilities and above-average per capita incomes.

12. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Property Rights and the Environment When property rights are present, individuals have an incentive to conserve resources, which helps to reduce the level of pollution. Property rights give legal standing to those who are threatened by pollution, and provide them with the incentive to use those rights. Property rights also help to preserve environmental quality by enabling greater economic prosperity and growth.

13. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Property Rights and Protection of Water Quality

14. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Property Rights and Water Quality Private ownership of fishing rights in England illustrates the benefits of private ownership on water quality. In 1948, long before the government imposed water quality regulations, the Anglers’ Cooperative Association (ACA) was formed to help fishing rights owners (clubs and anglers) get court orders forcing intruders to cease polluting activities and pay damage awards. ACA won cases in court, establishing enough court precedents that it seldom has to go to court now.

15. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Property Rights and Water Quality In the U.S., fishing rights on most streams are owned by state governments, but the bureaucratic decision makers who could sue, seem less inclined to aggressively protect either the fish or the water quality. When control of water pollution in streams is left up to environmental regulators, progress may come, but due to a lack of market information and incentives, it seems to come more slowly and less efficiently.

16. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Government Regulation and the Environment

17. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Government Regulation and the Environment When enforceable property rights cannot be put into place, government regulation is an alternative mechanism that can improve the use of resources and the environment. Regulation seldom leads to ideal outcomes, and it can be enormously expensive. Regulatory choices are not based on information & incentives from market prices. Regulation has potential for inefficiency and ineffectiveness. Environmental quality in the former Soviet Union illustrates this point. Environmental regulations can exert a powerful influence, for good or for ill.

18. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Questions for Thought: 1. “When it comes to risks from chemicals, such as pesticides that might find their way into food, it is impossible to choose too much safety.” -- Is this statement true? 2. “In nearly every case, environmental problems stem from insecure, unenforceable, or non- existent property rights.” -- Is this true? 3. Is economic growth good or bad for the environment? Does the quality of the environment typically improve or deteriorate as countries achieve higher levels of income?

19. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. Questions for Thought: 4. “Market institutions and technological advancements generally lead to higher income levels and a stronger demand for a cleaner and safer environment.” -- Is this statement true?

20. Jump to first page Copyright 2003 South-Western Thomson Learning. All rights reserved. End Special Topic 14