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Isues in economics today 6th by guell chapter22

Chapter 22
Natural
Resources,
the
Environment,
and Climate
Change

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.


Chapter Outline






Using Natural Resources

How Clean Is Clean Enough?
The Externalities Approach
The Property Rights Approach
Environmental Problems And
Their Economic Solutions
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Natural Resources
• Limited natural resources:
Resources that cannot be
replaced.
• Renewable Natural Resources:
Resources that can be replaced.
• Stewardship: The management of
resources in a fashion that weighs
their value through time.
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Optimal Resource Use
• Present value can be used to determine
the optimal usage of resources.
• The optimal usage plan depends on the
discount rate.
• With a 0% discount rate optimal usage
• would spread out the use of limited natural
resources over eternity.
• Would have renewable natural resources used only
at the rate at which they are generated by nature.


• With a positive discount rate, the usage plan
would be more frontloaded.

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Sustainability
• Sustainability requires that
• renewable natural resources be
used only at a rate at which they
can be replaced.
• Limited natural resources be used
as sparingly as possible.

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How Clean is Clean Enough
• Economists answer most “how much is
enough” questions with the same
answer: “until the marginal benefit
equals the marginal cost.”
• The right level of environmental
cleanliness is achieved when the value
of cleaning the environment a little
more equals the cost of doing so.

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The Dirty Room Example
• Cleaning your room (dorm room or your own
bedroom) can be done to many degrees
• A short time can be spent getting things off the floor
(high marginal benefit, low marginal cost).
• More time can be spent with vacuuming and
straightening (moderate marginal benefit, moderate
marginal cost).
• Even more time can be spent deep cleaning,
removing stains from carpets, dusting all shelves and
moving furniture so as to clean behind them (for
most low marginal benefit and high marginal cost.)

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Modeling Environmental
Cleanup
Marginal Cost
Marginal Benefit

Marginal Cost

Marginal Benefit
EQ*
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Environmental Quality

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The Externalities Approach
• Externalities are the effects of a
transaction that hurt or help
people who are not a part of that
transaction.
• When a product affects someone
other than the consumer of
producer in a negative way, such
as pollution, economists suggest
that the market has failed.
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P
A

When the Market Works
for Everyone•
Supply




P*

C



B

Value to the Consumer:
• 0ACQ*
Consumers Pay Producers:
• OP*CQ*
The Variable Cost to
Producers:
• OBCQ*
Consumer Surplus:
• P*AC
Producer Surplus:
• BP*C

Demand
0

McGraw-Hill/Irwin

Q*

Q/t
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When Externalities are Present
• If there are externalities then
there is overproduction of a good.
• The total cost of a good to society
(called social cost) includes the
costs of production incurred by
the firm as well as the external
costs.

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When the Market Does Not
Work for Everyone
Social Cost
External Cost
SMarginal Cost

P

P’
P*

D(Marginal Benefit)
0
McGraw-Hill/Irwin

Q’ Q*

Q/t
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The Property Rights Approach
• Coase’s Theorem
• If there are no costs of bargaining
between people and polluters then by
assigning a property right (either the
right of the firm to pollute or the right
of people to be free from pollution)
people and firms can negotiate to the
correct level of production.

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Why Coase’s Theorem Makes
Sense
• People do not pollute up their own
private property nearly as much as
they pollute Common Property.
• Common Property is not owned by any
individual but is owned by government
or has some other collective ownership
property.

• This is because when they do they
are removing value from
themselves.
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Problems with Coase’s Theorem
• It is impossible for companies
to negotiate with millions of
citizens affected by their
pollution.
• The system picks a winner and
a loser when it establishes the
property right.
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Natural Resources and Property
Rights
• Uses the concept of present value
• Choose the rate of exploitation
that maximizes profit.
• The rate of exploitation that
maximizes profit depends on
whether the firm owns the
property (or at least the long term
right to exploit it.)
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Various Environmental Problems
and their Solutions
• Problems of
• Water pollution, Air Pollution,
Extinction of Species, Acid Rain,
Global Warming

• Legal Solutions
• Clean Water Act
• Clean Air Act
• Endangered Species Act

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Legal vs. Economic Solutions
• Legal solutions to environment
problems typically limit or make
illegal activities that harm the
environment.
• Economic solutions to environmental
problems tend to discourage
activities that harm the environment
by making the people doing the harm
recognize the cost of that harm.
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Taxation as an Economic Solution
S+tax

tax
SMarginal Cost

P

P’
P*
D(Marginal Benefit)

0
McGraw-Hill/Irwin

Q’ Q*

Q/t

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Other Economic Solutions
• Cap-and-trade: Any policy that imposes
a limit on the total amount of emissions
and allows for the free exchange of
emission permits within that cap.
• Emission permits for SO2 in the Clean Air
Act of 1990.
• Obama preferred limits on GHGs

• California’s old-car purchases
• Cash for Clunkers

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When There is No Authority to
Tax or Regulate
• Global Warming crosses
governmental boundaries.
• There is no motivation for an
individual country to limit
pollution that contributes to
global warming.
• No government can enforce the
Kyoto Protocol
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Economic Consequences of
Kyoto (if it were implemented)
• The United States is 25% above its
Kyoto target for Greenhouse gasses.
• Estimates vary of how much energy
prices would have to rise in order to
reduce US GHG production to the
Kyoto targets.
• Low-end estimates: 25%
• High-end estimates: 67%
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