Chapter 32IntroductionLearning ObjectivesLearning Objectives (cont'd)Chapter OutlineDid You Know That...Private versus Social CostsPrivate versus Social Costs (cont'd)Slide 9Slide 10Correcting for ExternalitiesFigure 32-1 Reckoning with Full Social CostsCorrecting for Externalities (cont'd)Slide 14Policy Example: Belgian Governments Forgo a Uniform Tax and Kill Off JobsPollutionFigure 32-2 The Optimal Quantity of Air PollutionPollution (cont'd)International Policy Example: Canada Confronts a High Marginal Cost of Pollution AbatementInternational Policy Example: Canada Confronts a High Marginal Cost of Pollution Abatement (cont'd)Common PropertyCommon Property (cont'd)Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Example: Profiting by Generating Electricity from Thin Air in IrelandExample: Profiting by Generating Electricity from Thin Air in Ireland (cont'd)Wild Species, Common Property, and Trade-OffsWild Species, Common Property, and Trade-Offs (cont'd)RecyclingE-Commerce Example: Boom Times in Personal Computer RecyclingRecycling (cont'd)Slide 36Slide 37Issues and Applications: The Government’s Climbing Costs to Protect Wild HorsesSummary Discussion of Learning ObjectivesSummary Discussion of Learning Objectives (cont'd)Slide 41Slide 42End of Chapter 32Chapter 32Environmental EconomicsCopyright © 2008 Pearson Addison Wesley. All rights reserved.32-2IntroductionMany people see wild horses as a living symbol of the nation’s natural beauty, while others regard them as pests.One thing is certain: U.S. taxpayers spend more than $50 million per year on more than 50,000 wild horses and 5,000 of their cousins, wild burros.Copyright © 2008 Pearson Addison Wesley. All rights reserved.32-3Learning Objectives•Distinguish between private costs and social costs•Understand market externalities and possible ways to correct externalities•Describe how economists can conceptually determine the optimum quantity of pollutionCopyright © 2008 Pearson Addison Wesley. All rights reserved.32-4Learning Objectives (cont'd)•Explain the roles of private and common property rights in alternative approaches to addressing the problem of pollution•Discuss how the assignment of property rights may influence the fates of endangered species•Contrast the benefits and costs of recycling scarce resourcesCopyright © 2008 Pearson Addison Wesley. All rights reserved.32-5Chapter Outline•Private versus Social Costs•Correcting for Externalities•Pollution•Common Property •Wild Species, Common Property and Tradeoffs•RecyclingCopyright © 2008 Pearson Addison Wesley. All rights reserved.32-6Did You Know That...•Every decision involving the environment involves a tradeoff?•The economic way of thinking about endangered species requires considering the costs of protecting them?•Economists want to help us opt for informed policies that have maximum net benefits?Copyright © 2008 Pearson Addison Wesley. All rights reserved.32-7Private versus Social Costs•Private Costs Costs borne solely by the individuals who incur themAlso called internal costsCopyright © 2008 Pearson Addison Wesley. All rights reserved.32-8Private versus Social Costs (cont'd)•Social CostsThe full costs borne by society whenever a resource use occursMeasured by adding internal to external costsCopyright © 2008 Pearson Addison Wesley. All rights reserved.32-9Private versus Social Costs (cont'd)•Environmental issues occur when social costs exceed private cost.•The cost of polluted air—consider both private and social costs•QuestionWhat if you had to pay the social cost of driving a car?Copyright © 2008 Pearson Addison Wesley. All rights reserved.32-10Private versus Social Costs (cont'd)•ExternalityA situation in which a private cost (or benefit) diverges from a social cost (or benefit)A situation in which the costs (or benefits) of an action are not fully borne (or gained) by the two parties engaged in a scarce-resource-using activityCopyright © 2008 Pearson Addison Wesley. All rights reserved.32-11Correcting for Externalities•An externality arises when there is a divergence between private cost and social cost.•The remedy is to change the signal for decision making.•In the case of industrial pollution, the firm must be forced to internalize the cost of the environmental damage.Copyright © 2008 Pearson Addison Wesley. All rights reserved.32-12Figure 32-1 Reckoning with Full Social CostsCopyright © 2008 Pearson Addison Wesley. All rights reserved.32-13Correcting for Externalities (cont'd)•The polluters’ choice1. Install pollution abatement equipment or change production techniques2. Reduce pollution-causing activity3. Pay the price to polluteCopyright © 2008 Pearson Addison Wesley. All rights reserved.32-14Correcting for Externalities (cont'd)•Is a uniform tax appropriate?It may be appropriate to levy a uniform tax, as external costs might vary from location to location.We must establish the amount of economic damages; we have to come up with a measure of economic costs.Copyright © 2008 Pearson Addison Wesley. All rights reserved.32-15Policy Example: Belgian Governments Forgo a Uniform Tax and Kill Off Jobs•In 2004, DHL announced plans to expand its operations in Brussels.•The expansion correlated with an increase in late-night flights.•National and regional Belgian governments objected.•DHL moved 1,300 jobs to Leipzig, Germany.Copyright © 2008 Pearson Addison Wesley. All rights reserved.32-16Pollution•QuestionHow much pollution is too much? •AnswerThe optimal quantity is determined by a comparison of marginal costs and benefits.Copyright © 2008 Pearson Addison Wesley. All rights reserved.32-17Figure 32-2 The Optimal Quantity of Air PollutionThe optimal quantityof pollution occurswhere MC = MBCopyright © 2008 Pearson Addison Wesley. All rights reserved.32-18Pollution (cont'd)•Optimal Quantity of PollutionThe level of pollution for which the marginal benefit of one additional unit of pollution abatement just equals the marginal cost of that additional unitCopyright © 2008 Pearson Addison Wesley. All rights reserved.32-19International Policy Example: Canada Confronts a High Marginal Cost of Pollution Abatement•Under the Kyoto protocol, Canada promised that it would reduce emissions of global warming gasses.•Since signing the treaty, Canada’s emissions have actually increased by 1.5% per year.Copyright © 2008 Pearson Addison Wesley.