Slide 1After studying this chapter, you will be able to:Slide 3Negative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionNegative Externalities: PollutionThe Tragedy of the CommonsThe Tragedy of the CommonsThe Tragedy of the CommonsThe Tragedy of the CommonsThe Tragedy of the CommonsThe Tragedy of the CommonsThe Tragedy of the CommonsThe Tragedy of the CommonsThe Tragedy of the CommonsThe Tragedy of the CommonsThe Tragedy of the Commons17EXTERNALITIES AND THE ENVIRONMENT© 2014 Pearson Addison-WesleyAfter studying this chapter, you will be able to:¨Explain why external costs bring market failure and too much pollution and how property rights and public choices might achieve an efficient outcome¨Explain the tragedy of the commons and its possible solutions© 2014 Pearson Addison-WesleyHow can we use less coal, natural gas, and oil to reduce the air pollution and global warming we’re causing? What can we do to conserve the ocean’s fish stocks and save endangered species from extinction?These questions arise because some of our choices impose costs on others—external costs—that we don’t think about when we make those choices. How can we be made to take these costs into account?© 2014 Pearson Addison-WesleyNegative Externalities: PollutionAn externality is a cost or benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than the consumer. A negative externality imposes an external cost.© 2014 Pearson Addison-WesleyNegative Externalities: PollutionSources and Consequences of Air PollutionThe problems of local air quality and the global problem of climate change are related, but distinct problems.Local air quality is influenced by 180 airborne substances. Most important are carbon monoxide, lead, nitrogen dioxide, ground level ozone, particulate matter, and sulfur dioxide. Global temperature is influenced by human emissions of greenhouse gases. Most important is carbon dioxide (CO2).© 2014 Pearson Addison-WesleyNegative Externalities: PollutionCO2 emission is a global phenomenon and problem.The United States and China each account for about one quarter of the CO2 emitted into the global atmosphere in a year.Electric power utilities, highway vehicles, and industrial processes are the main sources of both local air pollution and global CO2 emissions.The effects of pollution mean that production and consumption decisions impose costs that are not taken fully into account when decisions are made.© 2014 Pearson Addison-WesleyNegative Externalities: PollutionProduction and Pollution: How Much?A private cost of production is a cost that is borne by the producer.Marginal private cost (MC) is the private cost of producing one more unit of a good or service.An external cost of production is a cost that is not borne by the producer but is borne by others.Marginal external cost is the cost of producing one more unit of a good or service that falls on people other than the producer.© 2014 Pearson Addison-WesleyNegative Externalities: PollutionMarginal social cost (MSC) is the marginal cost incurred by the entire society—by the producer and by everyone else on whom the cost falls.Marginal social cost is the sum of marginal private cost and marginal external cost. MSC = MC + Marginal external costWe express costs in dollars but remember that the dollars represent the value of a forgone opportunity.Marginal private cost, marginal external cost, and marginal social cost increase with output.© 2014 Pearson Addison-WesleyNegative Externalities: PollutionValuing an External CostSuppose that there are two similar rivers, one polluted and the other clean with 10 identical riverside homes.The homes on the clean river rent for $2,000 a month, and those on the polluted river rent for $1,500 a month. If the pollution is the only detectable difference between the houses, then the rent difference of $500 per month is the pollution cost per home. With 10 homes on the side of a polluted river, the external cost of pollution is $5,000 a month.© 2014 Pearson Addison-WesleyNegative Externalities: PollutionExternal Cost and Output Figure 17.1 shows the relationship between external cost and output in a paint industry that pollutes a river.The MC curve shows the marginal private cost of producing paint.It costs producer $1 a gallon to produce 3 million gallons of paint.© 2014 Pearson Addison-WesleyNegative Externalities: PollutionIf a firm pollutes a river, it imposes an external cost that is borne by other users of the river.The figure shows the marginal social cost of producing paint, the MSC curve.The vertical distance between the MC and MSC curves is marginal external cost of the pollution.MSC = MC + External cost© 2014 Pearson Addison-WesleyNegative Externalities: PollutionEquilibrium and Amount of PollutionEquilibrium in the market for paint determines the amount of pollution. Figure 17.2 shows the equilibrium in an unregulated market.The quantity of the good produced is where marginal private cost (MC) equals marginal social benefit (MSB).© 2014 Pearson Addison-WesleyNegative Externalities: PollutionAt the market equilibrium, MSB is less than MSC, so the market produces an inefficient quantity of the good.At the efficient quantity of the good, MSC = MSB.With no regulation, the market produces too much paint and creates a deadweight loss.© 2014 Pearson Addison-WesleyNegative Externalities: PollutionThree approaches to overcoming the inefficiency areEstablish property rightsMandate clean technologyTax or price pollutionEstablish Property RightsProperty rights are legally established titles to the ownership, use, and disposal of factors of production and goods and services that are enforceable in the courts.Establishing property rights can confront