Chapter 03: Pollution and Resource Degration as Externalities

Question 1

What are “sources” and “sinks?”

Answer 1

Economy depends ecological system which it is embedded in two fundamental ways. Humans:

1. Rely environment as source of raw materials
2. Exploit the environment as a sink for waste materials

= form “Natural Capital” (The input that nature provided for our production and comsumption process

Question 2

What is natural capital?

Answer 2

The input that nature provided for our production and comsumption process

Question 3

What is the excessive exploitation of natural capital?

Answer 3

(1) Pollution:

• negative externality: cost of transaction not boren by the buyer or the seller.Negative supply-side externiality
• Overuse of sinks

(2) Resource Degradation:

• Overharvesting of sources

(1) and (2) are flip sides same process

Question 4

Define externalities:

Answer 4

• Third party outside the producer and consumer
• One example where government intervention is justified
• Supply or demand side

Question 5

What are examples of positive demand-side externalities?

Answer 5

Vaccine, electric cars, masks

See graph

Question 6

What are examples of negative demand-side externalities?

Answer 6

Litter

see graph

Question 7

What are examples of positive supply-side externalities?

Answer 7

New technology

see graph

Question 8

What are examples of negative supply-side externalities?

Answer 8

Pollution

See graph

Question 9

Why do market systems generate pollution?

Answer 9

Market systems create pollution because many natural inputs (e.g. air and water) = underpriced

• No one owns resources so (in the absense of government regulation or legal protection victims) business use them up freely

Question 10

How can you internalize the externalities?

In a market system?

Answer 10

If businesses forced compensate victims for damage = paying for “underpriced” natural inputs

• Result in conservation of resource use
• Seek cleaner production methods

> “Internatizing the externality” - dealing with problems of pollution and resource degradation

Question 11

How does positive externalities present on the supply-demand curve?

Answer 11

• Below supply curve
• Subsidize it

Question 12

Why is externalities an instance where government intervention is necessary?

Answer 12

• Ex. Tax for pollution (raises cost of production)
• Tax proportional to the MC of society

Question 13

How is pollution a market failure?

Answer 13

• Many forms natural capital are not (and cannot) be privately owned

Hence, unregulated free-market system generate too much pollution (by any standard):

1. Open access problem
2. Public goods problem

see graph

Question 14

What is the open access problem?

“The Tragedy of the Commons”

Answer 14

When natural capital help in common:

• People weigh private benefits against private (oppsed to social) costs
• Overexploit common resources when given access
• Non-renewable: Problem - consume into extincition

“The Tragedy of the Commons”

• Trafic: overconsumption of the road

Question 15

What is “resource rent?”

Answer 15

Resource Rents:

• Natural capital used efficiently: long-run economic profits earned by those retain access

> Resource Rent: Long-run profits (generated by restricted access to natural capital)

• Need to reduce fishing 70% to elimi

Ex. Resource Rents in New England

Question 16

How can you handel the open access problem?

Answer 16

Tranditional Societies: Informal social presure and tradition relied to prevent overexploitation

Modern Equivalent: Free-Market Environmentalism

• Internalize externalitiees through lawsuits against offending company
• Is government regulation needed?

Question 17

What is the Public Goods Problem?

Answer 17

Features:

1. Non-Rival:Cannot stop another person using
2. Non-excludable:Producer cannot stop consumption

Pricing is difficult

Public goods problem to the free market:

1. Free Riding:People benefit from public goods regardless of whether or not they pay for them
2. High Transaction Costs:Requires groups of people to take action
   • Information about environmental damaage costly to obtain
   • Extra “transaction costs” making it costly to provide public good

Demand Private and Public Goods:
- Private good - total demand is horizontal sum of individual demand curves
- Public good - total demand is the vertical sum of individual demand curves

Question 18

Is sustainable business a solution?

Answer 18

> Sustainable business: new paradigm around economics and environment

Rather than looking environmental and social problems as costs - view potential profit opportunity

Promoting sustainability - if it is profitable to do so

Question 19

What are the three levels of cost saving?

Answer 19

1. Rish Reduction:Firms pro-actively reduce pollution reduces risk regulations, legal liability, comsumer backlask
2. Resource Savings:Firms use water, energy, raw materials efficiently = reduce emmisions & save money
3. Culture of Innovation:Firms see it as part of business to profitably solve environmental problems = create culture that breeds innovation

Question 20

Demand for public and private goods:

Answer 20

Demand Private and Public Goods:
- Private good - total demand is horizontal sum of individual demand curves
- Public good - total demand is the vertical sum of individual demand curves (WTP) (Face a public quantity and decides how much they are willing to pay)

In the graph, Dp is willing to pay $30 for commodity x for q=100, and Dm gets q=120 at the same price so the total demand is the horizontal sum = 220