Chapter 03: Pollution and Resource Degration as Externalities Flashcards
What are “sources” and “sinks?”
Economy depends ecological system which it is embedded in two fundamental ways. Humans:
- Rely environment as source of raw materials
- Exploit the environment as a sink for waste materials
= form “Natural Capital” (The input that nature provided for our production and comsumption process
What is natural capital?
The input that nature provided for our production and comsumption process
What is the excessive exploitation of natural capital?
(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
Define externalities:
- Third party outside the producer and consumer
- One example where government intervention is justified
- Supply or demand side
What are examples of positive demand-side externalities?
Vaccine, electric cars, masks
See graph
What are examples of negative demand-side externalities?
Litter
see graph
What are examples of positive supply-side externalities?
New technology
see graph
What are examples of negative supply-side externalities?
Pollution
See graph
Why do market systems generate pollution?
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
How can you internalize the externalities?
In a market system?
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
How does positive externalities present on the supply-demand curve?
- Below supply curve
- Subsidize it
Why is externalities an instance where government intervention is necessary?
- Ex. Tax for pollution (raises cost of production)
- Tax proportional to the MC of society
How is pollution a market failure?
- Many forms natural capital are not (and cannot) be privately owned
Hence, unregulated free-market system generate too much pollution (by any standard):
- Open access problem
- Public goods problem
see graph
What is the open access problem?
“The Tragedy of the Commons”
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
What is “resource rent?”
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
How can you handel the open access problem?
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?
What is the Public Goods Problem?
Features:
- Non-Rival:Cannot stop another person using
- Non-excludable:Producer cannot stop consumption
Pricing is difficult
Public goods problem to the free market:
- Free Riding:People benefit from public goods regardless of whether or not they pay for them
-
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
Is sustainable business a solution?
> 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
What are the three levels of cost saving?
- Rish Reduction:Firms pro-actively reduce pollution reduces risk regulations, legal liability, comsumer backlask
- Resource Savings:Firms use water, energy, raw materials efficiently = reduce emmisions & save money
- Culture of Innovation:Firms see it as part of business to profitably solve environmental problems = create culture that breeds innovation
Demand for public and private goods:
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
