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The EnvironmentBy applying the talent and technology of America, this

country can dramatically improve our environment, move

beyond a petroleum-based economy, and make our

dependence on Middle Eastern oil a thing of the past.

çPRESIDENTGEORGE W.BUSH, STATE OF THEUNIONADDRESS,

JANUARY 31, 2006

The opening quotation to this chapter suggests a

great sense of optimism on the part of our pres-

ident about our environment. Is it warranted?

Does President Bush have the solutions to protect our

environment? What has been the role of President Bush

regarding the environment? And what is your role?Most (probably all) of us are concerned to some

degree about environmental issues. In this chapter, we

will consider the economics of environmental protection

and environmental damage. Let’s start by saying that

economic activity affects the environment, often in a

harmful manner. Production of goods often causes pol-

lution. Consumption of goods can also cause pollution.

We often use our scarce resources inefficiently and

unwisely.In this chapter, we will discuss the pollution created

as a by-product of production, as well as policies to deal

with this pollution. We will also focus particular atten-

tion on the topics of global warming, finite energy

sources, and other international environmental issues.

We will consider the environmental effects of consump-

tion, conservation, and recycling, with an eye to our own

role in becoming more environmentally friendly. We will

conclude with a discussion of international policy and

the various criticisms of U.S. environmental policy. As

always, we will consider various liberal and conservative

viewpoints on the matter of pollution control. Finally,

there are suggestions for engaging activities in the

discussion and action questions at the end of the

chapter.

&& The Economic Toolbox

& Externalities

& Spillover costs and benefits

& Social costs of production

& Over-allocation and under-allocation

of resources

& Luxury good

& Marketable pollution permits

& Cost-benefit analysis

& Subsidies

1

The Problem of PollutionLet’s consider the global problem of pollution. We will define pollution as wastethat is not recycled. Motor vehicles and industrial plants emit carbon monoxide,sulfur oxides, nitrogen oxides, and other hazardous compounds into the atmo-sphere, thereby polluting our air. The burning of fossil fuels releases carbondioxide, which, along with other greenhouse gases, traps heat within the earth’satmosphere, thereby contributing to global warming. Deforestation contributes toglobal warming and causes other problems for less-developed countries and therest of the globe. The release of certain chemicals, primarily chlorofluorocarbons(CFCs), damages the ozone layer of our atmosphere, thereby allowing in danger-ous levels of ultraviolet radiation from the sun. Industrial wastes, leaking septictanks and landfills, and pesticides contaminate aquifers and threaten our watersupply.

In all of these cases, environmental damage is a harmful by-product of eco-nomic activity. The problem caused by pollution is that of spillover costs, and theresults are twofold: inequity and inefficient resource allocation. These topics arediscussed in the sections that follow.

SPILLOVER COSTS AND BENEFITSPollution is the classic example of an economic externality. An externality issimply a cost or benefit of an economic activity that spills over onto the rest ofsociety. Externalities can be positive or negative. Pollution represents a negativeexternality, or a spillover cost. Although firms that pollute incur the private costsof production such as wages and energy costs, they do not bear the entire cost ofproduction. A portion of the production costs, specifically the pollution, spillsover onto society. The accounting books of the polluting firm do not take intoaccount the effects of pollution. Instead, society bears the burden of this pollutioncost in the form of poorer health and productivity, higher health care expenses,greater cleaning costs, damage to buildings and forests, aesthetic displeasure, andso on. Other businesses bear the burden of the pollution cost in the form ofdamage to capital structures and machinery, harm to crops and needed resources,and so forth. All negative externalities involve costs created by an economic activity

that are shifted to other firms or individuals; this situation is not an equitable one nor

an efficient one.

Pollution is not the only negative externality that is common in our lives.Consider your dismay if you live near a newly constructed airport or highway.You will bear the burden of the noise pollution that results. Or imagine living in aheavily populated area, driving on heavily congested streets and freeways, andexperiencing time delays and a greater probability of accidents. You would bearcosts of congestion. These, too, are negative externalities.

Not all spillover costs are caused by businesses. We consumers also createnegative externalities. A good example is our use of the automobile. As youknow, Americans love their cars and as a result are reluctant to carpool or takepublic transportation. We incur private costs associated with driving: car pay-ments, insurance, gas, oil, maintenance costs, taxes and license fees, and parkingexpenses. Society, however, bears a portion of the total costs in the form of the airpollution caused by auto emissions. Another example might be our use of throw-away bottles and cans. We consumers pay for the product, but society bears aburden in the form of litter, solid waste, and an inefficient use of scarce resources.All negative externalities involve costs imposed on others who do not benefit fromthe production or consumption of the product.

Pollution

Waste that is not recycled.

Externality

The cost or benefit of aneconomic activity that spillsover onto the rest ofsociety.

Spillover cost

A negative externality (thecost that is shifted from theprivate market ontosociety).

54 C H A P T E R 3 The EnvironmentThe Environment2

Externalities can also be positive. We call positive externalities spillover

benefits. Education is a classic example of a service that yields spillover benefits.

You, the student, will benefit most directly from your education. You are likely toearn a higher income, to have a job you enjoy, and to have a richer intellectual lifeif you are educated. But society also benefits. College graduates tend to be better-informed citizens. They are less likely to be chronically unemployed. They are

more likely to vote. They are less likely to commit crimes, or at least violentcrimes. They often are more productive workers. So, spillover benefits are con-ferred on society. Because society receives these benefits, most people feel thatsociety is justified in bearing part of the costs of education through tax revenues.

We will address this issue of education in greater detail in the next chapter.Another spillover benefit comes to society through immunization of children

against common childhood diseases. Families pay for the shots and vaccinationsand receive most of the benefits in the form of decreased risk of measles, smallpox,and polio. Others in society benefit as well, however. Other children, even if not

immunized, are less likely to contract these diseases because the diseases will notbe so prevalent. The families of nonimmunized children benefit without bearingany of the cost. Society benefits in terms of lower medical expenses. The burden ofcosts is inequitable if the responsible family is not in some way compensated forthe benefits provided to society.

This chapter affords us the opportunity to continue our use of the demand and

supply model, to once again utilize cost-benefit analysis, and to consider theimplications of a negative externality. We begin by recognizing that the existenceof an externality causes both inequity and inefficiency.

InequityExternalities shift costs to groups that did not incur them andbenefits to groups thatdid not earn them.Aswe have noted, pollution causes a spillover cost onto society at

large, including other businesses.We, as a society, either tolerate the environmentaldegradation or clean up someone else’s mess with our tax dollars. This inequitableburden of costs is one of the chief economic characteristics of pollution.

INEFFICIENT RESOURCE ALLOCATIONIn addition, externalities can cause resources to be inefficiently allocated. Simplyput, we produce and consume too much of a product (overallocate resources to itsproduction) if negative externalities are present, and we produce and consume toolittle of a product (underallocate resources to its production) if positive external-

ities are present. Let’s look at the effects of pollution on the market for a goodproduced by firms that hypothetically pollute the environment. Let’s use springvacation air travel to the Bahamas during one week in March as the product.

The Effects of Pollution in a Single MarketFirst, consider the hypothetical market demand curve for air travel to the

Bahamas. Remember that demand reflects the value of the product to consumersin society, because it represents the prices that consumers are willing to pay for aticket to the Bahamas. D is the market demand curve in Figure 3-1, on page 56.

Now let’s consider the supply of air transportation to the Bahamas. Rememberthat we defined pollution as waste that is not recycled. The amount of pollutantsemitted by firms will increase proportionately with output. But low levels

of output will not result in spillover costs, because the natural processes ofthe earth can absorb and reprocess a certain amount of waste (pollutants).

Spillover benefits

A positive externality (thebenefit that is shifted fromthe private market ontosociety).

C H A P T E R 3 The Environment 55The Environment 3

If production increases beyond the level that natural processes can handle, weincur pollution and therefore spillover costs.

Suppose that natural processes can absorb the hypothetical air pollutants thatwe create if we provide 2,000 units of output (passenger tickets); but that if weprovide more than 2,000, we exceed the earth’s capacity to cleanse itself. (Let’skeep it simple by pretending that college students flying to the Bahamas duringthis particular week in March represent the only people traveling to the Bahamasby air.) After the production of 2,000 units of output, we have a negativeexternality.

Curve SP in Figure 3-1 is the hypothetical private market supply curve. Thiscurve is based on firms’ (airlines’) private costs of production but does not reflectthe full social costs of production when pollution occurs. These social costs ofproduction include both the private costs to the producer (since the producer ispart of society) and the spillover costs borne by society. Curve SS is the hypotheticalsocial supply curve. This curve is higher in the graph (in terms of the dollar axis)than the private supply curve, reflecting the higher social costs of production. Thevertical distance between SP and SS at each level of output is the hypotheticalamount of the spillover cost.

The private market supply curve intersects with the demand curve at a quantityof 5,000 units (tickets to the Bahamas) and a price of $400 per person. Note,however, that the social supply curve intersects with demand at only 4,000 unitsand a price of $500. The private market supply curve results in output that is toohigh, because it is based on a cost that is too low. When markets base their outputdecisions on their costs of production, they do so on the basis of private costs of

F I G U R E

3 - 1ALLOCATIVE EFFECTS OF POLLUTION IN A HYPOTHETICAL

MARKET FOR SPRING VACATION AIR TRAVEL TO THE BAHAMAS

400

300

200

100

$, P

600

500

0

SP

SS

D

1 2 3 4 5 6 7 8 9 10 11 12Q Tickets (thousands)

Hypothetical air and noise pollution increase the socialcosts above the private costs of providing travel. This risein social costs causes the private market equilibrium priceto be too low, resulting in the overallocation of resourcesto air travel.

Social costs of

production

The total costs of produc-tion, including private costsand spillover costs.


production only, and not on the full social costs of production. However,the socially optimal level of output is based on the full social costs of production.This is because we wish to balance our desire for the product with the full socialcosts of production. Because the free market results in too much output, we saythere is an overallocation of resources to the production of this product. Too muchoutput may not sound like a problem, but remember that society has scarceresources. Too much production of a product that society doesn’t want (especiallywhen it causes pollution) means we end up with too little production of productsthat society does want. Inefficient allocation of resources means that society’spreferences are not being met.

Note an essential difference between the economist’s view of the market andthe environmentalist’s. The socially correct quantity in Figure 3-1 is 4,000 units,and at this quantity, we will have some pollution. The environmentalist’s goalwould be to eliminate all pollution, but if we do that we have to cut production to2,000 units. Most economists believe that if all costs are accurately reflected in the

supply curve, and society’s values are accurately reflected in the demand curve, the

market output is efficient and desirable. Society values those extra 2,000 unitsenough to be willing to bear the cost of the pollution that accompanies them.In the region between 2,000 units (no pollution) and 4,000 units (sociallydesirable output), the demand curve is above the social supply curve, indicatingthat society values these units of the good more than it costs to manufacturethem, including the costs of pollution. Thus, economists would not recommendcutting back production to 2,000 units to eliminate all pollution. (And studentsheading for the Bahamas during spring break can breathe a collective sigh ofrelief!)

The Effects of Pollution from One Market onto Another MarketNow let’s consider a hypothetical case of resource allocation between two indus-tries, the paper industry and the beer industry, to understand how the actions offirms in one industry can affect those in others. To simplify, the demand andsupply curves for the two industries are drawn identically in Figure 3-2, onpage 58. Initially, we assume no pollution and no spillover costs. The marketequilibrium of price P and quantity Q in each market is the socially desirableprice and quantity. Now suppose that firms in the paper industry decide it is tooexpensive to prevent pollution, and they begin to dump their by-products andwaste into the adjacent river. They save on production costs, but cause waterpollution. Decreased private costs of production in the paper industry will shiftthe firms’ supply curve forward to S0 (since the firms’ private costs of productionwill not include the costs of pollution). The market equilibrium price and quantityare now P0 and Q0, respectively. Too much paper is being produced and consumedat a price that does not reflect the costs of pollution.

The beer industry, which uses water as an input to beer production, will beadversely affected by the paper companies’ actions. Assume that the beer industryhas breweries located downstream on the same river. Because polluted water willnot produce beer that is safe and good-tasting, beer producing firms in the for-merly land of sky blue waters (a phrase used before most of you were born) haveto clean up the water before they use it for brewing. The beer industry thereforeincurs additional private costs in purifying the water, which shifts the beer indus-try’s supply curve back to S0. This decrease in the supply of beer causes anincrease in equilibrium price to P0 and a decrease in equilibrium quantity to Q0.Society consumes less beer and pays higher prices.

Thus, the externality in the paper market not only shifts the pollution costsonto society at large, but also causes a distortion of resource allocation in other

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Overallocation of

resources

The production of morethan the socially optimumamount of a good orservice.


markets, namely, the underallocation of resources in the beer market. Societyconsumes more paper and less beer than it would if not for the pollution. Tomost economists, an essential problem with pollution (or any other externality forthat matter) is that it causes resource allocation to be distorted. We can summarize

the discussion so far by stating that externalities cause both problems of inequity

(unfairness) and inefficiency (improper allocation of resources).

Environmental Policies and PoliticsAir and water pollution are certainly not new phenomena. In 1858, London wasstricken by the ‘‘Great Stink’’ caused by the dumping of wastes and garbage intothe Thames River. We tend to romanticize the past as a cleaner, better environ-ment, but this view ignores much of our environmental history. The horse-drawncarriage left its own brand of pollution behind it.

Widespread concern about environmental quality is a recent phenomenon,despite our history of environmental problems. It began in the 1960s and wasconfined mainly to the United States and other economically advanced countries.Why did environmental concern occur so late, and why was it localized in thesecountries? First, growth in population, accompanied by increases in output, hasgreatly increased the amount of pollutants released into the air and water.Inevitably, the quantity of these pollutants has exceeded the natural cleansingabilities of the earth. And the effects are pervasive. The cities of VictorianEngland may have been grimy, unpleasant, and possibly hazardous to inhabi-tants’ health, but the middle and upper classes could easily avoid these effectsby moving to the pleasant, agrarian countryside. This strategy no longer works.Pollution follows us to our rural hideaways.

Second, the degree of peril occasioned by pollutants is greater today than it wasin preceding centuries. Nuclear wastes and polychlorinated biphenyls (PCBs) are

F I G U R E

3 - 2EFFECTS OF WATER POLLUTION IN THE HYPOTHETICAL

MARKETS FOR PAPER AND BEER

P

P ′

P

S′

S

D

Q QQ′

Paper Industry

P

P′

P S′S

D

Q QQ′

Beer Industry

Pollution causes overallocation of resources to thepollutingindustry (here, the paper industry). As a result, resourcesare underallocated to other industries (here, the beerindustry).

Underallocation of

resources

The production of less thanthe socially optimumamount of a good orservice.


significantly different from the pollutants that plagued our grandparents.Complex technologies have produced pollutants of which they never dreamed.The news that the polar ice cap is melting and there is a very real threat of globalwarming are problems of a different magnitude than those experienced by previousgenerations.

Finally, we have become more affluent, and the demand for environmentalquality has increased markedly. Environmental quality is a luxury good, or acommodity with a demand extremely sensitive to increases in income. Oncesociety’s basic needs for food, clothing, and shelter have been met, citizensbegin expecting other things, such as a healthier and higher-quality environment.These three factors of population growth, increasing magnitude of problem, and

higher incomes explain why the environmental movement is both recent and a

product of affluent, economically advanced countries.

Environmental LegislationEnvironmental legislation is based on the fact that spillover costs and misalloca-tion of resources result from externalities unless the government takes anactive role in controlling the situation. Business firms, which are primarily moti-vated by profit maximization, will not likely take a strong stand against pollutionif they are not compelled to do so through government regulation or encouragedto do so by economic incentives. Nor will most consumers make major efforts toreduce their pollution unless forced to do so or provided with economicincentives.

Environmental regulation grew out of a grassroots movement, and thereforemany initiatives were at the local level. Chicago and Cincinnati enacted laws tocontrol smoke emissions from factories and power plants in the 1880s, beforethere was an environmental movement as such. Many other cities subsequentlyfollowed their lead. In fact, the federal government did not become involved incontrolling air pollution until the 1950s. The Air Pollution Act of 1955 was afederal call for research into the problem. This appeal was followed by the CleanAir Act of 1963 to control air pollution and the Clean Air Act of 1970 to enforcenational clean air standards. Of special concern at that time were automobileemissions, which contributed greatly to the smog plaguing the nation’s cities.The Clean Air Act was further amended in 1977 and in 1990.

The Environmental Protection Agency (EPA) was formed by executive order in1970 to administer all the environmental laws. The Federal Water Pollution Actof 1972 mandated that the EPA also reduce discharges into the nation’s water-ways; the EPA’s mission was subsequently amended to add protection of land andother environmental issues to its jurisdiction.

The environmental disaster of the Love Canal made the nation aware of theproblem of hazardous waste. Throughout the 1950s, Hooker Chemical andPlastics Company, as well as certain federal agencies, put waste into an oldcanal excavation near Niagara Falls, New York. Eventually, the landfill wassealed, and a school and housing development were built in the area. Toxicwastes bubbled to the surface and ended up in storm sewers, gardens, basements,and the school playground. In response to the environmental disaster of the LoveCanal, the Comprehensive Environmental Response, Compensation, andLiability Act of 1980 established the ‘‘Superfund’’ to clean up hazardous waste.It also gave the EPA significant enforcement authority to hold identified respon-sible parties liable for the cost of cleanup.

More recently, activists have publicized the environmental horrors that havesurrounded the border area between the United States and Mexico. As a result of

Luxury good

A commodity for whichdemand is highly sensitiveto changes in income.


poor environmental regulation and enforcement, toxic chemicals have filled land-

fills and rivers, creating significant health hazards for citizens of both the United

States and Mexico. The North American Free Trade Agreement (NAFTA), which

removed trade restrictions and went into effect in 1994, included a ‘‘side agree-

ment’’ designed to protect the environment. As discussed in Chapter 13 on inter-

national trade, the environmental protections built into NAFTA are not being

enforced adequately on either side of the border. Horrific health stories in the

border area occasionally show up in our newspapers.Because the federal government as well as state and local governments have

been involved in regulation for environmental protection, it is important to

address the issue of the proper level of government to handle environmental

regulation. Some people argue that the federal government is characterized by a

huge bureaucracy that is far from the people it governs and unresponsive to the

people’s needs. The EPA, they argue, is slow to respond to local needs and

insensitive to local opinion. They feel that local, or regional, regulation would

be more sensitive and responsive. Conservative representatives to Congress have

generally taken a strong stand against federal regulations, including those that

protect the environment. The Bush administration strongly favors giving states a

bigger role in environmental regulation, reducing any federal role by the

Environmental Protection Agency. As we will see shortly, California is one

state that has taken a lead in addressing the issue of global warming, in part

because the federal government response has not been adequate.Although local regulation keeps government closer to the governed, the federal

level may be the more appropriate level of government to regulate the environ-

ment. One reason is that whatever the source of air and water pollution, the

problem affects neighboring communities, states, and even countries. Acid rain

originating in the United States but damaging property in Canada has become a

heated issue between the two nations. Global warming, ozone depletion, and loss

of biodiversity are also global phenomena.At the same time, local communities, acting in their own perceived self-interest,

may be lax in setting standards to control air and water pollution. By tolerating

pollution, they may attract industry and increase the jobs available for their

citizens. As long as some pollution affects other jurisdictions, localities have an

incentive to underregulate their own pollution sources. Indeed, a major cause of

acid rain is the sulfur dioxide emitted into the atmosphere by the tall smokestacks

of coal-burning electric utilities. The smokestacks were built to conform to local

standards for air pollution, and they protect the local community but emit pollu-

tants that damage distant communities. They were (and are) considerably less

expensive than scrubbers, which are designed to eliminate most of the pollutants

at the source. The localities export the problem rather than solve it. Adequately

enforced federal legislation would help minimize both the disparity of pollution

standards and the lax pollution standards that would exist if regulation were left

to individual localities and states.Furthermore, the states have widely differing resources. The federal govern-

ment has a larger tax base than any state, and it has greater ability to finance

pollution control activities. It can also mitigate the burden of pollution control by

transferring income from affluent states to poorer states.We define pollution as an externality, spilling from producer and consumer

onto society at large. But we’ve also identified a secondary form of externality,

which is geographical. Since pollution can spread from one locality to another, or to

the world for that matter, there will be an underallocation of resources devoted to

pollution control unless it is addressed at a geographical level that incorporates all of

EconDebate‘‘Should AntipollutionStandards BeStrengthened?’’

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the pollution. This means that while pollution control policy might be adminis-tered at a variety of government levels, the appropriate jurisdiction for settingpollution control standards should be large enough to capture all the negativespillovers. Thus, decisions about pollution control are most appropriately made atthe national, or even international, level.

Methods of RegulationGovernment agencies, at any level, use the following methods to limit adverseenvironmental effects: (1) standards, (2) pollution fees, and (3) marketable pollu-tion permits.

THE STANDARDS APPROACHLet’s look at the standards approach to pollution control first. This approach isthe easiest to understand and the one originally used by environmental agencies.

With the standards approach, maximum acceptable levels of pollutants areestablished, and firms that exceed these levels are punished, usually by fines.Firms can thus be forced into compliance with the standard.

The logic of the standards approach is clear, and the process appears simple.But this approach is more complex than it at first appears. The agency must firstset the standards and then enforce them. In addition, it should continually explorenew technical possibilities and evaluate its programs.

Standards may be classified as performance standards or design standards.A performance standard specifies a certain level of performance or compliancethat must be met. It does not specify the means by which that level must bereached. The regulating agency might require the firm to reduce the pollutantsemitted in a combustion process by 10 percent, without specifying the meansby which this standard will be met. A design standard, on the other hand, specifiesnot only the required level of performance but also the means to reach thatlevel. Control of auto emissions by the installation of catalytic converters is anexample of a design standard. A performance standard leaves the compliancemethod up to the regulated firm. It is more flexible than the design standardand may encourage research into new technologies and lower-cost methods bybusiness firms to meet pollution reduction goals. In practice, both types of stan-dards are used.

The requirement of the catalytic converter, our example of a design standard,has been criticized by many. Catalytic converters are expensive. Old cars (thatcause most of the pollution) are often exempt from the requirement. Poorlymaintained converters fail, and not enough inspection takes place. Automakershave no incentive to design alternative engines or other technology that could cutemissions. Consumers have no incentive to drive less, better maintain theirautomobiles, or use less polluting fuel sources. Since car emission standardsrequire the use of catalytic converters, research into other emissions control meth-ods has been stymied. The general problem with technology forcing is that tech-niques that could control pollution more cheaply are not being encouraged,developed, or used.

Given the very real problems with the standards approach to environmental reg-

ulation, many economists propose that we use pollution fees or pollution permits

instead. Both methods are more flexible than standards and rely on the market-place to control pollution more efficiently than standards regulation can. Let’slook now at how these types of policies can achieve our environmental goals at alower cost than standards regulation can.

Standards

Maximum levels of pollu-tants that are acceptableby law.

Performance standard

A regulation that specifiesthe required level of per-formance but not themeans of compliance.

Design standard

A regulation that specifiesboth the required level ofperformance and themeans of compliance.

Technology forcing

Standards that force firmsto use specific pollutioncontrol technologies.


POLLUTION FEESThe two types of pollution fees are effluent fees and emissions fees. Effluent feesare taxes on production that causes water pollution, whereas emissions fees aretaxes on production that causes air pollution. If the amount of the pollution fee isat least equal to the social spillover cost, the imposition of the tax will correct theoverallocation of resources that results from pollution. It does this by giving firmsan incentive to change their behavior. They can either pay the fee or find a newprocess of production that is less harmful to the environment.

Refer back to the polluting paper company in Figure 3-2. If the companycontinues to pollute, it must pay the effluent fee, which can be viewed as anadditional cost of production. Supply will decrease in the direction of the originalcurve. Consumers will pay a higher price for the polluters’ products because of theeffluent fee. They will also consume less. In these ways, they will bear some of theburden of pollution control. If the company chooses to eliminate its pollution,the higher costs of doing so will also cause supply to decrease. The importantpoint is that fees do not force technology. Instead, they give firms an incentiveto look for least-cost techniques to cut pollution and fees. From the view ofenforcement and administration, pollution fees are easier to administer thanare standards. From society’s view, they result in least-cost—and thus moreefficient—pollution control.

MARKETABLE POLLUTION PERMITSUnder the marketable pollution permits approach, the maximum level of pollutionacceptable to society is divided into units, and the government issues permitsthat allow business firms to produce these units of pollution in their productionprocess. These permits can be bought and sold. They will eventually wind upin the hands of firms for whom the costs of reducing pollution are the highest.This will result in the lowest cost to society (producers and consumers) of pollu-tion control.

Let’s consider an example. Suppose two farms are located along a river in asmall rural locality. One farm is located on a hill, and the other farm is in a valley.The river flows between them. It is costly for the farmer on the hill to contain therunoff of chemical fertilizers and pesticides into the river. Let’s say it costs $100for this farmer to prevent each unit of runoff from entering the river. (One unitcould be a pound or a ton or any other way we have of identifying an amount ofpollution.) Let’s assume it is relatively cheap and easy for the farmer in the valleyto control its runoff, perhaps $10 per unit. Suppose the local government allows atotal of four units of agricultural runoff into the river. Each farmer is allocatedtwo pollution permits, meaning that each farmer is permitted to pollute two unitsof pollution into the river. Let’s assume that normally each farm would causefour units of water pollution.

One alternative is for the government to forbid each farmer from causing morethan two units of pollution. This means that each farmer would have to eliminatetwo units of pollution, at a cost of $200 for the farmer on the hill and a cost of $20for the farmer in the valley. Society will end up with four units of water pollution(instead of eight units) and a total cost of $220 for pollution control (rememberthat the two farmers are part of society). These farmers may presumably pass theirpollution prevention costs onto consumers of their products.

The other alternative is for the local government to issue the same two pollu-tion permits to each farmer, but allow the farmers to buy and sell their permits(that is, the permits are marketable). The two farmers may agree on a price of $50per permit. The farmer on the hill will find it advantageous to purchase the two

Effluent fees

Taxes on production caus-ing water pollution.

Emissions fees

Taxes on production caus-ing air pollution.

Marketable pollution

permits

Tradable permits that allowthe owners of the permitsto produce a given amountof pollution.


pollution permits from the farmer in the valley, paying a total of $100 for theright to continue to cause its four units of water pollution. The farmer in thevalley will find it advantageous to sell its two pollution permits to the farmer onthe hill, receiving $100 from this farmer but incurring $40 to eliminate its entirefour units of pollution. Society once again ends up with only four units of waterpollution (instead of eight units), but incurs a total cost of pollution control ofonly $40. By allowing pollution permits to be marketable, the same amount ofpollution will be prevented, but the total cost of pollution control will beminimized.

The federal government has experimented with this notion of marketable pol-lution permits with respect to air pollution. For example, in 1979, the EPA estab-lished its first marketable pollution permits on an experimental basis. The earliestexperiments focused on individual firms that caused pollution at various stages ineach of their production processes. Amendments made to the Clean Air Actin 1990 extended the concept industry-wide, creating pollution permits for coal-burning utilities. Nevertheless, EPA policies utilizing pollution permits have madelimited strides.

It was the state of California that recently took a huge step forward by intro-ducing marketable pollution permits for the emissions of greenhouse gases.Calling it the California Global Warming Solutions Act, this state (with aRepublican governor and a Democratic legislature and the sixth largest economyin the world) took the unprecedented initiative to reduce its emission of carbondioxide by 174 million metric tons annually. This means that major industrialproducers of greenhouse gases will reduce total emissions by 25 percent by 2020.Low pollution control cost companies are permitted to sell their pollution permitsto high pollution control cost companies, creating an incentive for firms to findthe most efficient ways to control pollution and to reward them for doing so. Theadditional benefit is that the state of California estimates that its global-warminginitiative will increase statewide income by more than $4 billion while providing83,000 new jobs. This growth will come from the creation of green technologiesand lower energy costs.1

Pollution permits and pollution fees are incentive-based regulation schemes, uti-

lizing the efficiencies of the marketplace. Studies indicate that these schemes dowork. They are less expensive than standards regulation and do not stifle tech-nological change. Instead, they encourage research and the development of newpollution control technologies.

We’ve seen that California has devised an innovative way to reduce the pollu-tion that contributes to global warming. Let’s consider this important topic ofglobal warming in greater detail.

GlobalWarmingRight now it seems that the glaciers are moving faster than the negotiators.

ç JOHNCOEQUYT,GREENPEACE ENERGY POLICYANALYST,NOVEMBER 4, 20062

Many experts believe that the major environmental issue of the twentieth centurywas pollution, but the principal issue of the twenty-first will be global warming.Scientists have long since concluded that global warming is a serious phenomenonthat is caused by human activity. We also know that whatever efforts are nowmade to address global warming are too late to reverse future catastrophic results,although action now can prevent additional catastrophes from occurring.Scientists have identified the emissions that contribute to global warming andmade dire predictions of what will come true if the production of greenhouse

EconNews‘‘An International Marketin Pollution’’

Read more on the U.S.proposal of internationaltrading of pollutionpermits under theInternational Tradecategory.



gases is not reduced. Despite awareness of the problem, society has been reluctant

to deal with it. While the term ‘‘moving at glacial speed’’ has traditionally meant

‘‘moving very slowly,’’ the Greenpeace analyst, quoted on the eve of the twelfth

international global warming conference, suggest that the glaciers are changing

much more rapidly.Carbon dioxide is one of the principal greenhouse gases. Global production of

carbon dioxide is addressed in Table 3-1, which displays the amount of carbon

dioxide produced by the highest and medium emitting countries of the world.

Note that the United States creates the largest amount of carbon dioxide emis-

sions, followed by China. Each of these two countries exceeds any other country’s

emissions by far, with approximately three times the emissions of the next highest

country (Russia). The United States produces from seven to 57 times more than

the medium emitting countries in the table. We also see that whereas North

America and Asia (and Oceania) cause the greatest emissions, the continent of

Africa causes very little. Nevertheless, the impact of climate change falls most

heavily on the poorest countries of the world, including those in Africa.We should note that the data on carbon dioxide emissions are not adjusted for

population size, and it may be reasonable that more populous countries create

more carbon dioxide emissions. It we want to adjust for population size, we would

divide the carbon dioxide emissions in the United States, for example, by the

population of the United States. In 2004, we would divide the 5,912 million

metric tons of emissions by the 294 million people in the country, giving us

about 20 tons of carbon dioxide emissions per person. Among the highest emis-

sion countries, China produces less than four tons per person, Russia produces

less than 12 tons per person, Japan produces 10 tons per person, and India

produces one ton per person. Clearly, even after adjusting for population, the

United States produces far more carbon dioxide emissions than any other

country.Since the United States is the largest emitter of carbon dioxide in the world, it is

interesting to see how our emissions have changed over time. Table 3-2, on page

66, shows these data for selected years from 1980–2004. Note that our emissions

have grown considerably (24 percent) since 1980. However, they have not

increased steadily—we see that they declined from 1980 to 1985 and from

2000 to 2001. Nevertheless, they have increased each year since 2001. We

produce carbon dioxide emissions when we heat our homes, drive our cars, and

purchase electricity and consumer goods made by carbon dioxide emitting

businesses.An international summit dedicated to reducing global warming and other

environmental problems was held in Kyoto, Japan, in 1997. The result of the

Kyoto summit was a treaty designed to reduce global warming. This Kyoto

Accord requires industrial countries to substantially reduce industry-generated

heat-trapping gases that cause global warming. At the time, President Bill

Clinton voiced his support for the treaty.President George W. Bush acknowledged for the first time in 2002 that human

activity is indeed causing global warming. Nevertheless, his administration

opposes the Kyoto treaty, and he refused to sign it, supporting instead a call

for voluntary restraint among U.S. companies. Indeed, the U.S. Environmental

Protection Agency (EPA) ruled in August of 2003 that carbon dioxide is not even

a pollutant, thereby eliminating the opportunity for the EPA to regulate carbon

dioxide. In July of 2006, the U.S. Supreme Court agreed to consider a test case

brought against the EPA by environmentalists and several state governments.

They charge that the EPA is required to regulate against carbon dioxide in the


T A B L E

3 - 1WORLD CARBONDIOXIDE EMISSIONS,a BYHIGHEST

bANDMEDIUM

c

EMITTING COUNTRIES, REGIONS, AND THE WORLD, 2004

Country Million Metric Tons of Carbon Dioxide

Highest Countries

United States 5,912

China 4,707

Russia 1,685

Japan 1,262

India 1,113

Medium Countries

Germany 862

Canada 588

United Kingdom 580

South Korea 497

Italy 485

South Africa 430

France 406

Iran 402

Australia 386

Mexico 385

Saudi Arabia 365

Ukraine 364

Spain 362

Brazil 337

Indonesia 308

Taiwan 308

Poland 288

Netherlands 267

Thailand 219

Turkey 212

Kazakhstan 172

Malaysia 154

Belgium 148

Egypt 147

Venezuela 143

Argentina 142

United Arab Emirates 141

Singapore 129

Uzbekistan 121

Czech Republic 112

Greece 106

Pakistan 106

Regions and World

North America 6,887

Central & South America 1,041

Western Europe 4,653

Eastern Europe 2,551

Middle East 1,320

Africa 987

Asia & Oceania 9,605

World 27,044

aCarbon dioxide emissions from the consumption and flaring of fossil fuels for reporting countries.bMore than 1,000 million metric tons.cFrom 100 to 1,000 million metric tons.

Source: U.S. Energy Information Administration, Department of Energy, July 19, 2006,

http://www.eia.doe.gov/pub/international/iealf.

The Environment 13

form of automobile emissions, contending that President Bush has not compliedwith the Clean Air Act that requires the federal government to eliminate harmfulemissions, including those affecting climate. At the writing of this text, the Courthas not yet heard the case.

The spotlight on action to address global warming shifted to Congress withinhours of the Democrats taking control of Congress in early 2007. One of anumber of new bills that would impose mandatory controls on carbon dioxideemissions now stands a good chance of being passed.

Just as global warming is one particular environmental issue that we face,another is the consumption of the earth’s finite supply of petroleum. As an inter-national environmental issue, it is useful to focus a bit of attention on petroleumin particular and energy in general.

World Energy and PetroleumPresident Bush is correct in one regard: We must find a way to move beyonda petroleum based economy. Petroleum is a finite resource. It is also one that theUnited States has been highly dependent upon, and one that we import from othercountries in the world, including those in the Middle East. Partly out of concernfor this dependence, environmentalists and others have paid attention to ourpetroleum use and have begun to recommend alternatives.

Table 3-3 displays global consumption of petroleum for the highest andmedium consuming countries of the world. We see that the United States usesby far more petroleum than any other country in the world. China, which con-sumes the second largest amount, uses less than one-third of the amount con-sumed in the United States. The United States uses from 3 to 17 times morepetroleum than the medium using countries of the world. If we consider consump-tion by region, North America, and then Asia (and Oceania), consume the most.Africa, on the other hand, consumes very little.

Once again, we may want to adjust our numbers for population size. In doingso, we would find that the United States consumes 0.07 barrels of petroleum perperson (per day). Among the next largest consuming countries, China consumes0.01 barrels per person, Japan consumes 0.04 barrels per person, Russia consumes0.02 barrels per person, and India consumes far less than 0.01 barrels per person.

T A B L E

3 - 2UNITED STATES CARBON DIOXIDE EMISSIONS,* SELECTED

YEARS 1980 TO 20 04

YearMillion Metric Tonsof Carbon Dioxide

1980 4,755

1985 4,585

1990 5,013

1995 5,293

2000 5,816

2001 5,742

2002 5,757

2003 5,808

2004 5,912

*Carbon dioxide emissions from the consumption and flaring of fossil fuels.


http://www.eia.doe.gov/pub/international/iealf/.


Once again, the United States consumes by far the largest amount of petroleum,even when adjusted for population size.

With the United States being the largest user of petroleum, we should considerhow our consumption of petroleum has changed over time. Table 3-4, on page 68,reveals these data for the time period 1980–2004. We see that except for 2001, ourpetroleum consumption has grown steadily since 1985. There was a large increasein the year 2000 and steady increases since that time.

The demand and supply of petroleum naturally affects the price of thisresource. Various factors influence demand and supply in this market. Whilethe market power held by the Organization of Petroleum Exporting Countries(OPEC) is not as strong as it was in the 1970s, this organization of 13 oil-exporting countries still has the ability to influence the market price. (OPEC isdiscussed in more detail in Chapter 11 on market power, which is defined as theability to influence the market price of the product.) OPEC wields its marketpower by controlling its supply of petroleum. By setting quotas on the oil exports

T A B L E

3 - 3WORLD PETROLEUM CONSUMPTION, BY HIGHEST

aAND

MEDIUMb USING COUNTRIES, REGIONS, AND THE WORLD, 20 04

Country Million Barrels per Day

Highest Countries

United States 20.731

Medium Countries

China 6.400

Japan 5.353

Russia 2.770

Germany 2.650

India 2.450

Canada 2.294

South Korea 2.149

Brazil 2.140

France 1.977

Mexico 1.970

Italy 1.881

Saudi Arabia 1.845

United Kingdom 1.827

Spain 1.573

Iran 1.510

Indonesia 1.200

Regions and World

North America 25.003

Central & South America 5.384

Western Europe 16.308

Eastern Europe 4.106

Middle East 5.662

Africa 2.791

Asia & Oceania 23.341

World 82.595

aMore than 20 million barrels.bFrom 1 to 20 million barrels.

Source: U.S. Energy Information Administration, Department of Energy, June 5, 2006,



of each member country, OPEC is able to restrict the supply of oil when it deemspreferable. This is shown in Figure 3-3.

International demand for petroleum is expressed by curve D in Figure 3-3,whereas the international supply is shown by curve S. Assuming that OPECsupplies a sizeable amount of the world’s petroleum exports, this organizationis able to reduce the global supply to S0 by reducing its members’ exports. Thisdecrease in supply will raise the market price of petroleum to P0 and reduce theinternationally sold quantity to Q0.

The U.S. government also maintains stocks of petroleum that it releases to themarket when oil prices rise to high levels. This release of oil stocks would betantamount to shifting the supply curve in Figure 3-3 forward once again, therebyreducing the price. Other factors also affect the price of oil. For example, in thesummer of 2006, BP Amoco Oil Company announced that it was shutting down asizeable portion of its oil fields along the northern coast of Alaska to correct aproblem of corrosion in its pipelines. This caused a temporary reduction in thesupply of oil. Similarly, Hurricane Katrina reduced the oil-producing capacity of

T A B L E

3 - 4UNITED STATES PETROLEUM CONSUMPTION, SELECTED

YEARS 1980 TO 20 04

Year Million Barrels per Day

1980 17.056

1985 15.726

1990 16.989

1995 17.725

2000 19.701

2001 19.649

2002 19.761

2003 20.034

2004 20.731



F I G U R E

3 - 3A DECREASE IN THE WORLD SUPPLY OF PETROLEUM

BYOPEC

P, $

S′

S

P ′

Q ′

P

DQuantity of Petroleum

Q

When OPEC decreases the international supply of oil,quantity falls to Q0 and price rises to P0.


our nation’s Gulf states, just as the war in Iraq reduced its oil-producing capacity.Similarly, shifts in the demand for oil affect the market price as well. Risingdemand due to higher population levels and higher standards of living can beoffset by deliberate measures by consumers to conserve their use of petroleum.

Petroleum prices in the United States are shown in Table 3-5 for the time period1980–2006. Contrary to what wemight think, prices have not risen steadily over thetime period. In fact, prices fell substantially from 1981 through 1988, and over othershorter time periods. However, we see huge recent jumps in oil prices in 1997, 2000,2003, 2005, and 2006. In fact, oil prices increased by an astounding 49 percent in2006. Can you think of what factors might have contributed to this increase?

Prices of petroleum are, of course, reflected in prices at the gas pumps, andthese are the prices that probably hit most of you where it hurts. Table 3-6, onpage 70, shows these prices in the United States for the time period 1990–2005. Wesee an especially large jump in gasoline prices in 2005, and, as many of you arepainfully aware, gas prices reached over $3 per gallon in 2006.

You may think that the obvious solution to high gasoline prices is to imposeprice controls (also called price ceilings). While we will consider this option of priceceilings in Chapter 7 on world poverty and Chapter 8 on housing, we will note fornow that this type of government effort to outlaw high prices doesn’t work aswell as we might wish. Prices may be kept artificially low, but shortages arethe automatic result. These were the outcomes of well-intentioned but poorlythought-out price ceilings on gasoline and other energy products in the 1970s (dis-cussed in the appendix to Chapter 8). We will consider alternative policies shortly.

Other International Environmental ProblemsAside from global warming and use of finite energy, other global issues includeozone depletion, deforestation, loss of biodiversity, and desertification. In con-trast to the problem of global warming, efforts to reduce ozone depletion have

T A B L E

3 - 5CRUDE OIL PRICES* (U.S. DOLLARS PER BARREL),1980 TO 20 06

Year Price Year Price

1980 $30.75 1994 $12.93

1981 38.85 1995 16.56

1982 35.54 1996 17.48

1983 31.40 1997 23.02

1984 28.80 1998 14.33

1985 27.49 1999 10.16

1986 24.93 2000 25.29

1987 16.45 2001 24.49

1988 15.45 2002 17.04

1989 16.04 2003 30.30

1990 20.51 2004 30.24

1991 22.30 2005 37.55

1992 16.10 2006 55.90

1993 16.80

*U.S. refiner acquisition cost of imported crude oil.




been viewed as one of the greatest environmental success stories over the past fewdecades. Nations have largely been able to agree on reductions in the use ofchlorofluorocarbons that damage the ozone.

Less success has been achieved, however, in dealing with problems in the less-developed world. These involve deforestation, loss of biodiversity, and desertifi-cation, all of which have both local and global implications. As a result of theinternational debt crisis (discussed in greater detail in Chapter 17) and otherfinancial difficulties, many less-developed countries (LDCs) have been forced toundertake policies that maximize their earnings of internationally accepted cur-rencies (such as U.S. dollars). These policies have emphasized exports and indis-criminate foreign investment. While used to acquire export earnings, unmanagedtimber operations and expanded agricultural plantations have resulted in defor-estation, which is the loss of trees and other vegetation. Multinational corpora-tions, seeking grazing land for cattle, profits from mining operations, expandedenergy infrastructure, and other ventures, have also contributed to the destructionof LDC forests. Deforestation impacts global warming by reducing the vegetationthat naturally absorbs carbon dioxide and by creating carbon dioxide emissionswhen forests are burned.

Deforestation, however, also has other negative effects. It results in the loss ofprecious biodiversity through the extinction of species of animals and plants thatlive in our rainforest environments. It also reduces the fertility of once-productiveagricultural land by eliminating the vegetation that protects against wind andrain-caused soil erosion. This is especially true in the case of desertification,which is the shifting of desert sands across previously fertile land that occurswhen forested windbreaks are removed. Desertification and the loss of fertileland are serious problems in many sub-Saharan African countries that rely onland for food production.

Since the rest of the world has a stake in practices affecting global warming andbiodiversity, it seems that the rest of the world should assist the LDCs in waysthat reduce the necessity of engaging in practices that cause deforestation.

Deforestation is not the only environmental issue in the less-developed world.Industrial pollution is also a problem. One of the most notorious global examplesof industrial pollution occurred in 1984, when a Union Carbide subsidiary plantaccidentally released toxic emissions in Bhopal, India. More than 1,000 peoplewere killed, and more than 200,000 were injured. It was the worst industrial

T A B L E

3 - 6U.S. RETAIL MOTOR GASOLINE PRICES (U.S. DOLLARS PER

GALLON), 1990 TO 20 05

Year Price Year Price

1990 $1.16 1998 $1.06

1991 1.14 1999 1.17

1992 1.13 2000 1.51

1993 1.11 2001 1.46

1994 1.11 2002 1.36

1995 1.15 2003 1.59

1996 1.23 2004 1.88

1997 1.23 2005 2.30


http://www.eia.doe.gov/pub/international.


accident ever recorded until then. Two years later, the official death toll of the

1986 Chernobyl nuclear accident in Russia was 3,576, but Greenpeace Ukraine,an environmental organization, estimated that by 1995 the total death toll from

the accident approached 32,000. Many people were killed, many more wereinjured, women are still bearing deformed children, and contamination in the

Ukraine and neighboring countries continues to this day.These two examples are striking in their losses of life, but many more examples

of commercial pollution affect LDC consumers and workers day after day. In an

effort to attract foreign investment, environmental regulations are often deliber-

ately lax. Indeed, this is one of the reasons that developed country corporationsoften flock to LDCs, attracted to the lower costs of production arising from

minimal environmental laws and worker protections. NAFTA, referred to earlier,is a case in point. Even though ‘‘side agreements’’ that would supposedly equalize

environmental laws and worker protections were built into the NAFTA accord,these regulations have often not been enforced. There are also concerns

about pesticides that are banned by the United States but are exported by U.S.

corporations to Central American countries, where the chemicals contaminategroundwater and harm the health of farmworkers. Similarly, U.S. waste and

environmentally harmful products are often shipped to other countries.Finally, warfare shows no respect for the global environment. For example, an

oil slick caused by the Israeli bombing of Lebanon in July 2006 covered 85 miles

of Lebanon’s coast and blocked sunlight from penetrating the water’s surface,killing small plants on which many fish feed. As the oil sank to the floor of the

Mediterranean Sea, it covered marine life with sludge, killing the plants and fishthat live on the sea floor. Cleanup was slowed by Israeli bombardment and

blockades for a month while oil continued to seep out into the Mediterranean.

The United Nations stated that the spill could take as long as a year to clean upand would cost $64 million.

Clearly, the global pollution problem has many aspects.

Evaluation of Environmental PoliciesPollution affects our lives. Andpolicies to prevent or reduce pollution also affect ourlives. Whatever the method used by regulators, regulation raises the firm’s produc-

tion costs and increases the pricewe pay for the productswe buy. These policies also,of course, result in air, water, and soil of higher quality. Such policies must be

efficient. One framework for evaluating public policies of all types is cost-benefitanalysis, already introduced in Chapter 2 in the context of crime prevention.

Cost-benefit analysis is the systematic comparison of all the costs of a program

with all the benefits. The program should be undertaken only if the benefits aregreater than the costs. From the perspective of the environment, let’s look at the

costs and benefits of environmental protection programs. The costs of these pro-

grams are the costs incurred by government in regulating business, in runningpublic recycling programs, and in any other activity that cuts down on or cleans

up pollution. Business firms also incur costs of environmental protection. If theyadopt a more expensive but less-polluting process, their increase in cost is an

environmental protection cost. If they use less-polluting but more costly rawmaterials, the difference in cost is also an environmental protection cost. If they

install and maintain pollution control equipment, such as scrubbers in smoke-

stacks, they incur an environmental protection cost. Consumers can also incurenvironmental protection costs if they install high-efficiency, less-polluting fur-

naces and other appliances, or if they incur the expense and inconvenience of

Cost-benefit analysis

A study that compares thecosts and benefits of apolicy or program.


recycling. The environmental protection costs are the total of all these costs,whether incurred by government, businesses, or households.

The benefits of environmental protection are the improvements in our envir-onmental quality that result. Some of these benefits are quantifiable. We save oncleaning costs if air pollution is reduced. Businesses save on repair costs when acidrain no longer damages their structures. We save on medical costs when people nolonger suffer the ill health that results from pollution.

However, many of the benefits of environmental programs cannot be calcu-lated in monetary terms. The personal benefits of improved health and longevitygo far beyond the savings on medical costs. The biodiversity of our rain forests isexpected to yield yet undiscovered products to benefit humankind. And there is noway to place a price on a stream used for trout fishing or a lake used for swimmingthat might otherwise be too polluted for use.

In reconciling the costs with the benefits of environmental protection, we musttake a wide view and a long view. We must consider the monetary and nonmo-netary benefits of environmental protection, and we must consider the benefits tofuture as well as current generations. Indeed, we’ve hit upon another type ofexternality. We’ve defined pollution as a negative externality that spills costsonto society at large. We’ve also noted a secondary form of externality, whichis geographical. One locality spills pollution onto other localities and even ontothe world as a whole. There is still this final form of externality that occurs, whichis an intertemporal one. Pollution caused by one generation spills costs ontofuture generations. Unless citizens of the present time period address the needs of

future generations, an underallocation of resources devoted to pollution control in the

present will fail to meet the needs of our children and grandchildren.

Conservation and RecyclingPollution by producers is an important facet of our environmental problem, butconsumers also contribute to the problem. We exhaust nonrenewable resourcessuch as petroleum at an increasing rate. We cause emissions of greenhouse gases,and we consume ever larger amounts of goods and services.

While many people point to overpopulation in the less-developed world, in fact itis the developed world that strains the environment the most. The United Statesplays an inordinate role.With about 5 percent of the world’s population, the UnitedStates uses 21 percent of the world’s energy, emits 24 percent of the world’s carbondioxide emissions, and consumes 31 percent of the world’s output. In contrast,the low-income countries of the world, representing 37 percent of the world’s popu-lation, use 10 percent of the world’s energy, emit 8 percent of the world’s carbondioxide emissions, and consume 3 percent of the world’s output.3 Given its consu-

merism, U.S. society stresses the environment far more than does an overpopulated

less-developed country. The attitude reflected in the bumper-sticker quotation, ‘‘Theone who dies with the most toys wins,’’ results in wasteful consumption of resourcesand energy. We live in a society characterized by a throwaway mentality, plannedobsolescence, and the production of unnecessary and ecologically harmfulproducts. The antithesis of this attitude is one of conservation and recycling.Let’s look first at the economics of conservation, then that of recycling. Thenlet’s examine a few innovative policies to reduce pollution by consumers.

ECONOMICS OF CONSERVATIONThis section is especially targeted to you, the student, in an effort to see how youand I and others can personally address the problem of pollution. As a startingpoint, let’s review the law of demand from Chapter 1. Price and quantity

EconNews‘‘Reducing AirlineEmissions: The Future Isthe Past’’

Find a summary of thisnews story underEconomics and theEnvironment in theMicroeconomics category.



demanded are negatively related. Consumers will buy more at low prices than at

high ones. It therefore follows that raising the price of a product will result in less

consumption of it, whereas lowering the price will cause greater consumption. The

market can act as a mechanism to encourage conservation. And the government

can influence the market by taxes or by subsidies, which are payments to produ-

cers or consumers of the product.Let’s look at a few examples of such policies, beginning with a hypothetical

market for gasoline. The United States is castigated by environmentalists for

being the world’s largest consumer of oil. Much of the oil we consume is in the

form of gasoline to power cars, sport utility vehicles, and light trucks. The price

per gallon of gasoline in the United States is unrealistically low because it is not

fully adjusted to account for pollution costs and depletion of natural resources.

Gas prices in the United States are much lower than in the rest of the industrialized

world, where countries impose gasoline taxes higher than those in the United

States. Such taxes increase the price of a gallon of fuel, giving consumers an

incentive to conserve gas.Let’s consider two hypothetical countries, illustrated in Figure 3-4. Let’s

assume identical demand and supply curves in each hypothetical market. These

identical curves result in an initial equilibrium price of $2 per gallon, and an initial

equilibrium quantity of 4 million gallons in each country.

F I G U R E

3 - 4EFFECTS OF HYPOTHETICAL GASOLINE TAXES ON THE PRICE AND SALE

OF GASOLINE

2.50

2.00

1.50

1.00

0.50

$, P

4.00

3.00

3.50

2.50

2.00

1.50

1.00

0.50

4.00

3.00

3.50

0

S

S′

D

1.00

1 2 3 4 5 6

Q Gallons (millions)

Low-Tax Country

$, P

0

S

S″

D

2.00

1 2 3 4 5 6

Q Gallons (millions)

High-Tax Country

The higher ($2.00 per gallon) gasoline tax results in the consumption of only 2 milliongallons of gas and thus encourages greater conservation than the lower ($1.00 pergallon) tax.

Subsidies

Payments from the govern-ment for some givenaction, such as recycling.


Recall that an excise tax is an additional cost of production that must be paidto the government by the sellers of the product. The tax will thereby cause adecrease (backward shift) in supply.

Now suppose that the first country (the low-tax country) imposes a gasolinetax of $1.00 per gallon, and the second country (the high-tax country) imposes atax of $2.00 per gallon. The supply curve in the low-tax country shifts back(upward) by $1.00 per gallon to S0 (the vertical distance between the two supplycurves is the amount of the taxes). The new equilibrium price to consumers is$2.50 per gallon, and the new equilibrium quantity is 3 million gallons. Theimposition of the tax has increased price slightly and resulted in a decrease inconsumption of 1 million gallons of gasoline.

In the case of the high-tax country, the supply curve shifts back (upward) by$2.00 per gallon to S00 (again, the vertical distance between the two supply curvesis the amount of the tax). The new equilibrium price is $3.00 per gallon, and thenew equilibrium quantity is 2 million gallons. The imposition of the tax hasincreased price greatly and has resulted in a decrease in consumption of 2 milliongallons of gasoline. In both cases, consumption decreases, but far more signifi-cantly where gasoline taxes are higher.

How does this conservation occur? In many ways. Drivers are less likely tomake unnecessary trips. They are more likely to take public transportation if it isavailable. They carpool. When purchasing a car, they compare the gas efficiencyof various models and weigh this information heavily in their decision to buy.Higher gasoline prices give individuals an incentive to make many independent

decisions that result in conservation of oil supplies. Conversely, a low priceencourages us to waste gasoline. (Americans do not vote for politicians whocampaign on the promise to raise gasoline taxes, although it might be in ourlong-run best interest to do so.)

Other examples of using economic incentives to conserve scarce resources comefrom our agricultural policy. We will see in Chapter 12 that one aspect of farmpolicy is to reduce the supply of farm products by taking land out of production.We pay subsidies to farmers not to farm their agricultural land. It makes ecolog-ical sense to require that highly erodible land be taken out of production, and itmakes sense for the farmer to be paid to leave such land uncultivated. It alsomakes sense to eliminate government payments to farmers who cultivate wetlandsor other environmentally fragile acreage.

The bottom line with regard to conservation is that taxes increase market pricesand therefore lead to efforts to conserve. The marketplace, combined with taxes, is

an effective tool for implementing conservation policy.

ECONOMICS OF RECYCLINGIt is also possible to save and reuse some of our natural resources. Many com-munities and business firms have established recycling programs in an effort toreduce the strain on our landfills and resources. Recycling has many dimensionsand many economic aspects.

Recycling programs vary throughout the nation. Communities commonly recyclealuminum and newspapers. Some communities also recycle cardboard, magazines,tin cans, glass, plastics, scrap metal, and used oil. You can also recycle your usedprinter ink cartridges. Recycling keeps these commodities out of landfills. As ourpopulation has grown, so have the wastes we produce. Landfills have filled up. Oldlandfills, in which everything (including hazardous waste) has been dumped, arerecognized as environmental hazards that pollute the land and water supply.


Although modern, state-of-the-art landfills are environmentally safe iflocated and monitored properly, their use is nevertheless controversial. If youhave ever followed the local political wrangling over the site of a proposed newlandfill, you are aware of this. No one wants the landfill anywhere near his or herproperty, and citizens’ groups form to fight landfill siting projects. Reducing thebulk of our garbage through recycling is therefore a popular alternative tolandfilling.

The two most pressing problems faced by recycling programs are (1) motivat-ing consumers and businesses to recycle and (2) developing markets for recyclablegoods.

Motivation to RecycleStudies have found that people are more willing to recycle if it is convenient forthem to do so. Collecting recyclables at consumers’ homes (curbside recycling) orestablishing numerous neighborhood drop-off points makes recycling easier andmore convenient for people.

Although some people recycle because they are environmentally conscious,others are willing to do so only if they are given sufficient economic incentives.These incentives can take a variety of forms.

Many households pay for waste disposal services by a fixed fee to a public orprivate garbage collection service. A family might pay $10 a month to have itsgarbage collected. The charge is the same whether the family has 1 bag or 12 bagsof garbage per week. There is no incentive to reduce the amount of waste that iscollected.

On the other hand, some communities charge households for each bag or canof garbage they discard. A charge of $2 per bag of garbage provides an incentiveto decrease the number of disposed bags. Households can save money by buyingproducts with less packaging or by recycling or composting their waste. Althoughsuch programs hold much promise for motivating consumers to recycle, they alsomay create some less desirable effects. They may motivate some people to disposeof their garbage illegally by dumping it in vacant lots or along country roads or byburning it themselves.

Under another type of incentive system, the government sets a target for recy-cling a product, and producers are responsible for ensuring that their product isrecycled. Producers are required to buy ‘‘credits’’ from firms that recycle theirtype of product. For example, if a 50 percent recycling target were set for news-paper, the local newspaper company would be required to buy 500 pounds ofcredits for every 1,000 pounds of newspapers it produces. It would buy its creditsfrom firms such as cardboard box producers that can use old newspapers inproducing their product. Because the box producer is paid for using old news-papers, it has an incentive to use recycled newsprint instead of new paper pulp.

The price of the recycling credit is set by market forces. If the box manufacturercan use the newspapers at low cost, the price of the credit will be low. If a secondfirm can use old newsprint at a still lower cost, it will sell the credits to thenewspaper at a still lower price. The old newspaper will go to the firm with thelowest use costs, and society’s recycling costs will be minimized. As with taxes andsubsidies, recycling credits are most appropriate for particularly troublesomeitems in our waste stream.

A final example of an economic incentive to reduce waste by recycling is thebeverage container deposit, which is legally required in several states. Consumerspay a deposit of 5 or 10 cents per can or bottle when they buy beer or soda pop.Their money is returned when they bring the containers back to the store or a


redemption center. A similar situation exists for plastic milk and water containers.Studies have shown that states with beverage deposit laws recycled far morecontainers than nondeposit states. The bottom line is that economic incentives

can motivate us to recycle and reuse materials, which extends the life of our

resources and landfills.

Markets for Recyclable ProductsA serious problem faced by recycling programs is lack of markets for recyclablematerials. Old newspapers can be used to make paper or cardboard, or they can beshredded for animal bedding. Glass can be used as an additive for asphalt paving.Other recyclable materials have similar uses. But the firms that produce recycledproducts often face an uncertain demand. They may therefore suspend thepurchase of the recyclable materials, and recycling centers will build up inventoriesof these articles. When we drop off our recyclables at the recycling collection point,we assume that these articles will be put to some appropriate use. In fact, theysometimes go to landfills because there is no user for them. The EPA has awardednumerous grants to local governments so they can develop additional markets forrecyclables. Further uses of recycled products must be found, and consumers,governmental units, and business firms must be given incentives to chooseproducts made with recycled material, if such a choice is available. Many peopleare averse to buying products made with recycled materials (for example, retreadedtires) because they view the products as inferior to those made with new materials.If there are quality differences between recycled products and new ones, marketforces will result in price differences that are consistent with the quality differences.Last, we must also raise the issue that sometimes recycling is simply not an efficientchoice in the context of the resources used in recycling, the negative by-productscreated in the process, or the possible lack of safety of recycled products.

Innovative PoliciesBeginning in 2003, motorists driving into central London were charged $8 per dayfor the privilege. By 2007, the fee had increased to $15 per day. While controver-sial, the goal of the policy was to reduce the volume of traffic in the area, easecongestion, and raise money for investing in public transportation. Those whosupported this policy believed that the costs of pollution should be placed back onthose who cause the pollution, thereby giving them an incentive to change theirways. The policy was controversial, but it suggests some policy measures thatmight encourage U.S. automobile drivers to reduce downtown congestion. Thegasoline tax already discussed is one example. What are some others? What if,instead of constructing more parking ramps and charging minimal prices forparking, cities placed a moratorium on parking construction and raised the farefor parking? What if, instead of widening city roads and building new ones, citiesplaced a moratorium on road construction as well? What if, instead of expectingthat city buses and subways (and taxi cab companies) be self-supporting (profit-able), the city government recognized their positive externalities in the form ofreduced congestion, pollution, and resource depletion and subsidized them instead(thereby making them more attractive to commuters)? Some of these ideas maynot be feasible, but they do make us question whether more parking ramps andhighways are self-defeating and create more congestion rather than less. All areideas using incentives to reduce reliance on the automobile.

Have you read the book by Al Gore that is a companion to his global warmingmovie, An Inconvenient Truth? The book uses recycled paper and claims to be‘‘carbon neutral.’’ This means that its publisher, Rodale, used a system of carbon


offsets to make up for the energy sources used in production of the book. In otherwords, the publisher helped finance the production of clean energy sources tomake up for the ‘‘less clean’’ energy used in producing, printing, and transportingthe book.4

How does this affect you? Well, you can become ‘‘carbon neutral’’ as well!More and more consumers, feeling guilty about use of their SUVs and otherpolluting consumer items, go to the Internet to purchase carbon offsets. Byusing a carbon offset Web site, you can calculate the amount of carbon dioxideproduced when you drive (or fly, or use air conditioning or home heating) andbuy an offset that goes toward the production of the same amount ofnonpolluting energy. Depending on the organization, offsets may go to subsidiz-ing existing clean power production or toward financing new wind turbinesor solar collectors. You will be in good company. Ben & Jerry’s buys offsetsto cover its manufacturing and retail operations, and the Rolling Stones havepurchased offsets to make their concerts carbon neutral. Some people arguethat carbon offsets are a trick to make polluting consumers feel less guiltyabout their pollution, and others claim that this is a real opportunity to makea difference. Those who use carbon offsets in the context of an overall environ-ment friendly lifestyle are, of course, the most consistent and effective. (See thediscussion and action questions at the end of the chapter for a list of suggestedcarbon offset Web sites.)5

The Effects of Environmental Policyon the U.S.EconomyThe environmental movement and our environmental policies are not uncontro-versial. Environmental regulation has increased the costs of American business andhas therefore been accused of the following adverse effects on the U.S.economy. Critics argue that by increasing costs, environmental regulation hascontributed to inflation, which is a general increase in the average level of prices.They also argue that environmental regulation has reduced national output, sinceincreased costs of production due to regulation cause the supply curves of produ-cers to shift backwards. Lower output implies increased unemployment, sincefewer workers are needed to produce lower output levels. Moreover, criticsargue that because output is lower, economic growth, which is the increase innational production, will slow down. U.S. firms will be less competitive thantheir international counterparts because they face stricter environmental regula-tions than many firms abroad. This was certainly the concern in the controversymentioned earlier with the North American Free Trade Agreement.

Others argue that employment has actually increased as a result of environ-mental regulations because the decrease in jobs in polluting firms has been offsetby an increase in jobs at firms formerly harmed by pollution (remember thepaper and beer industries?). Furthermore, jobs have been created in pollutioncontrol and in new technology development. Moreover, continued relianceon our finite resources will ultimately only raise the cost of using these resources.Keep in mind the production possibilities curve introduced in Chapter 1.Although there may be some short-run cost of environmental protection on oureconomy, over the long run, we know that without environmental protection,the production curve would actually shrink inward as our resources are depleted.This would be the opposite of economic growth. Hence, the long- and short-run benefits of environmental protection must be considered along with theshort-run costs.


Criticism of U.S.Environmental PolicyAs a conservative president with a conservative administration, George W. Bushhas been strongly criticized by environmentalists for his environmental policies.He wants voluntary restraint by businesses that contribute to global warming,rather than mandatory controls. He has repeatedly called for more research intothe question of whether global warming exists, which his critics charge to be adelaying tactic. In addition, critics charge that the widespread use of the hydrogenfuel cells that President Bush made a centerpiece of his energy plan might not beas environmentally friendly as Bush wants to believe. Scientists say that the newtechnology could lead to greater destruction of the ozone layer. President Bushhas supported the approval of a federal dump for nuclear waste at the YuccaMountain in Nevada and has proposed the drilling for oil and gas in the ArcticNational Wildlife Refuge, both to the chagrin of environmentalists. Bush has alsoreversed prior policy in many areas, including the loosening of environmentalrestrictions on logging and mining on federal property, the easing of rules thatrequire an environmental impact assessment before thinning our national forests,and the pushing of a comprehensive energy plan that stresses reliance on fossilfuels, which are known to cause global warming and air pollution. Finally, aswe’ve noted, he favors reducing the role of the federal government in pollutioncontrol, permitting more flexibility for individual states. And he certainly opposesany mandatory policy enacted by the United Nations.

On the other hand, Bush argues that environmental policy must be carried outin a way that blends the needs of the environment with the needs for economicgrowth. In addition to voluntary compliance, he prefers market-oriented solu-tions, such as pollution fees and pollution permits, rather than other forms ofpollution control.

International Aspects of Pollution ControlJust as local governments do not effectively control local pollution that affectsthe nation, individual nations do not effectively control national pollution thataffects the world. As we have seen, environmental policy should be made bydecision-making groups that include all those affected by negative spillovers.Environmental problems such as loss of biodiversity, ozone depletion, andglobal warming are international issues. International action is therefore necessary.

Two major international environmental summits have been held to try to dealwith some of these problems. Participants have sought environmental treatiesmodeled after our international trade treaties and have tried to reform andstrengthen the United Nations’ powers with regard to the environment. Thefirst international environmental summit was the Rio Earth Summit in Brazil in1992. Two outcomes of this summit were the Climate Change Convention,designed to address global warming, and the Biodiversity Convention, intendedto protect vulnerable species and protect the natural environment. PresidentGeorge H. W. Bush refused to sign the Biodiversity Convention, but he didendorse the Climate Change Convention.

The second international summit took place in Johannesburg, South Africa, in2002, ten years after the first summit. This latter summit, entitled the WorldSummit on Sustainable Development, presented an opportunity for governments,United Nations agencies, global financial institutions, nongovernment organiza-tions, and others to work to achieve sustainable development in the less-developed


world. Tens of thousands of people from all over the world attended this summit,which set new targets on poverty and development aid. A subsequent resolutionadopted by the General Assembly of the United Nations in late 2005 reaffirmedits commitment to sustainable development, stating that ‘‘development is a centralgoal in itself and that sustainable development in its economic, social and envir-onmental aspects constitutes a key element of the overarching framework ofUnited Nations activities.’’6 One measure that we, as global citizens, can take isto encourage our government’s support of international initiatives to protect ourglobal environment.

SummaryEconomic activity causes pollution. Pollution is a spillover

cost of production that causes inequity and distorts the

allocation of resources in the economy. Pollution causes

resources to be overallocated to the market in which it

occurs and underallocated to other affected markets,

thereby creating inefficiency. Government therefore regu-

lates private business by the standards approach, pollution

fees, or marketable pollution permits.

The standards approach has been criticized, especially

when it forces certain types of technology on producers of

the product. Conservation and recycling programs also

reduce pollution. Such programs are most effective when

they give individuals and businesses some economic

incentives for participation. Environmental programs can

be evaluated by cost-benefit analysis, and these programs

should be used only if benefits are greater than costs.

Benefits must be broadly considered and include the

monetary and nonmonetary benefits to current and future

generations.

Many environmental problems are, in fact, international

in nature. These include the emission of greenhouse gases

and the consumption of finite petroleum resources. The

United States is a major emitter of carbon dioxide and user

of petroleum. Since resources will be underallocated to

pollution control unless the decision-making entity is large

enough to incorporate all of the effects of pollution,

international cooperation will be necessary to solve our

international environmental problems.

ViewPointCONSERVATIVE VERSUS LIBERAL

Economists often make decisions about environ-mental matters on noneconomic grounds, as theydo with certain other issues (such as crime) dis-cussed in this book. It is possible for both liberaland conservative economists to care deeply aboutthe environment.

Because liberals are not necessarily averse togovernment intervention in the economy and theregulation of private businesses, they generallywish to see government take an active role in pro-tecting the environment. As such, liberals may wellfavor standards regulation, as well as policiesdrafted at the national and international levels.Liberals may well take the position that weshould do whatever it takes to get the job doneand not worry about the government’s expandingrole in the economy.

Conservatives, on the other hand, want to limitthe role of government in the economy. They areconsequently more likely than liberals to opposeenvironmental regulation. They will be more likelyto favor pollution control policies that utilizemarket forces rather than other methods. Thus,they favor pollution fees and marketable pollutionpermits over the regulation of pollution by meansof standards. Conservatives may also prefer stateand local solutions to environmental problemsover policies developed at the federal and interna-tional levels. They, like President George W. Bush,may also prefer voluntary compliance of industryover forced compliance. While some conservativesare well intentioned on the environmental issue,President Bush has been vehemently chastised byenvironmentalists at home and abroad.


Discussion and ActionQuestions1. Why do polluters pollute? Consider various rea-

sons for both individuals and businesses.

2. Howdoes pollution distort resource allocation inthe economy? Consider both over- and underallo-cation of resources.

3. What are some of the costs of pollution control?Shouldwe bewilling to pay anything and sacrificeeverything to eliminate all pollution?

4. What do you think is the appropriate level of gov-ernment to deal with pollution? Does itmatterwhat type of pollutionwe are considering?Why?

5. Can you think of examples of negative or positiveexternalities notmentioned in the text?

6. Compare the various incentive-based environ-mental policies to the standards approach.Whatare the strengths andweaknesses of each?

7. Do you think it is appropriate that the consumerbears part of the burden of effluent or emissionfees in the form of higher prices?Why or why not?

8. Explain cost-benefit analysis.Would the results ofcost-benefit analysis ever be different in the shortrun than in the long run?Why or why not?

9. Do you think that we are a throwaway society?Are your attitudes toward consumption the sameas your parents’? Your grandparents’?

10. Is it efficient to convert food (corn) into ethanol toburn in our cars and trucks?Would this be eco-nomical if the government taxed the use of gaso-line and subsidized the use of ethanol? Howmightthe government justify these taxes and subsidies?

11. Keeping inmind that environmental regulation isa luxury good, would you expect American atti-tudes to be the same as attitudes of citizens ofThirdWorld countries?

12. Consider pollution, gasoline use, and other prob-lems associatedwith our large congested cities.People often demand additional roads and parkingstructures to handle these problems.Howmightthesemeasures be self-defeating?What are other(incentive-based) policies thatmight be used toreduce automobile use and/or increasemasstransit?

13. Are you a liberal or a conservative on issues ofenvironmental protection?Why?

14. Check out theWeb sites http://www.carbonfund.org, http://www.terrapass.com, http://www.nativeenergy.com, http://www.self.org, or similar

sites to learn how to purchase carbon offsets forthe carbondioxideyou emitwhendriving your car.

15. The U.S. Environmental Protection Agency (EPA)provides information about EPA policies andenvironmental issues.Check out itsWeb site athttp://www.epa.gov and report on some of theinformation that pertains to human health.

16. Go again to the Environmental Protection AgencyWeb site (http://www.epa.gov).Click ‘‘WhereYouLive’’, go to ‘‘SearchYour Community’’, enter yourzip code, and find current environmental issues inyour geographical area.

17. TheWeb site for theWorld Business Council forSustainableDevelopment is http://www.wbcsd.ch.Go to thisWeb site to discover information on thecoalition of hundreds of international companiesthat are unitedby a shared commitment to sus-tainable development through economic growth,ecological balance, and social progress. It concernsitself with poverty and other social justice issues,and it provides an extensive list of publications.After surfing, do you find yourself to be in generalagreementwith theWorld Business Council, or doyou find that you largely disagree?

18. TheWorld Summit on SustainableDevelopment inJohannesburg wasmentioned in the text of thischapter.TheWeb site for the summit, http://www.johannesburgsummit.org, providesmuchinformation, including surveys, documents, publi-cations, and summaries of the summit.What weresome of themajor accomplishments of thesummit?

19. TheUnitedNations Environment Programme alsocontains information on theWorld Summit onSustainable Development.Check out theWeb siteat http://www.unep.org/wssd/.

20. TheWeb site for Resources for the Future, anenvironmental research group, is http://www.rff.org.Use thisWeb site to browse forinformation on research topics such as the envi-ronment, natural resources, andmethods ofenvironmental protection. Are there any envi-ronmental protection tools or techniques thatseemparticularly useful to you?

21. The Environmental News Service has up-to-dateinformation on environmental issues at itsWebsite, http://www.ens-news.com.Use this Web siteto find examples of the latest news on environ-mental issues.


Notes1. John Doerr, ‘‘California’s Global-Warming

Solution,’’ TimeMagazine, September11, 2006, p. 55.

2. Andrew C.Revkin,‘‘Talks to Start on ClimateAmid Split onWarming,’’ The NewYorkTimes,November 5, 2006.

3. Based on calculations from data of theWorldBank,World Development Indicators 2006, http://www.worldbank.org.Data are for 2002 through2004.

4. Rachael Donadio,‘‘Saving the Planet,OneBook at aTime,’’NewYorkTimes Book Review,July 9, 2006.

5. Much of this information is from AnthonyDePalma,‘‘Gas Guzzlers Find the Price ofForgiveness,’’ The NewYorkTimes, April 22, 2006.

6. Resolution adoptedby the General Assembly ofthe United Nations: 2005World SummitOutcome,October 24, 2005.


The Environment30

index

‘‘Great Stink’’, 6

‘‘Superfund’’, 7

AAAI

See American Antitrust Institute (AAI).

Absolute poverty

See also Poverty; Poverty line.

AFDC

See Aid to Families with Dependent Children(AFDC).

Air Pollution Act of 1955, 7

American Indian

See also Native Americans.

An Inconvenient Truth (Gore), 24

Arctic National Wildlife Refuge, 26

BBen & Jerry’s, 25

Benefits

See also Spillover benefits.

Biodiversity Convention, 26

BP Amoco Oil Company, 16

Bush, George H. W., 26

Bush, George W.

administration of. 8

Bush, George W.

administration of

environmental regulations, 8

CCalifornia Global Warming Solutions Act, 11

CCC

See Commodity Credit Corporation.

CFCs (chlorofluorocarbons), 2

Chernobyl nuclear accident in Russia, 19

Clean Air Act (1963, 1970, 1977, and 1990), 7,11,14

Climate Change Convention, 26

Clinton, Bill, 12

COLA

See Cost-of-living adjustment (COLA).

Comprehensive Environmental Response,Compensation and Liability Act of 1980, 7

Conservation

recycling and. 20-24

Conservative views on

environment. 27

Cost-benefit analysis

definition. 19

CPI

See Consumer price index (CPI).

DDeforestation

in less-developed countries. 18

Demand

See also Demand and supply.

Demand and supply

See also Aggregate demand and supply.

Design standard, definition, 9

EEconDebate

‘‘Should Antipollution Standards BeStrengthened?’’. 8

EconNews

‘‘Reducing Airline Emissions: The Future Isthe Past’’. 20

Economic conservative, definition

See also Conservative views.

Economic liberal

See also Liberal views.

Economics

of recycling. 23-24

Education

See also Higher education.

Effluent fees, definition, 10

EITC

See Earned Income Tax Credit (EITC).

Emissions fees, definition, 10

Environment

world energy and petroleum. 14-17

Environmental policy

evaluation of. 19-20

Environmental Protection Agency (EPA), 7,8,12

Externality, definition, 2

FFarm income

See also Agriculture.

Federal taxes

See also Taxes.

Federal Water Pollution Act of 1972, 7

FHA

See Federal Housing Administration (FHA).

FTC

See Federal Trade Commission (FTC).

G

G-8

See Group of Eight (G-8).

GATT

See General Agreement on Tariffs and Trade.

GDP

See Gross domestic product (GDP).

Global warming, 11-14

GMO

See Genetically modified organisms(GMOs).

GNI

See Gross national income (GNI).

GNP

See Gross national product (GNP).

Gore, Al, 24

Government programs

subsidies. 21

Gross domestic product (GDP)

nonmarket activities, flaws of. 2-29

HHigher education

See also Education.

Hooker Chemical and Plastics Company, 7

HUD

See Housing and Urban Development(HUD).

Hurricane Katrina, 16

IICC

See Interstate Commerce Commission (ICC).

IMF

See International Monetary Fund (IMF).

Innovative policies, 24-25

KK–12 education

See also Education.

Kyoto Accord, 12

LLaw of demand

See also Demand.

Law of supply

See also Supply.

Less-developed countries (LDCs)

See also Less-developed world.

Less-developed world

See also Less-developed countries.

Liberal views on

index

the environment. 27Love Canal, 7Luxury good, definition, 7

MMarketable pollution permits

definition. 10

NNAFTA

See North American Free Trade Agreement.North American Free Trade Agreement(NAFTA), 8,19,25

OOPEC

See Organization of Petroleum ExportingCountries (OPEC).

Organization of Petroleum Exporting Countries(OPEC), 15Overallocation of resources, definition, 5

PPerformance standard, definition, 9Personal income tax

See also Taxes.Pollution

problem of. 2-6Poor persons

See also Poverty.Poverty

See also World poverty.Private higher education

See also Education; Higher education.Private schools

See also Education.Progressive taxes

See also Taxes.Property taxes

See also Taxes.Proportional taxes

See also Taxes.Public higher education

See also Education; Higher education.

RRecycling

economics of. 22-24Regulation

standards approach. 9Resource allocation

problem of pollution. 3-6

Rio Earth Summit, 26

Rolling Stones, 25

SSales tax

See also Taxes.

Social costs of production, definition, 4

Spillover benefits, definition, 3

Spillover cost

definition. 2

SSI

See Supplemental Security Income (SSI).

Standards, definition, 9

Subsidies

definition. 21

TTANF

See Temporary Assistance for NeedyFamilies (TANF).

Technology forcing, definition, 9

Third-World countries

See Lessdeveloped countries; Less-developed world.

UUnderallocation of resources, definition, 6

Union Carbide, 18

WWorld energy and petroleum, 14-17

World poverty

See also Poverty; Poverty line.

World Summit on Sustainable Development, 26

WTO

See World Trade Organization (WTO).

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