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Chapter 12: Environmental Protection and Negative Externalities
13 problems · 1 figure12-1 §12.1 source ↗
Identify the following situations as an example of a negative or a positive externality:
a. You are a birder (bird watcher), and your neighbor has put up several birdhouses in the yard as well as planting trees and flowers that attract birds.
b. Your neighbor paints his house a hideous color.
c. Investments in private education raise your country’s standard of living.
d. Trash dumped upstream flows downstream right past your home.
e. Your roommate is a smoker, but you are a nonsmoker.
Answer
a. positive externality
b. negative externality
c. positive externality
d. negative externality
e. negative externality
12-2 §12.1 source ↗
Identify whether the market supply curve will shift right or left or will stay the same for the following:
a. Firms in an industry are required to pay a fine for their carbon dioxide emissions.
b. Companies are sued for polluting the water in a river.
c. Power plants in a specific city are not required to address the impact of their air quality emissions.
d. Companies that use fracking to remove oil and gas from rock are required to clean up the damage.
Answer
a. supply shifts left
b. supply shifts left
c. supply stays the same
d. supply shifts left
12-3 §12.1 source ↗
Answer
a. price will rise
b. price will rise
c. price stays the same
d. price will rise.
12-4 §12.1 source ↗
| Price | Quantity Demanded | Quantity Supplied without paying the cost of the pollution | Quantity Supplied after paying the cost of the pollution |
|---|---|---|---|
| $10 | 450 | 400 | 250 |
| $15 | 440 | 440 | 290 |
| $20 | 430 | 480 | 330 |
| $25 | 420 | 520 | 370 |
| $30 | 410 | 560 | 410 |
Answer
12-5 §12.2 source ↗
Answer
12-6 §12.3 source ↗
Classify the following pollution-control policies as command-and-control or market incentive based.
a. A state emissions tax on the quantity of carbon emitted by each firm.
b. The federal government requires domestic auto companies to improve car emissions by 2020.
c. The EPA sets national standards for water quality.
d. A city sells permits to firms that allow them to emit a specified quantity of pollution.
e. The federal government pays fishermen to preserve salmon.
Answer
a. market-based
b. command-and-control
c. command-and-control
d. market-based
e. market-based
12-7 §12.3 source ↗
Answer
12-8 §12.3 source ↗
| Elm | Maple | Oak | Cherry | |
|---|---|---|---|---|
| Current production of garbage (in tons) | 20 | 40 | 60 | 80 |
| Cost of reducing garbage by first five tons | $5,500 | $6,300 | $7,200 | $3,000 |
| Cost of reducing garbage by second five tons | $6,000 | $7,200 | $7,500 | $4,000 |
| Cost of reducing garbage by third five tons | $6,500 | $8,100 | $7,800 | $5,000 |
| Cost of reducing garbage by fourth five tons | $7,000 | $9,000 | $8,100 | $6,000 |
| Cost of reducing garbage by fifth five tons | $0 | $9,900 | $8,400 | $7,000 |
Answer
First, if each firm is required to reduce its garbage output by one-fourth, then Elm will reduce five tons at a cost of $5,500; Maple will reduce 10 tons at a cost of $13,500; Oak will reduce three tons at a cost of $22,500; and Cherry will reduce four tons at a cost of $18,000. Total cost of this approach: $59,500. If the system of marketable permits is put in place, and those permits shrink the weight of allowable garbage by one-quarter, then pollution must still be reduced by the same overall amount. However, now the reduction in pollution will take place where it is least expensive.
| Reductions in Garbage | Who does the reducing? | At what cost? |
|---|---|---|
| First 5 tons | Cherry | $3,000 |
| Second 5 tons | Cherry | $4,000 |
| Third 5 tons | Cherry | $5,000 |
| Fourth 5 tons | Elm | $5,500 |
| Fifth and sixth 5 tons | Elm and Cherry | $6,000 each |
| Seventh 5 tons | Maple | $6,300 |
| Eighth 5 tons | Elm | $6,500 |
| Ninth and tenth 5 tons | Elm and Cherry | $7,000 each |
Thus, the overall pattern of reductions here will be that Elm reduces garbage by 20 tons and has 15 tons of permits to sell. Maple reduces by five tons and needs to buy five tons of permits. Oak does not reduce garbage at all, and needs to buy 15 tons of permits. Cherry reduces garbage by 25 tons, which leaves it with five tons of permits to sell. The total cost of these reductions would be $56,300, a definite reduction in costs from the $59,500 cost of the command-and-control option.
12-9 §12.3 source ↗
| Incentives to Go Beyond | Flexibility about Where and How Pollution Will Be Reduced | Political Process Creates Loopholes and Exceptions | |
|---|---|---|---|
| Pollution Charges | |||
| Marketable Permits | |||
| Property Rights |
Answer
| Incentives to Go Beyond | Flexibility about Where and How Pollution Will Be Reduced | Political Process Creates Loopholes and Exceptions | |
|---|---|---|---|
| Pollution Charges | If you keep reducing pollution you reduce your charge | Reducing pollution by any method is fine | If charge applies to all emissions of pollution then no loopholes |
| Marketable Permits | If you reduce your pollution you can sell your extra pollution permits | Reductions of pollution will happen at firms where it is cheapest to do so, by the least expensive methods | If all polluters are required to have permits then there are no loopholes |
| Property Rights | The party that has to pay for the pollution has incentive to do so in a cost effect way | Reducing pollution by any method is fine | If the property rights are clearly defined, then it is not legally possible to avoid cleanup |
12-10 §12.4 source ↗
Suppose a city releases 16 million gallons of raw sewage into a nearby lake. Table 12.8 shows the total costs of cleaning up the sewage to different levels, together with the total benefits of doing so. (Benefits include environmental, recreational, health, and industrial benefits.)
a. Using the information in Table 12.8, calculate the marginal costs and marginal benefits of reducing sewage emissions for this city. See Production, Costs and Industry Structure if you need a refresher on how to calculate marginal costs.
b. What is the optimal level of sewage for this city?
c. Why not just pass a law that firms can emit zero sewage? After all, the total benefits of zero emissions exceed the total costs.
| Total Cost (in thousands of dollars) | Total Benefits (in thousands of dollars) | |
|---|---|---|
| 16 million gallons | Current situation | Current situation |
| 12 million gallons | 50 | 800 |
| 8 million gallons | 150 | 1300 |
| 4 million gallons | 500 | 1650 |
| 0 gallons | 1200 | 1900 |
Answer
a. See the answers in the following table. The marginal cost is calculated as the change in total cost divided by the change in quantity.
| Total Cost (in thousands of dollars) [marginal cost] | Total Benefits (in thousands of dollars) [marginal benefit] | |
|---|---|---|
| 16 million gallons | Current situation | Current situation |
| 12 million gallons | 50 [50] | 800 [800] |
| 8 million gallons | 150 [100] | 1,300 [500] |
| 4 million gallons | 500 [350] | 1,850 [350] |
| 0 gallons | 1,200 [700] | 2,000 [150] |
b. The “optimal” level of pollution is where the marginal benefits of reducing it are equal to the marginal cost. This is at four million gallons.
c. Marginal analysis tells us if the marginal costs of cleanup are greater than the marginal benefit, society could use those resources more efficiently elsewhere in the economy.
12-11 §12.4 source ↗
The state of Colorado requires oil and gas companies who use fracking techniques to return the land to its original condition after the oil and gas extractions. Table 12.9 shows the total cost and total benefits (in dollars) of this policy.
a. Calculate the marginal cost and the marginal benefit at each quantity (acre) of land restored. See Production, Costs and Industry Structure if you need a refresher on how to calculate marginal costs and benefits.
b. If we apply marginal analysis, what is the optimal amount of land to be restored?
| Land Restored (in acres) | Total Cost | Total Benefit |
|---|---|---|
| 0 | $0 | $0 |
| 100 | $20 | $140 |
| 200 | $80 | $240 |
| 300 | $160 | $320 |
| 400 | $280 | $380 |
Answer
a. See the next table for the answers, which were calculated using the traditional calculation of marginal cost equal to change in total cost divided by change in quantity.
| Land Restored (in acres) | Total Cost [marginal cost] | Total Benefit [marginal benefit] |
|---|---|---|
| 0 | $0 | $0 |
| 100 | $20 [0.2] | $140 [1.4] |
| 200 | $80 [0.6] | $240 [1] |
| 300 | $160 [0.8] | $320 [0.8] |
| 400 | $280 [1.2] | $480 [0.6] |
b. The optimal amount of restored land is 300 acres. Beyond this quantity the marginal costs are greater than the marginal benefits.
12-12 §12.5 source ↗
Consider the case of global environmental problems that spill across international borders as a prisoner’s dilemma of the sort studied in Monopolistic Competition and Oligopoly. Say that there are two countries, A and B. Each country can choose whether to protect the environment, at a cost of 10, or not to protect it, at a cost of zero. If one country decides to protect the environment, there is a benefit of 16, but the benefit is divided equally between the two countries. If both countries decide to protect the environment, there is a benefit of 32, which is divided equally between the two countries.
a. In Table 12.10, fill in the costs, benefits, and total payoffs to the countries of the following decisions. Explain why, without some international agreement, they are likely to end up with neither country acting to protect the environment.
| Country B | |||
| Protect | Not Protect | ||
| Country A | Protect | ||
| Not Protect | |||
Answer
| Country B | |||
| Protect | Not Protect | ||
| Country A | Protect | Both A and B have a cost of 10 and a benefit of 16; each country has net = 6 | A has a cost of 10 and a benefit of 8 (net = –2); B has a cost of 0 and a benefit of 8 ( net = 8) |
| Not Protect | A has a cost of 0 and a benefit of 8 (net = 8); B has a cost of 10 and a benefit of 8 (net = –2) | Both A and B have a zero cost and a zero benefit; each country has net = 0 | |
Country B will reason this way: If A protects the environment, then we will have benefits of 6 if we act to protect the environment, but 8 if we do not, so we will not protect it. If A is not protecting the environment, we will have losses of 2 if we protect, but have zero if we do not protect, so again, we will not protect it. Country A will reason in a similar manner. The result is that both countries choose to not protect, even though they will achieve the largest social benefits—a combined benefit of 12 for the two countries—if they both choose to protect. Environmental treaties can be viewed as a way for countries to try to extricate themselves from this situation.
12-13 §12.6 source ↗
| Combos | Corn Bushels (thousands) | Number of Trees (thousands) |
|---|---|---|
| P | 9 | 1 |
| Q | 2 | 7.5 |
| R | 7 | 5 |
| S | 2 | 1 |
| T | 6 | 2 |
A country called Sherwood is very heavily covered with a forest of 50,000 trees. There are proposals to clear some of Sherwood’s forest and grow corn, but obtaining this additional economic output will have an environmental cost from reducing the number of trees. Table 12.11 shows possible combinations of economic output and environmental protection.
a. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the number of trees, and the quantity of economic output, measured in corn, on the vertical axis.
b. Which choices display productive efficiency? How can you tell?
c. Which choices show allocative efficiency? How can you tell?
d. In the choice between T and R, decide which one is better. Why?
e. In the choice between T and S, can you say which one is better, and why?
f. If you had to guess, which choice would you think is more likely to represent a command-and-control environmental policy and which choice is more likely to represent a market-oriented environmental policy, choice Q or S? Why?
Answer
a. 
b. Of the choices provided, P, R, and S demonstrate productive efficiency. These are the choices on the production possibility frontier.
c. Allocative efficiency is determined by the preferences—in this case by the preferences of society as expressed through government and other social institutions. Because you do not have information about these preferences, you really cannot say much about allocative efficiency.
d. In the choice between T and R, R should clearly be preferred, because it has both more corn and more trees. This answer illustrates why productive efficiency is beneficial. Compared with choices inside the PPF, it means more of one or both goods.
e. In the choice between T and S, it is not possible to say which choice is better. True, S is on the PPF and T is not—but that only addresses the issue of productive efficiency. If a society has a strong preference for economic output and places a lower value on trees, then allocative efficiency may lead to a choice of T over S. Of course, the reverse could also be true, leading to a choice of S. Without information on society’s preferences to judge allocative efficiency, this question cannot be answered.
f. Compared with command-and-control policies, market-oriented policies allow either more output with the same environmental protection or more environmental protection with the same level of output—or more of both environmental protection and output. Thus, a choice like Q inside the PPF is more likely to represent a command-and-control policy demand than a choice like S on the frontier of the PPF.
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Problems and answers are adapted from Principles of Economics 3e by Steven A. Greenlaw, David Shapiro and Daniel MacDonald, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-economics-3e/pages/1-introduction. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.