We'd better get tough on environmental destruction wherever we find it, whatever it takes, because there's only one Earth.
It's tempting to think that this is a useful social policy.
When businesses were free to dump their waste anywhere they chose, it was impractical to eliminate all pollution.
Whenever we extract resources, manufacture goods, fertilize croplands, or power our electrical grid, there will be some amount of environmental damage.
To ensure that participants in markets are fully accounting for both social costs and benefits, the answer is to examine the tension between social costs and benefits.
In the previous chapters, we saw that markets provide many ben efits and that participants pursue their own self- interests.
Sometimes markets need help.
Some market exchanges harm innocent bystanders and some trades are not efficient because the ownership of property is not clearly defined.
Externalities and the differences between private and public goods are explored in this chapter.
Buyers and sellers benefit from trade.
Externalities are failures in the market.
In 2010, an offshore oil rig in the Gulf of Mexico operated by Brit allocation of resources in ish Petroleum exploded, causing millions of barrels of oil to spill into the market.
Many people along the Gulf Coast had their lives disrupted because of the production of oil.
Tourism and fishing, industries dependent on high environmental quality, were hit particularly hard by the costs of the spill.
The people who are not part of the congestion and pollution caused by our cars are external costs.
Some of the mechanisms that encourage external costs of a market consumers and producers to account for the social costs of their actions are considered in this section.
An externality exists when a private cost and a social cost differ.
The externality is negative if a third party is adversely affected.
When the number of vehicles on the roads causes activity to experience negative or positive externalities, it's called a negative externality.
It is difficult to make consumers and producers take responsibility for the full costs of their actions because of negative externalities.
Drivers usually only consider the internal costs of reaching their destination.
Similarly, manufacturers prefer to ignore the pollution they create because addressing the problem would raise their costs without providing them with significant benefits.
Society would benefit if all consumers and producers paid attention to both the internal and external costs of their actions.
Governments design policies to create incentives for firms and people to limit the amount of pollution they emit.
An effort by the city government of Washington, D.C. shows the power of this approach.
The city instituted a 5-cent tax on every plastic bag a consumer picks up.
5 cents doesn't sound like much, but shoppers have responded by using cloth bags or reuse plastic ones.
In Washington, D.C., the number of plastic bags used every month fell from 22 million in 2009 to 9 million in 2014).
Some externalities are positive.
There are positive externalities.
Education creates a large positive externality for society beyond the benefits to individual students, teachers, and support staff.
Employers look for qualified employees and are more efficient and productive if they have a more knowledgeable workforce.
Local businesses have a stake in the educational process because they experience a positive externality from a well educated local community.
California's Silicon Valley is home to many high- tech companies and is an example of the synergy between local business and higher education.
In the late 19th century, the leaders of the university felt that the mission should include fostering the development of self- sufficient local industry.
The creation of Hewlett- Packard, Bell Labs, and Xerox was the result of faculty and graduates starting their own companies after World War II.
This group of high tech firms gave birth to leading software and Internet firms like 3Com, Adobe, and Facebook.
Many of the most successful businesses in the area have donated large sums to the university because of the benefits they received.
The Hewlett Foundation gave $400 million to the humanities and sciences endowment at Stanford University in order to highlight the positive externality of the school.
The university has received large donations.
We look at ways to correct negative externalities.
Supply and demand analysis is used to understand how externalities affect the market.
In the case of an oil refinery, supply and the difference between what market forces produce and what is best for society should be compared.
A refinery makes gasoline.
The release of pollutants into the air and the dumping of waste by- products are some of the negative externalities generated by this complex process.
When oil refineries are allowed to pollute the environment without limits, they are likely to overproduce.
The deadweight loss that occurs from overproduction is eliminated.
When a negative externality occurs, the government may be able to restore the social optimum by forcing market participants to pay for their actions.
There are three possible solutions.
The refinery can be required to change production techniques to reduce emissions.
The government can impose a tax on the refinery to discourage it from producing.
The firm can be required to pay for any environmental damage it causes.
The amount of pollution causing activity is reduced by having to pay the costs of imposing pollution on others.
As a result of its actions, this result is visible.
The internal and external costs of producing the good are reflected in the new supply curve.
Because each corrective measure requires the refinery to spend money to correct the externality and therefore increases overall costs, the willingness to sell the good declines or shift to the left.
The result is a social optimum at a lower quantity.
The trade off is clear.
Producers are required to internalize the externality in order to reduce negative externalities.
Costs do not come without doing so.
The price goes up because the quantity produced is lower.
There is always a cost in the real world.
We considered deadweight loss in the context of government regulation.
Deadweight loss or an undesirable amount of economic activity can be created by these measures.
In the case of a negative externality, the market isn't efficient because it isn't capturing the cost of production.
Once the government intervenes and requires the firm to internalize the external costs of its production, output falls to the socially optimal level, and the deadweight loss from overproduction is eliminated.
The decision making process is outlined in Table 7.1.
Society as a whole experiences both internal and external costs, but private decision makers only consider their internal costs.
We need to find ways to encourage internalization of externalities to align the incentives of private decision makers with the interests of society.
Metro Washington, D.C., is notorious for traffic, but new express lanes keep traffic moving by using dynamic pricing, which adjusts tolls based on real- time traffic conditions.
Dynamic pricing helps manage the quantity demanded.
During less busy times, the express lane tolls can be as low as $0.20 per mile.
The higher rush- hour rates are designed to keep the express lanes free of congestion.
Motorists have to weigh the costs and benefits of driving into congested areas because of dynamic prices.
Motorists make marginal adjustments in terms of time when they drive because of the dynamic pricing of express lanes.
High demand times, such as the morning and evening rush, see higher tolls for using the express lanes and longer waits in the regular lanes.
Many motorists attempt to use the Beltway at off- peak times because they are faced with either sitting in traffic (if they don't pay the toll) or being charged more to enter the express lanes at peak- demand times.
The traffic flow spreads out as drivers internalize the costs.
Positive externalities, such as vaccines, are the result of economic activities that benefit third parties.