Transcript
470Miller•Economics Today, Nineteenth Edition
Chapter 31Environmental Economics469
Answers to Questions for Critical Analysis
How Behavioral Responses to Appeals to Conserve Energy Boost Carbon Emissions (p. 694)
Why do you suppose that some observers have called for requiring installation of devices that would enable governments to monitor households’ energy consumption?
If governments were able to monitor households’ energy consumption, they might attempt to appeal to consumers in an effort to shift their energy usage across different times.
The Environmental Protection Agency Creates a Negative Externality (p. 696)
Who ultimately pays to address costs of negative, externalities created by government agencies such as the EPA when they accidentally release pollutants into the environment?
The public, or taxpayers, ultimately pay to address the costs of negative externalities created by government agencies.
How Trophy Hunting Might Help to Protect Dwindling Big-Game Species (p. 702)
Why might allowing profit-maximizing firms to manage the hunting of particular endangered animals potentially help to ensure the animals’ species would not disappear? (Hint: Would a company continue to generate profits from selling hunting rights if it allowed hunters to kill all of the animals that it manages?)
It is in the profit-maximizing firm’s interest to maintain or expand the overall population of the animals instead of allowing hunters to kill all of those animals.
You Are There
Companies in China Seek to Export Pollution Abroad (p. 703)
1. How would the relocation of pollution-generating Chinese plants to other nations affect the optimal degree of air cleanliness in China? Explain briefly.
The relocation of pollution-generating Chinese plants to other nations would raise the marginal cost of pollution abatement. Other things being equal, the result is a lower optimal degree of air cleanliness in China.
2. Why might a low-income nation with a currently very high degree of air cleanliness view a higher pollution level created by newly relocated plants of Chinese firms as optimal?
A low-income nation with a currently high degree of air cleanliness might view a higher pollution level as optimal if its marginal benefit of air cleanliness is sufficiently low.
Issues and Applications
Assessing the Economics of Global Plastic-Waste Pollution (pp. 703?704)
1. What would be the appropriate change in the U.S. degree of plastic-waste cleanliness if the marginal cost of pollution abatement is higher than the associated marginal benefit?
If the marginal cost of pollution abatement is higher than the associated marginal benefit for the U.S., then the efforts of pollution abatement will decrease, resulting in a lower optimal degree of plastic-waste cleanliness.
2. Should policymakers impose additional costly anti-plastics-pollution requirements if the marginal benefit of pollution abatement currently equals the marginal cost? Explain.
If the marginal benefit of pollution abatement is equal to the marginal cost, then the degree of plastic-waste pollution has reached the optimal level. This implies that policymakers should not impose additional costly anti-plastics pollution requirements.
Research Project
1. Learn more about plastic-waste pollution in the Web Links in MyEconLab.
2. To take a look at detailed estimates of plastic-waste pollution across the world’s nations, see the Web Links in MyEconLab.
Answers to Problems
31-1. The market price of insecticide is initially $10 per unit. To address a negative externality in this market, the government decides to charge producers of insecticide for the privilege of polluting during the production process. A fee that fully takes into account the social costs of pollution is determined, and once it is put into effect, the market supply curve for insecticide shifts upward by $4 per unit. The market price of insecticide also increases, to $12 per unit. What fee is the government charging insecticide manufacturers?
$4 per unit, which exactly accounts for the per-unit social cost of pollution.
31-2. One possible method for reducing emissions of greenhouse gases such as carbon dioxide is to inject the gases into deep saltwater-laden rock formations, where they would be trapped for thousands of years. Suppose that the federal government provides a fixed per-unit subsidy to firms that utilize this technology in West Virginia and other locales where such rock formations are known to exist.
a. Use an appropriate diagram to examine the effects of the government subsidy on the production and sale of equipment that injects greenhouse gases into underground rock formations. What happens to the market clearing price of such pollution abatement equipment?
b. Who pays to achieve the results discussed in part (a)?
a. Payment of the per-unit subsidy raises the demand for equipment that injects the greenhouse gases into underground rock formations. As shown in the diagram, the market clearing price of the equipment increases, from P1 to P2.
b. The government funds subsidy payments from tax receipts, so taxpayers finance the subsidy.
31-3. Examine the following marginal costs and marginal benefits associated with water cleanliness in a given locale:
Quantity of Clean Water (%) Marginal Cost ($) Marginal Benefit ($)
0 3,000 200,000
20 15,000 120,000
40 50,000 90,000
60 85,000 85,000
80 100,000 40,000
100 Infinite 0
a. What is the optimal degree of water cleanliness?
b. What is the optimal degree of water pollution?
c. Suppose that a company creates a food additive that offsets most of the harmful effects of drinking polluted water. As a result, the marginal benefit of water cleanliness declines by $40,000 at each degree of water cleanliness at or less than 80 percent. What is the optimal degree of water cleanliness after this change?
a. 60 percent
b. 40 percent
c. 40 percent
31-4. Consider the diagram below, which displays the marginal cost and marginal benefit of water pollution abatement in a particular city, and answer the following questions.
a. What is the optimal percentage degree of water cleanliness?
b. When the optimal percentage degree of water cleanliness has been attained, what cost will be incurred for the last unit of water cleanup?
a. 65 percent
b. $10
31-5. Consider the diagram in Problem 31-4, and answer the following questions.
a. Suppose that a new technology for reducing water pollution generates a reduction in the marginal cost of pollution abatement at every degree of water cleanliness. After this event occurs, will the optimal percentage degree of water cleanliness rise or fall? Will the cost incurred for the last unit of water cleanup increase or decrease? Provide a diagram to assist in your explanation.
b. Suppose that the event discussed in part (a) occurs and that, in addition, medical studies determine that the marginal benefit from water pollution abatement is higher at every degree of water cleanliness. Following both events, will the optimal percentage degree of water cleanliness increase or decrease? In comparison with the initial optimum, can you determine whether the cost incurred for the last unit of water cleanup will increase or decrease? Use a new diagram to assist in explaining your answers.
a. There is a downward shift in the position of the marginal cost curve. The optimal degree of water cleanliness will rise above 65 percent, to a level such as 70 percent, and the cost incurred for the last unit of water clean-up will decrease to less than $10, such as a per-unit cost of $7.
b. The second event induces an upward shift in the marginal benefit curve. Taken together, as shown in the diagram below, the two events unambiguously indicate that the optimal degree of water cleanliness increases above 65 percent, such as a level of 85 percent. The cost incurred for the last unit of water clean-up may rise or fall, however, and could end up at the initial level, which is the situation illustrated in the diagram.
31-6. Under an agreement with U.S. regulators, American Electric Power Company of Columbus, Ohio, has agreed to offset part of its 145 million metric tons of carbon dioxide emissions by paying another company to lay plastic tarps. These tarps cover farm lagoons holding rotting livestock wastes that emit methane gas 21 times more damaging to the atmosphere than carbon dioxide. The annual methane produced by a typical 1,330-pound cow translates into about 5 metric tons of carbon dioxide emissions per year.
a. How many cows’ worth of manure would have to be covered to offset the carbon dioxide emissions of this single electric utility?
b. Given that there are about 9 million cows in the United States in a typical year, what percentage of its carbon dioxide emissions could this firm offset if it paid for all cow manure in the entire nation to be covered with tarps?
a. 145 million metric tons / 5 metric tons per cow = 29 million cows.
b. 100 (9 million cows 5 metric tons per cow) / 145 million metric tons = 31 percent.
31-7. A government agency caps aggregate emissions of an air pollutant within its borders, establishes initial pollution allowances across all firms, and grants the firms the right to trade these allowances among themselves. The demand and supply curves for these pollution allowances have normal shapes and intersect at a positive price. Explain in your own words the government’s intent in establishing this private market for pollution allowances.
The positive market price of allowances is equivalent to a price that a firm must pay in order to release an additional unit of a pollutant. The idea behind establishing the market for pollution allowances, therefore, is to give firms an incentive to limit the quantity of pollutants released into the atmosphere.
31-8. Suppose that a new chief of the government agency discussed in Problem 31-7 decides to restrict considerably the extent to which firms in this nation can legally utilize pollution allowances. Evaluate the effects this policy change will have on the market price of pollution allowances, and discuss whether the policy appears to be fully consistent with the original intent of creating the market for these allowances.
Restricting the extent to which available pollution allowances may be utilized by firms will reduce the demand for allowances, which will cause the market price of allowances to decline. Consequently, the price that firms must pay to pollute declines, which thereby reduces the incentive that they have to limit the amount of additional pollutants that they emit.
31-9. The following table displays hypothetical annual total costs and total benefits of conserving wild tigers at several possible worldwide tiger population levels.
Population of
Wild Tigers Total Cost
($ millions) Total Benefit ($ millions)
0 0 40
2,000 25 90
4,000 35 130
6,000 50 160
8,000 75 185
10,000 110 205
12,000 165 215
a. Calculate the marginal costs and benefits.
b. Given the data, what is the socially optimal world population of wild tigers?
c. Suppose that tiger farming is legalized and that this has the effect of reducing the marginal cost of tiger conservation by $15 million for each 2,000-tiger population increment in the table. What is the new socially optimal population of wild tigers?
a. The marginal costs and benefits are tabulated below:
Population of
Wild Tigers Marginal
Cost ($) Marginal
Benefit ($)
0 — —
2,000 25 50
4,000 10 40
6,000 15 30
8,000 25 25
10,000 35 20
12,000 50 10
b. 8,000
c. 10,000
31-10. The following table gives hypothetical annual total costs and total benefits of maintaining alternative populations of Asian elephants.
Population of Asian Elephants Total Cost
($ millions) Total Benefit
($ millions)
0 0 0
7,500 20 100
15,000 45 185
22,500 90 260
30,000 155 325
37,500 235 375
45,000 330 410
a. Calculate the marginal costs and benefits, and draw marginal benefit and cost schedules.
b. Given the data, what is the socially optimal world population of Asian elephants?
c. Suppose that two events occur simultaneously. Technological development allows machines to do more efficiently much of the work that elephants once did, which reduces by $10 million the marginal benefit of maintaining the elephant population for each 7,500 increment in the elephant population. In addition, new techniques for breeding, feeding, and protecting elephants reduce the marginal cost by $40 million for each 7,500 increment in the elephant population. What is the new socially optimal population of Asian elephants?
a. The marginal costs and benefits are tabulated below:
Population of
Asian Elephants Marginal Cost Marginal Benefit
0 — —
7,500 20 100
15,000 25 85
22,500 45 75
30,000 65 65
37,500 80 50
45,000 95 35
b. 30,000
c. 37,500
31-11. Take a look at Figure 31-1. Why does “including externalities” cause the supply curve S2 to lie above the supply curve S1 that has been drawn “excluding externalities”?
The answer hinges on the fact that supply curves reflect the marginal costs of firms that produce goods and services. The supply curve S2 includes additional costs associated with externalities that are not taken into account in the supply curve S1. Because the marginal costs involved in constructing S2 are higher than those for S1, the former supply curve must lie above and to the left of the latter supply curve.
31-12. Consider Figure 31-1. What is the specific reason that accounting for externalities and thereby shifting the market supply curve causes the equilibrium quantity of Good X to decline from Q1 to Q2?
After the supply curve shifts upward and to the left, there is an excess quantity demanded of Good X at the initial per-unit price P1. As a consequence, consumers bid up the price of the item to P2. This price increase generates an upward movement along the market demand curve that causes the equilibrium quantity of Good X to decline from Q1 to Q2.
31-13. Take a look at Figure 31-2. Suppose that initially society were to opt for a degree of air cleanliness that is lower than Q0. What would be true of the marginal benefit in relation to the marginal cost, and why would this fact induce society to increase the degree of air cleanliness toward Q0?
At a degree of air cleanliness that is lower than Q0, the marginal benefit derived from that level of air cleanliness would exceed the marginal cost of attaining that level. Adding the last unit of air cleanliness thereby has gained a net benefit for society, and so society should add another unit of cleanliness and move toward Q0.
31-14. Consider Figure 31-2. Suppose that initially society were to opt for a degree of air cleanliness that is higher than Q0. What would be true of the marginal cost in relation to the marginal benefit, and why would this fact induce society to reduce the degree of air cleanliness toward Q0?
At a degree of air cleanliness that is higher than Q0, the marginal cost derived from that level of air cleanliness would exceed the marginal benefit of attaining that level. The last unit of air cleanliness added thereby would generate a net cost for society, and so society should reduce the degree of air cleanliness and move toward Q0.
31-15. Take a look at Figure 31-2. Explain why 100 percent air cleanliness is not optimal.
At a 100 percent level of air cleanliness, the marginal cost of that level of air cleanliness normally will, as displayed in the figure, exceed the marginal benefit. Hence, the last unit of air cleanliness attained at a 100 percent cleanliness level would generate a net cost to society. Society would gain from cutting back on air cleanliness instead of remaining at the 100 percent level.
31-16. Consider Figure 31-2. Explain why a society usually would not determine that a degree of 0 percent air cleanliness is optimal.
At a 0 percent level of air cleanliness, the marginal benefit of that level of air cleanliness normally will, as displayed in the figure, exceed the marginal cost. Therefore, the last unit of air cleanliness attained at a 0 percent cleanliness level would generate a net benefit to society. Society would gain from increasing the degree of air cleanliness instead of remaining at the 0 percent level.
Selected References
Barnett, H. and C. Morse, Scarcity and Growth, Baltimore, MD: Johns Hopkins Press, 1973.
Buchanan, J. M., “A Behavioral Theory of Pollution,” Western Economic Journal, Vol. 6, December 1968, pp. 347–358.
Cheung, S. N., “Transactions Costs, Risk Aversion, and the Choice of Contractual Arrangements,”
Journal of Law and Economics, Vol. 12, April 1969, pp. 23–47.
Coase, R., “The Problem of Social Costs,” Journal of Law and Economics, October 1960.
Eggert, Jim, Meadowlark Economics, New York: M.E. Sharpe, 1992.
Kneese, A. V., “Analysis of Environmental Pollution,” Swedish Journal of Economics, March 1971.
Kneese, A. V., Economics and the Environment, New York: Penguin Books, 1977.
Kneese, A. V. and C. E. Schultze, Pollution, Prices, and Public Policy, Washington, D.C.: The Brookings Institute, 1979.
Lee, Dwight, R., “Environmental versus Political Pollution,” Original Paper 39, International Institute
for Economic Research, 1982.
Mishan, E. J., Technology and Growth, New York: Praeger, 1970.
Seneca, Joseph and Michael K. Taussig, Environmental Economics, 2nd ed., Englewood Cliffs,
NJ: Prentice-Hall, 1979.
Simon, Julian L., The Ultimate Resource, Princeton, NJ: Princeton University Press, 1980.
