[Music]
As we talk of Externalities in this chapter,
we address examples centered right here in
Idaho.
We will learn about both positive and negative
externalities and what that means both from
an economics standpoint, and from what has
become a monumental human health problem.
We are headed to the Silver Valley of Idaho,
up the Coeur d'Alene River through Kellogg
and Wallace.
This area is currently the home of the world-class
ski mountain called Silver Mountain Resort.
In the late 1880s, a boom in mining activity
in Idaho's Silver Valley followed the construction
of railroad lines through what was previously
considered by European Americans to be inaccessible
"wilderness."
Silver Mountain became the largest iron smelting
facility in the world.
This area was known as a center of extensive
silver and other metal mining and processing.
Commercial mining and processing efforts resulted
in extensive contamination of water, land
and air, endangering residents of the Coeur
d'Alene Tribe, which had traditionally depended
on fish from the waterways as part of its
subsistence.
The unanticipated complication came from lead
poising from iron smelting operations contaminating
water and the air of the region.
We now step into 1979 to hear from one of
the Bunker Hill workers, Eva Sullivan.
Lead, silver and zinc are all mined here in
Kellogg Idaho the main employer in
Kellogg is the Bunker Hill Company over
1,500 people work at Bunker Hill Mine
and smelting complex.
Eva Sullivan is a working mother
employed at the LEAD Smelter she has been
active in her union the United
Steelworkers and the long fight for
stricter controls on Lead.
Prior to this
interview the level of Lead in her
blood was so high that Eva had to be
transferred out of the smelter being
LEADED it as the workers put it is an
everyday fact of life in Kellogg
This is the BUNKER Hill smelter and
this area right directly behind us is a fueling plant and
that's where I normally work at.
But I'm
transferred to the Zinc plant in July for LEAD
Even at the zinc plant there's LEAD areas
area and the area I'm working in now is
the non LEAD area but we work maybe we
have another departments above us and we
get the smoke coming down on us and it's
just if you work in this place unless
you're working underground at the
concentrator to some extent everybody
works in the LEAD.
I didn't even realize
that I was LEADED until after I was
taken out of it because for some reason
for months after you're out of it
is when you feel the worst.
A new Federal Rule
will limit worker exposure to lead.
But women
at Bunker Hill suffer other
indignities besides lead poisoning the
company admits that the plant high
levels could harm a pregnant woman.
Their
solution - sterilization.
You have to be
either surgically sterilized or are unable
to bear children to work in a LEAD area
I mean this is a company decision and
I don't think there's been any federal
decision on this but this has been a
company decision after they found out
some LEAD Facts and this is that they just
will not allow women that can bear
children inside the lead area and I'm
still upset about that I think it should
be my decision you know it shouldn't be
that you may say well you cannot work
there if you're not surgically
sterilized or you know we have we have to
bring in a slip from the doctor saying
we are surgically unable to bear
children.
This is the only place
I can make any money in
this valley I have a high school
education if I go to waiting tables I'm
not going to make nearly the money have
nearly the benefits that I do now.
I have no idea of women's lib I would like to
see Bunker Hill become a better place
for women to work and more women being
hired there.
I think they should have a fair
chance to at least try it.
Lead poising can cause
reproductive problems but it affects
both men and women.
A retired smelter worker
thinks the company should clean up the
plant not clear out the women.
The company transferred them
all out because they supposedly got
scared of the big rumor that if they
become pregnant it would affect the
offspring.
And they transfer them
just bang to the mines Zinc plant or
wherever the regardless of seniority
regardless of anything else
well some of us that were on the safety
committee and working in
the union - hazardous for
women are certainly hazardous for men
also.
And information has been coming to
us is showing that this is a fact.
for instance this article in Science
News on how it affects the fertility
of men.
Other companies have policy
similar to Bunker Hills.
Five West Virginia
women recently had themselves sterilized
in order to keep their jobs.
Many of the mine tailings were dumped directly
into the Coeur d'Alene River and its tributaries,
which became polluted with high levels of
sulfur dioxide, lead, and other metals.
In 1973 a stack cleaner accident damaged how
the smelter cleaned contaminants from the
smoke stack.
Bunker Hill Mining Company's management decided
to continue operations even though the stack
spewed toxic lead, cadmium and zinc into the
air around the smelter.
Winds carried the contaminants across the
valley for miles.
By 1974 the Idaho Department of Environmental
Quality tested blood lead levels in local
children to find the highest lead contamination
ever recorded, anywhere in the world.
Approximately 26% of the two-year-olds in
the region had dangerously high levels of
lead in their blood, which had long-term negative
consequences for their health, especially
intellectual functioning and achievement.
Once poisoned the effects are not reversible,
only further contamination can be prevented.
Bunker Hill Mine closed in 1982 and by 1983,
the Bunker Hill smelter was added to the National
Priorities List as a Superfund site by the
United States Environmental Protection Agency.
As of 2007, the EPA had spent $200 million
attempting to remediate the site, much of
which was spent removing contaminated topsoil
from residential areas.
The state of Idaho had also spent funds since
the early 1980s on cleanup.
While there were measurable improvements in
environmental conditions, a vast amount of
cleanup and restoration was still required.
I was hired in 2007 as a consultant for TerraGraphics
Environmental Engineering, Inc., of Moscow,
Idaho who began providing the service of contaminated
site cleanup for the Idaho DEQ and EPA in
1983.
They were there from the start of cleanup
efforts.
With a main office in Kellogg, TerraGraphics
had identified contaminated sites, developed
remediation protocols, and made measurable
differences in threat exposure to residents
of the region.
I assisted the company's efforts by managing
their geospatial analysis record keeping and
mapping, database interactions, environmental
science connectivity between engineers and
field staff, and reporting protocols to the
Idaho DEQ and US Environmental Protection
Agency.
I also led the effort to prepare a Hazard
Mitigation Plan for Shoshone County for the
Federal Emergency Management Agency to articulate
the costs of a natural disaster like flooding
on the remediated lands of along the Coeur
d'Alene River valley.
Potential costs of the mining disaster would
last for centuries.
The water in rivers turned opaque gray and
brown, earning this stream the nickname
"Lead Creek."
An estimated 100 million tons of arsenic,
cadmium, and zinc were released into the air,
along with 30,000 tons of lead.
As of 2015, about $865 million of cleanup
costs had been spent, but the end is not yet
in sight.
This is a huge Idaho example of a negative
externality.
It reaches far beyond the cleanup costs mentioned
here, it captured the health and safety of
people including the women who were surgically
sterilized and the children who experience
loss of appetite, abdominal pain, vomiting,
weight loss, constipation, anemia, kidney
failure, irritability, lethargy, learning
disabilities, and behavioral problems.
Slow development of normal childhood behaviors,
such as talking and use of words, and permanent
intellectual disability were commonly seen
and documented.
[Music]
Bunker Hill Mining operations make an obvious
example of a negative externality, but we
need to be able to identify and quantify lesser
causes and also positive externalities we
encounter.
A first reaction might be to conclude no pollution
is the best answer!
But really, not many of us are ready to give
up our polluting ways like driving a gas powered
car or turning on the natural gas heater at
home.
Yup, those are polluters and we really do
not want to give up our personal pollution
contributions.
We are economists so we will work out the
numbers on this topic to figure out how to
best manage this balance.
A few details are needed for us to really
get into these discussions about externalities.
First, they are called spill-over effects
by some because their impacts are not anticipated
by some market participants and because they
become the ones left holding the bag.
Or in this case, the ones who end up paying
for the costs of the negative things happening
from somebody else's production and consumption.
A pivotal point to remember is that externalities
are always something happening to someone
who is outside the transaction.
The logger is paid a wage to perform logging
duties while that logger accepts risks associated
with the occupation, like debris falling from
the harvested tree, or logs shifting in the
log deck as the logger is walking over.
If the logger is injured while on the job,
that person is not experiencing a
negative externality.
The logger and the operator are both parties
engaged in the transaction.
Employees often accept occupational risks
and are compensated for those risks.
Worker's Compensation insurance fills the
void to cover the medical costs of on the
job injuries, not negative externalities.
If we can anticipate negative externalities
of our actions, it is possible to structure
cost and price exchanges to cover those unanticipated
outcomes.
It is not too difficult to anticipate water
pollution happening because of a processing
activity that makes a good for a customer.
If you can anticipate the pollution, you can
predict the costs of remediating it to incorporate
those costs into the price of the product.
Failure to account for these events leads
to a market failure and the burden of your
activities is shifted to someone outside the
transaction.
Generally, your lawyer will be involved soon
enough to assist you in your after-the-fact
remediation efforts.
That will cost more than pre-event planning
and prevention.
I have been focused on negative externalities
so far, but positive externalities are also
seen.
It is the beekeeper who keeps bees to make
honey while the tree orchard next door gets
free pollination, it is the first aid training
workers at Clearwater Paper receive who then
saves the life of another fisherman while
on the Salmon River.
Taking this closer to home, your increased
education can lead to broader society benefits
in the form of greater economic productivity,
a lower unemployment rate, greater household
mobility and higher rates of political participation.
Yup, you and me are involved in this educational
transaction, but the positive externality
benefits are the rest of the country, even
the rest of the world.
I am holding up my end of this bargain, now
its your turn.
You made it this far, so there is no turning
back.
[Music]
An externality is a benefit or cost that affects
someone who is not directly involved in the
production or consumption of a good or service.
In the case of air pollution, there is a negative
externality because people with asthma, for
example, may bear a cost even though they
were not involved in the buying or selling
of the electricity generation of which caused
the pollution.
Medical research is an example of a positive
externality because people who are not directly
involved in producing it or paying for it
can benefit.
We like our electricity, right?
Of course we do: you are using it right now
to watch this video.
We are the buyers of it and there are sellers
of electricity making a living to produce
this scarce resource to people and businesses
who want it.
We are studying economics so we could make
Supply and Demand curves to diagram it, but
for now I want you to think in terms of marginal
costs of making more electricity and our marginal
benefits from consuming more.
Electricity production is big business.
From coal burning plants making it with its
high carbon dioxide emissions and acid rain
pollution, to hydroelectric dams, that blocks
migrating salmon from their spawning grounds.
We can consider solar, wind, nuclear and even
biomass electricity generation options to
realize each method carries its own private
and social cost burdens.
Because utilities do not bear the cost of
acid rain, they produce electricity beyond
the economically efficient level.
Supply curve S1 represents just the marginal
private cost that the utility has to pay.
Supply curve S2 represents the marginal social
cost, which includes the costs to those affected
by acid rain.
Again, we are shifting the supply curve UP,
like we did for taxes.
Recognize right away how the efficient quantity
as decreased while the efficient price is
higher than the market that did not consider
the marginal social cost.
If the supply curve were S2 rather than S1,
market equilibrium would occur at price P-Efficient
and quantity Q-Efficient, the economically
efficient level of output.
But, when the supply curve is S1, the market
equilibrium occurs at price P-Market and quantity
Q-Market where there is a deadweight loss
equal to the area of the yellow triangle.
Because of the deadweight loss, this equilibrium
is not efficient.
A competitive market achieves economic efficiency
by maximizing the sum of consumer and producer
surpluses.
But that result holds only if there are no
externalities in production or consumption.
An externality causes a difference between
the private cost of production and the social
cost, or the private benefit from consumption
and the social benefit.
The private cost is the cost borne by the
producer of a good or service.
The social cost is the total cost of producing
a good or service, including both the private
cost and any external cost.
The private benefit is the benefit received
by the consumer of a good or service.
The social benefit is the total benefit from
consuming a good or service, including both
the private benefit and any external benefit.
When there is a negative externality in the
production of a good or service, too much
of the good or service will be produced at
market equilibrium.
When there is a positive externality in consuming
a good or service, too little of the good
or service will be produced at market equilibrium.
Let's bring this back to you, a student in
this class.
People who do not consume college educations
can still benefit from it.
As a result, the marginal social benefit from
a college education is greater than the marginal
private benefit to college students.
Because only the marginal private benefit
is represented in the market demand curve
D1, the quantity of college educations produced,
Q-Market, is too low.
If the market demand curve were D2 instead
of D1, the level of college educations produced
would be Q-Efficient, which is the efficient
level.
At the market equilibrium of Q-Market, there
is a deadweight loss equal to the area of
the yellow triangle.
You might think of this Deadweight Loss as
a measurement of the benefits from the education
not received.
We can lump these situations into the category
of market failures.
It does not matter if it is a negative or
positive externality.
If there are externalities the market equilibrium
will not accurately account for these cases.
The bigger the externality, the bigger the
failure.
Think of Bunker Hill and the largest Superfund
Site ever experienced in the country.
In the snows of North Dakota they were
digging in for the long haul this camp
is the largest gathering of Native
Americans in living memory they had come
here to fight a pipeline which they say
desecrated sacred sites and threatened
tribal waters the three billion pound
pipeline is almost complete
apart from a short section under the
Missouri energy transfer Partners insist
its project is safe and legal now though
the US Army has decided not to grant
permission for that final stretch seeing
alternate routes should be explored in
recent weeks that have been bloody
clashes between protesters and the
authorities supporters of the pipeline
fret that such violence may have helped
opponents when their argument
president-elect Donald Trump is in favor
of the project and Republicans here say
the Army's decision is a chilling signal
for the future of us infrastructure but
the tribes here now feel that months of
struggle has paid off and the local
Standing Rock Sioux people have praised
the Obama administration for what they
call a courageous and historic decision
James Cook BBC news.
Imperfect administration of property rights
resides at the core of externality problems.
I am applying the term property right beyond
just the idea of an acre of land owned by
someone to encompass prevention of air pollution
- the air we all breathe.
It includes potential dumping of contaminants
from an oil pipeline into a river system running
through Standing Rock Sioux Reservation.
The protesters in North Dakota did not state
it this way, but their position has been to
force the US Army Corps of Engineers and Energy
Transfer Partners to internalize the negative
effects of the potential externalities potentially
borne by the Sioux Tribe, a group who is not
part of the transaction.
Deal with it before it makes nonrepairable
damages.
[Music]
Although government intervention may increase
economic efficiency in markets where externalities
are present, it is possible for people to
find private solutions to the problem of externalities.
Ronald Coase made this argument in a 1960
article.
To understand Coase's argument, it is important
to understand that completely eliminating
an externality is usually not economically
efficient.
If the reduction of sulfur dioxide emissions
is at 7.0 million tons per year, the marginal
benefit of $250 per ton is greater than the
marginal cost of $175 per ton.
Further reductions in emissions will increase
the net benefit to society.
If the reduction of sulfur dioxide emissions
is at 10.0 million tons, the marginal cost
of $225 per ton is greater than the marginal
benefit of $150 per ton.
A reduction in sulfur dioxide emissions will
increase the net benefit to society.
Only when the reduction is at 8.5 million
tons is the marginal benefit equal to the
marginal cost.
This level is the economically efficient level
of pollution reduction.
Increasing the reduction in sulfur dioxide
emissions from 7.0 million tons to 8.5 million
tons results in total benefits equal to the
sum of the areas of A and B under the marginal
benefit curve.
The total cost of this reduction in pollution
is equal to the area of B under the marginal
cost curve.
The total benefits are greater than the total
costs by an amount equal to the area of A.
Because the total benefits from reducing pollution
are greater than the total costs, it is possible
for those receiving the benefits to arrive
at a private agreement with polluters to pay
them to reduce pollution.
This delivers us into the global topic of
climate change and carbon sequestration.
Sequestration efforts involve benefits to
everyone in the world and logically would
include payments for the efforts from everyone
in the world.
That is a double-tough proposal because collecting
payment from everyone in the world carries
a super high transaction cost.
Now you know why attempts to address this
issue has anchored on global agreements.
There are frequently practical difficulties
in the way of a private solution to the problem
of externalities.
For example, if many people suffer from the
negative effects of pollution, bringing all
the victims together with all the producers
of the pollution to negotiate an agreement
often fails due to high transactions costs.
Transaction costs are the costs in time and
other resources that parties incur in the
process of agreeing to and carrying out an
exchange of goods and services.
Ronald Coase pointed out that the amount of
pollution reduction will be the same whether
polluters or the victims of pollution are
legally liable for damages.
Bargaining between the parties will result
in the same reduction in pollution, where
the marginal benefit of the last unit of reduction
is equal to the marginal cost.
Remember, when we discuss externalities we
focus on possible effects felt by parties
not part of the transaction.
The logger who accepted risks of logging when
negotiating compensation is not facing potential
externalities.
The farmer owning the stream and associated
property rights to the stream when negotiating
with the paper mill will be able to settle
an agreement about pollution into the stream.
A poor negotiation may be entered, but it
would be a failed negotiation, not an externality.
My family is a big consumer of raw honey;
amber and buckwheat are our favorites.
We buy about 6 gallons a year to add to our
chai, breakfast oatmeal, and to a teaspoon
of raw garlic each morning.
We made it a point to get to know local bee
keepers located in Lewiston and Moscow.
They travel the western states to deliver
their hives to paying farmers to pollinate
apple orchards, cherries, plums, almonds,
melons, raspberries and so much more.
The growers get their crops pollinated while
the Bee Keepers make their honey.
Growers pay the bee keepers to deliver their
hives on a set schedule coordinated with the
seasons.
It makes their crops more predictable.
The Bee Keepers migrate the hives to attend
to other locations to follow the bloom.
It makes honey harvests consistently productive.
There are loads of costs and benefits for
each participant of the transaction.
Hah, notice that?
Where once bees were a positive externality
for the growers, and perfectly timed blooms
were a positive externality to the Bee Keeper,
the Coase Theorem articulated how both could
benefit by making the event an integrated
transaction that internalizes the externalities.
What a great solution!
[Music]
Recently, we talked about the deadweight loss
because of a market that operates off-balance
of equilibrium.
The bigger the deadweight loss, the bigger
participant's consumption of surpluses in
that market.
Externalities can be measured the same way.
In this case, the deadweight loss is measured
by calculating how transactions would have
efficiently been measured if the parties excluded
from the transaction had actually been incorporated
into it.
A new optimal level of consumption is identified
with a new price level.
The shift in the Supply curve identifies where
that deadweight loss is found.
Because utilities do not bear the cost of
acid rain, they produce electricity beyond
the economically efficient level.
If the government imposes a tax equal to the
cost of acid rain, the utilities
will internalize the externality.
As a consequence, the supply curve will shift
up, from S1 to S2.
The market equilibrium quantity changes from
QMarket, where an inefficiently high level
of electricity is produced, to Q-Efficient,
the economically efficient equilibrium quantity.
The price of electricity will rise from P-Market:
which does not include the cost of acid rain
- to P-Efficient - which does include the
cost.
Consumers pay the price P-Efficient, while
producers receive the price P, which is equal
to P-Efficient minus the amount of the tax.
We know that rational people respond to taxes,
regulations, and incentives that influence
their decisions.
Negative externalities catch the attention
of people instigating the need to correct
a wrong - that is penalizing folks who were
not part of the transaction.
But what about a positive externality?
Can those be taxed into existence?
The reverse of a tax is an incentive; a subsidy.
We have heard the benefits of solar and wind
energy and how these forms of power generation
do not create carbon dioxide emissions, create
acid rain, or lead to global climate change.
So, why not subsidize creators of positive
externalities?
I introduce you to Bill Camp, living off the
grid.
When you're is plugged in as this you
think the electricity bill would go
through the roof but this homeowner
never pays an electric bill ever.
That's because Bill Camp has his
very own power supply a system of solar
panels that keeps his home located just
outside Ottawa Canada running just like
yours and mine.
it's called living off the grid yep that
means Bill Camp doesn't rely on
electricity from any utility company to
power his home he's completely
independent.
Now when you hear the words
off-gridder what's the first thing that
comes to mind?
Betting you didn't picture
this.
I gotta be honest, I honestly thought I
pictured a guy out in the woods beard
like that trying a raccoon over Bunsen
burner.
Bill an energy consultant and
best-selling author of the renewable
energy handbook and his wife Lorraine
are one of an estimated 180,000 families
living in off-grid homes in North
America today.
So this is gonna be my
first taste of solar brewed solar brewed capichino.
Bills journey began
on the grid here Lorraine wanted to move
but they found out it would cost a small
fortune to bring electric lines in so
they decided instead to invest that
money into building a new home off the
grid
well a lot of people thought that we
were just plain crazy
Lorraine was very supportive her
question was you know can I still run my
hair dryer and I said absolutely I
guarantee that that was 20 years ago and
they've never looked back.
Two large
rotating solar arrays track the Sun
every 90 seconds each array generating
over a thousand watts of energy enough
to run a large appliance how do you go
from the Sun billions of miles away
how does that thing run your hair dryer
in the morning?
okay
well it's it's really very simple the
sunlight comes in and hits these
photovoltaic panels these are like great
big integrated circuits on steroids the
sunlight charges of bank of batteries in
Bill's basement, feeds into an inverter a
device that converts the energy into
normal household power then flows
through the home and then into your
electrical devices the hairdryer.
Long
after the Sun Goes Down the charge
batteries keep the lights on and
anything else bill needs well into the
night on a cloudy day of 1500 watt
wind turbine picks up the slack and in
case of Armageddon or a spell of grey
skies and no wind a backup half
bio-diesel half diesel generator kicks in
to charge up the batteries would be
pretty tough to lose power here
oh and did I mention this living off the
grid is pretty low-maintenance all Bill
has to do is pour distilled water into
the battery's about two to three times a
year
my uncle gets a colonoscopy more often
than you check your batteries.
Bill and Marine Camp say
they're getting off the grid had its
upfront cost about forty thousand
dollars worth for other homeowners the
cost really depends on how much
electricity you think you need to live
comfortably it's a small price to pay
for a life unplugged in other words the
good life in Ontario Canada, Patty Kim, Energy
Now.
That is an incredible example Bill and Marine
Camp deployed to capture off-grid energy creation
while also eliminating negative externalities
by using electricity generated at coal burning
plants, natural gas burning furnaces, hydroelectric
power dams, or other heavily loaded negative
externality sources.
Let's keep our attention focused on this type
of a solution for other negative externality
transactions we get involved with.
People who do not consume college educations
can benefit from them.
As a result, the social benefit from a college
education is greater than the private benefit
to college students.
If the government pays a subsidy equal to
the external benefit, students will internalize
the externality.
The subsidy will cause the demand curve to
shift up, from D1 to D2.
As a result, the market equilibrium quantity
will shift from Q-Market, where an inefficiently
low level of college educations are supplied,
to Q-Efficient, the economically efficient
equilibrium quantity.
Producers receive the price P-Efficient, while
consumers pay the price P, which is equal
to P-Efficient minus the amount of the subsidy.
When private solutions to externalities are
not feasible, government can intervene to
increase economic efficiency.
A.C.
Pigou argued that to deal with a negative
externality in production, the government
should impose a tax equal to the cost of the
externality.
Pigou argued that the government should deal
with a positive externality in consumption
by giving consumers a subsidy equal to the
value of the externality.
Pigovian taxes and subsidies are government
taxes and subsidies intended to bring about
an efficient level of output in the presence
of externalities.
These taxes and subsidies internalize the
externalities.
In Bill and Marine Camp's situation it would
have involved providing them a subsidy equal
to the cost of abating global climate change
caused by other power source emissions plus
environmental cleanup for acid rain and restoring
anadromous fisheries to historic levels.
Of course, it would be put in terms of the
use of these two consumers of energy, so their
share of the subsidy would be pretty small,
but then it works in the right direction:
internalizing the externality.
Smoking cigarettes and drinking cases of soda
are personal decisions, right?
Why should anyone have the power to limit
what I consume?
Well, it turns out that second-hand smoke,
a mixture of smoke from the burning end of
a cigarette, and the smoke exhaled from the
lungs of smokers, has negative externalities
for the non-smoking third parties of the transactions.
Sodas are sugar-sweetened high calorie carbonated
beverages that when consumed lead to obesity,
weight related diseases, dental decay, hypokalemia,
and bone density loss.
With revised healthcare regulations in America
as of 2010, we as a country are in shared
health care cohorts.
That means that your decision to drink sodas
and smoke cigarettes will cost you more for
healthcare while also costing me more.
We share the cost-load of our unhealthy decisions.
I am not a part of your transaction to buy
those smokes or to drink those sodas, but
I am the one who bears the negative externality.
Our supply and demand curve equilibrium reveals
where the solidarity price and quantity are
located, but a soda tax would reduce demand
to indicate a new equilibrium quantity and
taxed price.
The reality check is to ask, what happens
to the soda tax monies?
That is a clincher question to explore!
Just because a tax is levied, it does not
mean the tax revenue will be spent to cover
the costs of the negative externality.
All too often, those tax dollars are diverted
to other general fund purposes.
Just reducing quantity demanded is not the
same as capturing the costs to be applied
to the negative externality event.
A command-and-control approach to pollution
is a policy that involves the government imposing
quantitative limits on the amount of pollution
firms are allowed to emit or requiring firms
to install specific pollution control devices.
This was the initial approach taken in Kellogg,
Idaho, with the smoke stack filters located
in the bag-house.
When it caught fire and released pollutants
into the air it violated the command-and-control
directives.
But when the mining company continued operations
without filtration, tons of pollutants were
released to the detriment of everyone in the
silver valley, then and now.
Thinking about how firms implement control
measures for things like pollution opens an
interesting complication.
For instance, Ford motor company designed
their truck fleet in a way that recaptured
much of the exhaust while still contained
in the gas engine.
By re-combusting it, they can pass it through
a low-cost scrubbing device releasing low
pollution level emissions out the exhaust
pipe.
At the same time, General Motors did not use
the same design solutions initially.
Their cost of pollution reduction is greater
than Ford's costs to achieve a target level
of acceptable pollution.
The GM catalytic converter redesign to reduce
pollution would be costlier, to achieve an
acceptable level of pollution.
If on the other hand, politicians and bureaucrats
mandate that all producers reduce their pollution
emissions by a certain percent, like a 10%
reduction, then Ford's ultimate target will
be lower than GM's ultimate target.
The lower producers make their emission reductions,
the costlier it becomes.
Ford would be penalized under such a scenario.
Each situation has complications and there
really are no perfect penalties or subsidies.
Shifting our focus from automobiles to power
generation.
Instead of a command-and-control approach,
Congress decided to use a cap-and-trade system
of tradable emission allowances to deal with
the problem of acid rain.
The objective was to reduce emissions of sulfur
dioxide to 8.5 million tons annually by 2010.
The federal government gave electric utilities,
the major sources of sulfur dioxide emissions
that cause acid rain, allowances equal to
the total amount of tradable emissions.
The utilities were then free to buy and sell
the allowances.
Utilities that could reduce their emissions
at a low cost did so and sold some or all
of their pollution allowances to utilities
that could reduce their emissions only at
a relatively high cost.
The program was successful not only in reducing
emissions but in doing so at a much lower
cost than had been previously expected.
Despite its success, the sulfur dioxide cap-and-trade
system effectively ended in 2013.
Research showed that illnesses caused by sulfur
dioxide emissions were greater than previously
had been thought.
Although President George W.
Bush proposed legislation to lower the cap
on sulfur dioxide emissions, Congress did
not pass the legislation.
As a result, the Environmental Protection
Agency reverted to selling limits on sulfur
dioxide emissions at the state or power plant
level.
They went back to the command-and-control
pollution management scenario.
Some environmentalists have labeled tradable
emissions allowances as licenses to pollute.
But this criticism ignores a central economics
lesson: resources are scarce and trade-offs
exist.
Resources spent reducing pollution are not
available for any other use.
Because reducing acid rain using allowances
cost utilities $870 million, rather than $7.4
billion as originally estimated, society saved
more than $6.5 billion per year.
Solutions are complicated to really understand
and apply, but it seems there are plenty of
Positive Analysis economists out here to find
these solutions and deploy their benefits.
It is distressing to realize that government
solutions that do not generate a tax revenue
are often passed over for other approaches.
Part of this trade-off comes from what Ronald
Coase articulated in the Coase Theorem: if
transaction costs are low, private bargaining
will result in an efficient solution to the
problem of externalities.
It can be helpful and beneficial to solve
complicated problems.
[Music]
If I want a pair of jeans I will go to a clothing
store, find a pair that suits me and I will
pay for them.
They become my jeans and no one else gets
to use them.
They are my private good and my use of them
excludes others from using them.
My jeans are both rival and excludable.
These two terms can be applied in four categories
of all goods and services we consume.
Goods and services can be divided into four
categories on the basis of whether people
can be excluded from consuming them and whether
they are rival in consumption.
A good or service is rival in consumption
if one person consuming a unit of a good means
that another person cannot consume that unit.
Reason these out in your head.
Think of the shoes you bought and know that
when you bought them they became your shoes
and thereby you excluded everyone else from
buying them, while also establishing that
no one else gets to wear them.
Excludable but also rival.
Think of that salmon you caught on the Clearwater
River, you had to compete for that fish against
the other ten thousand fishermen near Dworshak
Reservoir, but when you caught that legal
fish and it became your rival salmon.
Your fish is nonexcludable while it is rival.
When you paid for your monthly subscription
for DSL internet it became your excludable
connection to the web, but you getting online
through it did not exclude anyone else from
getting online with their own connection.
It is Excludable and nonrival.
When we enjoy national defense, the court
system, or even a great view of Mount Rainier
our enjoyment of the resource does not exclude
anyone else from its enjoyment and we cannot
exclude them from it.
It is nonexcludable and nonrival at the same
time.
What is it?
No really, where does it land on the table
we just looked at?
It is super simple when I talk you through
them so here you are give me the category
the sun fits into.
Well, OK, the sun is a public good meaning
it is nonexcludable and nonrival.
Efficient markets happen in the production
and consumption of private goods.
Freedom of choice to make what I am good at
making and to consume what I want.
It gets loads more difficult when we consider
things like public goods.
Do I really need to pay my taxes?
That person wants to freeload on benefits
from police protection, fire protection, national
defense and our legal system.
Some people want to take those trees from
the National Forest without paying for them!
They belong to all of us right?
Why should I have to pay for them?
Another freeloader of the Common Resources
available to everyone.
This situation, the Common Resource issue,
led to the Tragedy of the Commons known from
Great Britain where many farmers shared common
pasture lands.
Overgrazing was witnessed as more cattle were
not penalized.
Ultimately, the pasture lands were over grazed
and recovery took several years to recapture
sustainable production levels.
Think about how, in current times, we manage
this scenario in respect to deer and elk hunting
in Idaho, or salmon and steelhead fishing
in the Salmon and Clearwater rivers.
First, recognize these as Common Resources,
Nonexcludable and Rival.
Why is over harvesting a potential problem
and how do we manage these resources?
We have an Idaho State Fish and Game Department
and the US Fish & Wildlife Service dedicated
to these resources, but as consumers of hunting
and fishing regulations we are adhering to
rules to avoid that Tragedy of the Commons.
The market demand curve for private goods
is determined by adding horizontally the quantity
of the good demanded at each price by each
consumer.
For instance, in panel (a), Jill demands 2
hamburgers when the price is $4.00, and in
panel (b), Joe demands 4 hamburgers when the
price is $4.00.
So, a quantity of 6 hamburgers and a price
of $4.00 is a point on the market demand curve
in panel (c).
To find the demand curve for a public good,
we add up the price at which each consumer
is willing to purchase each quantity of the
good.
In panel (a), Jill is willing to pay $8 per
hour for a security guard to provide 10 hours
of protection.
In panel (b), Joe is willing to pay $10 for
that same protection.
Therefore, in panel (c), the price of $18
per hour and the quantity of 10 hours will
be a point on the demand curve for security
guard services.
Recognize the differences you just saw.
In Figure 5.8 we added the quantities together
at the price point of $4.00 to see Jill's
2 burgers and Joe's 4 burgers totaling 6 at
a price point of $4.00.
That $4 remained the price point where we
found the additive quantities.
In Figure 5.9 we looked at Public goods to
recognize the quantity was held constant but
costs were summed.
Jill paid $8.00 for 10 hours of protection
while Joe paid $10 for the same service.
If they can combine their needs into one security
guard, and 10 hours of protection can be provided
at the same time, for the same area, then
the guard would make $18 an hour.
This really fits nicely to explain how countries
provide national security and how Counties
operate Sheriff Departments.
The optimal quantity of a public good is produced
where the sum of consumer surplus and producer
surplus is maximized, which occurs where the
demand curve intersects the supply curve.
In this case, the optimal quantity of security
guard services is 15 hours, at a price of
$9 per hour.
For a public good otherwise known as a common
resource like firewood from a forest, the
efficient use level, Q-Efficient, is found
at the intersection of the demand curve, which
represents the marginal benefit received by
consumers, and S2, which represents the marginal
cost of cutting the wood.
Because each individual tree cutter ignores
the external cost, the equilibrium quantity
of firewood cut is Q-Actual, which is greater
than the efficient quantity.
At the actual equilibrium level of output,
there is a deadweight loss, as shown by the
yellow triangle.
It seems I keep taking you back to the topic
of property rights, broadly determined to
include what is permitted as actions and what
is recognized as ownership.
The Tragedy of the Commons collapsed because
of the lack of ownership of the land and policies
that would protect the resource.
Look into places where resource management
is managed well, managed without salmon over
harvest and without deer or elk overharvesting.
Look at Tribal wildlife management techniques.
Reservations are a shadow of the area they
were in time immemorial.
The geographical area is limited and well
defined.
Tribal regulations establish social norms,
commonly accepted practices, and regulations.
Overharvest is not generally seen and reinvestment
to the resource is made.
At the tribal level this works without the
imposition of taxes, quotas, or tradable permits.
Those traits are reserved for many dispersed
consumers spread over vast jurisdictions where
the resource is scarce in respect to the consumption
demands on them.
Wildlife management in Africa has gone through
some cascading declines of highly valued wildlife.
European and Asian trophy hunters could legally
enter the country, to participate in the hunt
of a lifetime.
Shoot a lion, elephant, rhino, or about any
other trophy for the sport of it.
Spending $10,000 for this hunt of a lifetime
was big excitement for the hunter, but a fortune
for the guides and their villages.
This led to overharvesting of areas, regions,
and ultimately some of the trophy species.
A few African countries applied an economics
lesson to manage their scarce resources: they
converted the common resource to a private
good.
Instantly, the game became valuable to the
landowner to maintain at harvestable levels.
Because wild animals were included as part
of Property Rights, landowners captured the
value of their resource.
Now the landowners have incentive to support
the species that brings them an income.
It is most interesting to me, that in Texas,
landowners have owned the wildlife on their
properties for over a century and thereby
have incentive to manage the wildlife populations
as a resource protected by property rights,
at least in the way we economists embrace
the term.
As you think about all the topics we have
discussed in this chapter, I want you to remember
that Eva Sullivan from the 1979 Bunker Hill
video in Kellogg, Idaho, was not the negative
externality victim.
She was a voluntary part of the transaction,
established when she accepted the job for
the mining company and the pay they gave her.
She accepted the terms of employment that
included surgical sterilization.
It sounds to us as an absurd exchange of considerations
Eva and the Bunker Hill Mine company made,
but that made their agreement.
The negative externality victims are the children
of the Silver Valley with lead poising and
the developmental hindrances they live with.
Sometimes, Normative and Positive analysis
critiques come to the same conclusions.
[Music]
