1

Announcements: Tuesday

Breakout sessions: midterm review Next week: Dupont case You can see the correct Quiz 1

answers on Oncourse. You can also see your raw score (though even a “1” is a pass).

Midterm—32 questions, multiple choice, covers up through the Dupont case.

Extra office hours: Monday 2-4pm

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Announcements: Thursday

You can see the correct Quiz 1 answers on Oncourse. You can also see your raw score (though even a “1” is a pass).

Breakout sessions next week: Midterm review

Midterm—32 questions, multiple choice, covers up through the Dupont case.

Extra office hours: Monday 2-4pm

3

G302, Week 6

Externalities

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Why does Dow Chemical care about the government?

•Weedkiller ban in California and Washington states

•Groundwater contamination in San Francisco Bay

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What you will learn today

•How different solutions to externalities affect businesses, and which they should lobby for

•What’s been happening to the environment in the USA over the past 50 years

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Problem: A $2/unit Negative Externality

Readings: Figure 13.5

P

Quantity of benzene

109

8

competitiveefficient

supply

supply+$2/unit

demand

DWL

QQ*

Too much benzene isproduced

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Example with Two Companies

Currently, Firm 1 generates 15 pounds of air pollution per day and Firm 2 generates 25 pounds.

The harm to neighbors is 2 dollars per pound.

The benefit to the firms is the profit from the benzene and the savings from not having to pay for pollution control equipment

Solutions: 1. Ban pollution2. Each firm pollutes 10 pounds3. Each firm cuts by 10 pounds4. Each firm cuts by half

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Look at marginal cost and benefit

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2

10

2

10 15 20 25

$/pound

pounds ofpollution/day pounds of

pollution/day

$/pound

MB

MCMC

MB

FIRM 1 FIRM 2

0 0

The shaded area is ____________social surplus

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What happens if Firm 2 is completely forbidden to pollute, instead of being allowed to pollute 20 pounds/day?

10

2

20 25

pounds ofpollution/day

$/pound

MC

MB

FIRM 2

0

(a) Neighbors gain $40, Firm 2 loses $20 (b) Neighbors gain $100, Firm 2 loses $200 (c) Neighbors gain $20, Firm 2 loses $80 (d) Neighbors gain $40, Firm 2 loses $200 (e) Neighbors gain $40, Firm 2 loses $120

Neighbors gain 2(20)=40.Firm 2 loses that, and .5((10-2)(20)=80 besides.

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Solution 1: The Optimal Emission Standard

Firm 1 can only pollute 10 pounds instead of 15, and Firm 2 can only pollute 20 pounds instead of 25

What are possible problems with this kind of solution? Unfairness—unequal rights to pollute No incentive to find better pollution control methods Government failure– will the government really get

the numbers 10 and 20 right?

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Solution 2: Each firm has permits to pollute 15 pounds, and they can sell their permits

6

2

10

2

10 15 20 25

$/pound

pounds ofpollution/day pounds of

pollution/day

$/pound

MB

MCMC

MB

FIRM 1 FIRM 2

0 0 15

value=__________________________________

value= ____________4

.5 (2-0)(15-10)=5

.5 (4-2)(20-15)+ (2-0)(20-15) =15

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Solution 3: A Pollution Tax of $2/pound

6

2

10

2

10 15 20 25

$/pound

pounds ofpollution/day pounds of

pollution/day

$/pound

MB

TaxTax

MB

FIRM 1 FIRM 2

0 0

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Solution 4: Litigation: Allow lawsuits by the neighbors

6

2

10

2

10 15 20 25

$/pound

pounds ofpollution/day pounds of

pollution/day

$/pound

MB

damage damage

MB

FIRM 1 FIRM 2

0 0

Which is better: pollution taxes or lawsuits?

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Who Likes Each Policy?

Write on a notecard which policies Firm 1 likes and which policies Firm 2 likes bestFirm 1: Best: Tradeable permits, next: Emissions standard, next: pollution tax, next: litigation

Firm 2: Best: Emissions standard, next: Tradeable permits next: pollution tax, next: litigation1. Did the sign-in sheet get around?

2. If you answered a question, bring up anotecard for me.

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Pollution: The Long View…

How does air pollution in London in 2001 compare to

pollution in 1900? pollution in 1800? pollution in 1600?

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Air Pollution since 1600

                                                           

       

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The Environment is Getting Cleaner...

1972-1992: 98% of miles of rivers and 96% of lakes sustained or improved their quality.

Wastewater treatment had reduced release of toxic organic wastes by 99%, and toxic metals by 98%.

Net tree growth exceeds tree cutting by 37%.

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Intentional Reductions in Pollution

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Cost of Pollution Control: USA(Billions of 1986 dollars)

0

20

40

60

80

100

120

140

160

180

1975 1980 1985 1990 1995 2000

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Unintentional Pollution Reduction

Aluminum cans weigh only two-thirds as much as they did in 1990.

Disposable diapers use 50 percent less paper pulp than in 1990

The thickness of plastic grocery bags fell by 70% from 1976 to 1989

A plastic milk jug weighed 95 grams in the early 1970s; by 1990, it weighed just 60 grams