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By way of review:
If an unregulated activity produces a negative externality, one can infer that:
Today, we'll cover three additional topics from Chapter 11:
Coase Theorem and Environmental Regulation The Coase Theorem, named after a guy named Coase (pronounced cose, rhymes with hose) claims that individuals should be able to figure out ways of making private and social costs and benefits coincide through negotiation or lawsuits. For instance, an individual who is adversely affected by pollution should be able to threaten to sue the polluter. The threat of paying the cost should motivate the polluter to cut back to the efficient level. Sometimes this works. But sometimes it doesn't, for obvious reasons. It is often hard to prove cause and effect. Lawsuits are expensive, etc. In general, the "information costs" and the "transactions costs" are very high. As a result, we have rules and regulations that are designed to address the problem--and an Environmental Protection Agency. We have made considerable progress in the U.S. in improving air quality and water quality. We have some of the best environmental regulations in the world. But the really big environmental problems today are GLOBAL in nature. No single nation can enforce rules that will solve the problem: e.g. global warming, depletion of ozone layer, over-fishing outside of coastal waters. Many would argue that this is why international governance and cooperation is increasingly important. Global free trade agreements actually make it harder for nations to enforce environmental rules. Example: nets that allow turtles or dolphins to escape. I can tell you a story about my own experiences with efforts to monitor the population of leatherback turtles. Optimal Pollution Environmental regulation places considerable emphasis on cost-benefit analysis. You might assume that the optimal amount of pollution is zero. Not so. A little bit of pollution may be better than the next best alternative. What if you depend on the local polluting factory for your job? Or what if a little bit of pollution only makes you cough once a week, but doubles your income? The concepts we've developed earlier in the course come into play--opportunity cost, reservation price.... Social efficiency is achieved when pollution abatement reaches the point were the marginal cost of further abatement equals the marginal benefit. Of course, when you're looking a social efficiency, much depends on how you weigh the costs imposed on some people with the benefits delivered to others. The "weights" placed on the welfare of different people depend to a very large extent on their political power and their ability to stick up for themselves in other ways. Poor people tend to suffer more from pollution than rich people do. They are more likely to live in neighborhoods with hazardous waste, poor air quality, and also with forms of social pollution such as crime. Poor people go to public beaches. Rich people fly to Bermuda or St. John's. How do you measure the marginal benefit of health to people? Economists use two kinds of measures; the amount of money someone could earn if they were healthy (the earnings losses incurred as a result of the disease) or how much an individual would be willing to pay in order to avoid the health problem (also known as a "willingness to pay" principle). Both measures of marginal benefit tend to value the health and well-being of well-educated and affluent individuals more than than of poorly educated or low-income individuals. We will pursue another example of cost-benefit reasoning in a later chapter on public policy, where we will look at the use of "pollution permits." Tragedy of the Commons Term comes from criticisms of common grazing rights--which can lead to over-grazing. Because each individual who has access to the commons gets a benefit from it, but doesn't pay the cost. This is especially true if access to the commons is not regulated by any kind of rules, or collective governance, and if people lack information about the effects of their actions on others. A better example of the Tragedy of the Commons, in my opinion, is over-fishing. Countries can solve this problem by regulating fishing in their coastal waters (e.g. successful regulation of swordfishing in coastal waters of New England, note link to A Perfect Storm). But outside coastal waters no county has the right to regulate. For instance, no international regulation of whaling. We can do an experiment in class to illustrate. Let the paperclips on the overhead projector represent whales. These whales are worth 25 cents apiece in the first ten seconds. They are worth 50 cents a piece in the second ten seconds. Let the whalers begin. They must capture only 1 whale at a time using only one hand. What happens? Why is this a Prisoner's Dilemma? There's further discussion of these issues in The Invisible Heart. All but one of the following factors would lessen the ability of the Coase theorem to solve an externality. Which one?
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