Skip to main content
Social Sci LibreTexts

12.E: Environmental Protection and Negative Externalities

  • Page ID
  • \( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \) \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)\(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\) \(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\)

    Identify the following situations as an example of a negative or a positive externality:

    1. You are a birder (bird watcher), and your neighbor has put up several birdhouses in the yard as well as planting trees and flowers that attract birds.
    2. Your neighbor paints his house a hideous color.
    3. Investments in private education raise your country’s standard of living.
    4. Trash dumped upstream flows downstream right past your home.
    5. Your roommate is a smoker, but you are a nonsmoker.

    2. Identify whether the market supply curve will shift right or left or will stay the same for the following:

    1. Firms in an industry are required to pay a fine for their emissions of carbon dioxide.
    2. Companies are sued for polluting the water in a river.
    3. Power plants in a specific city are not required to address the impact of their emissions on the quality of air.
    4. Companies that use fracking to remove oil and gas from rock are required to clean up the damage.

    3. For each of your answers to Exercise 12.2, will equilibrium price rise or fall or stay the same?


    4. The supply and demand conditions for a manufacturing firm are given in Table \(\PageIndex{1}\). The third column represents a supply curve without taking the social cost of pollution into account. The fourth column represents the supply curve when the firm is required to take the social cost of pollution into account. Identify the equilibrium before the social cost of production is included and after the social cost of production is included.

    Price Quantity Demanded Quantity Supplied without paying the cost of the pollution Quantity Supplied after paying the cost of the pollution
    $10 450 400 250
    $15 440 440 290
    $20 430 480 330
    $25 420 520 370
    $30 410 560 410

    Table \(\PageIndex{1}\)

    5. Consider two approaches to reducing emissions of CO2 into the environment from manufacturing industries in the United States. In the first approach, the U.S. government makes it a policy to use only predetermined technologies. In the second approach, the U.S. government determines which technologies are cleaner and subsidizes their use. Of the two approaches, which is the command-and-control policy?
    6. Classify the following pollution-control policies as command-and-control or market incentive based.
    1. A state emissions tax on the quantity of carbon emitted by each firm.
    2. The federal government requires domestic auto companies to improve car emissions by 2020.
    3. The EPA sets national standards for water quality.
    4. A city sells permits to firms that allow them to emit a specified quantity of pollution.
    5. The federal government pays fishermen to preserve salmon.

    7. An emissions tax on a quantity of emissions from a firm is not a command-and-control approach to reducing pollution. Why?


    8. Four firms called Elm, Maple, Oak, and Cherry, produce wooden chairs. However, they also produce a great deal of garbage (a mixture of glue, varnish, sandpaper, and wood scraps). The first row of Table \(\PageIndex{2}\) shows the total amount of garbage (in tons) currently produced by each firm. The other rows of the table show the cost of reducing garbage produced by the first five tons, the second five tons, and so on. First, calculate the cost of requiring each firm to reduce the weight of its garbage by one-fourth. Now, imagine that marketable permits are issued for the current level of garbage, but the permits will shrink the weight of allowable garbage for each firm by one-fourth. What will be the result of this alternative approach to reducing pollution?

      Elm Maple Oak Cherry
    Current production of garbage (in tons) 20 40 60 80
    Cost of reducing garbage by first five tons $5,500 $6,300 $7,200 $3,000
    Cost of reducing garbage by second five tons $6,000 $7,200 $7,500 $4,000
    Cost of reducing garbage by third five tons $6,500 $8,100 $7,800 $5,000
    Cost of reducing garbage by fouth five tons $7,000 $9,000 $8,100 $6,000
    Cost of reducing garbage by fifth five tons $0 $9,900 $8,400 $7,000

    Table \(\PageIndex{2}\)


    9. The rows in Table \(\PageIndex{3}\) show three market-oriented tools for reducing pollution. The columns of the table show three complaints about command-and-control regulation. Fill in the table by stating briefly how each market-oriented tool addresses each of the three concerns.

      Incentives to Go Beyond Flexibility about Where and How Pollution Will Be Reduced Political Process Creates Loopholes and Exceptions
    Pollution Charges      
    Marketable Permits      
    Property Rights      

    Table \(\PageIndex{3}\)

    10. Suppose a city releases 16 million gallons of raw sewage into a nearby lake. Table \(\PageIndex{4}\) shows the total costs of cleaning up the sewage to different levels, together with the total benefits of doing so. (Benefits include environmental, recreational, health, and industrial benefits.)
      Total Cost (in thousands of dollars) Total Benefits (in thousands of dollars)
    16 million gallons Current situation Current situation
    12 million gallons 50 800
    8 million gallons 150 1300
    4 million gallons 500 1650
    0 gallons 1200 1900

    Table \(\PageIndex{4}\)

    1. Using the information in Table \(\PageIndex{4}\), calculate the marginal costs and marginal benefits of reducing sewage emissions for this city. See Cost and Industry Structure if you need a refresher on how to calculate marginal costs.
    2. What is the optimal level of sewage for this city?
    3. Why not just pass a law that zero sewage can be emitted? After all, the total benefits of zero emissions exceed the total costs.

    11. The state of Colorado requires oil and gas companies who use fracking techniques to return the land to its original condition after the oil and gas extractions. Table \(\PageIndex{5}\) shows the total cost and total benefits (in dollars) of this policy.

    Land Restored (in acres) Total Cost Total Benefit
    0 $0 $0
    100 $20 $140
    200 $80 $240
    300 $160 $320
    400 $280 $380

    Table \(\PageIndex{5}\)

    1. Calculate the marginal cost and the marginal benefit at each quantity (acre) of land restored. See Cost and Industry Structure if you need a refresher on how to calculate marginal costs and benefits.
    2. If we apply marginal analysis, what is the optimal amount of land to be restored?
    12. Consider the case of global environmental problems that spill across international borders as a prisoner’s dilemma of the sort studied in Monopolistic Competition and Oligopoly. Say that there are two countries, A and B. Each country can choose whether to protect the environment, at a cost of 10, or not to protect it, at a cost of zero. If one country decides to protect the environment, there is a benefit of 16, but the benefit is divided equally between the two countries. If both countries decide to protect the environment, there is a benefit of 32, which is divided equally between the two countries.
    1. In Table \(\PageIndex{6}\), fill in the costs, benefits, and total payoffs to the countries of the following decisions. Explain why, without some international agreement, they are likely to end up with neither country acting to protect the environment.
        Country B
      Protect Not Protect
      Country A Protect    
      Not Protect    

      Table \(\PageIndex{6}\)

    13. A country called Sherwood is very heavily covered with a forest of 50,000 trees. There are proposals to clear some of Sherwood’s forest and grow corn, but obtaining this additional economic output will have an environmental cost from reducing the number of trees. Table \(\PageIndex{7}\) shows possible combinations of economic output and environmental protection.
    Combos Corn Bushels (thousands) Number of Trees (thousands)
    P 9 5
    Q 2 30
    R 7 20
    S 2 40
    T 6 10

    Table \(\PageIndex{7}\)

    1. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the number of trees, and the quantity of economic output, measured in corn, on the vertical axis.
    2. Which choices display productive efficiency? How can you tell?
    3. Which choices show allocative efficiency? How can you tell?
    4. In the choice between T and R, decide which one is better. Why?
    5. In the choice between T and S, can you say which one is better, and why?
    6. If you had to guess, which choice would you think is more likely to represent a command-and-control environmental policy and which choice is more likely to represent a market-oriented environmental policy, choice Q or S? Why?
    14. What is an externality?
    15. Give an example of a positive externality and an example of a negative externality.

    16. What is the difference between private costs and social costs?


    17. In a market without environmental regulations, will the supply curve for a firm take into account private costs, external costs, both, or neither? Explain.

    18. What is command-and-control environmental regulation?

    19. What are the three problems that economists have noted with regard to command-and-control regulation?

    20. What is a pollution charge and what incentive does it provide for a firm to take external costs into account?

    21. What is a marketable permit and what incentive does it provide for a firm to take external costs into account?


    22. What are better-defined property rights and what incentive do they provide to take external costs into account?

    23. As the extent of environmental protection expands, would you expect marginal costs of environmental protection to rise or fall? Why or why not?

    24. As the extent of environmental protection expands, would you expect the marginal benefits of environmental protection to rise or fall? Why or why not?

    25. What are the economic tradeoffs between low-income and high-income countries in international conferences on global environmental damage?

    26. What arguments do low-income countries make in international discussions of global environmental clean-up?

    27. In the tradeoff between economic output and environmental protection, what do the combinations on the protection possibility curve represent?

    28. What does a point inside the production possibility frontier represent?

    29. Suppose you want to put a dollar value on the external costs of carbon emissions from a power plant. What information or data would you obtain to measure the external [not social] cost?
    30. Would environmentalists favor command-and-control policies as a way to reduce pollution? Why or why not?

    31. Consider two ways of protecting elephants from poachers in African countries. In one approach, the government sets up enormous national parks that have sufficient habitat for elephants to thrive and forbids all local people to enter the parks or to injure either the elephants or their habitat in any way. In a second approach, the government sets up national parks and designates 10 villages around the edges of the park as official tourist centers that become places where tourists can stay and bases for guided tours inside the national park. Consider the different incentives of local villagers—who often are very poor—in each of these plans. Which plan seems more likely to help the elephant population?

    32. Will a system of marketable permits work with thousands of firms? Why or why not?

    33. Is zero pollution possible under a marketable permits system? Why or why not?


    34. Is zero pollution an optimal goal? Why or why not?

    35. From an economic perspective, is it sound policy to pursue a goal of zero pollution? Why or why not?

    36. Recycling is a relatively inexpensive solution to much of the environmental contamination from plastics, glass, and other waste materials. Is it a sound policy to make it mandatory for everybody to recycle?

    37. Can extreme levels of pollution hurt the economic development of a high-income country? Why or why not?

    38. How can high-income countries benefit from covering much of the cost of reducing pollution created by low-income countries?

    39. Technological innovations shift the production possibility curve. Look at graph you sketched for Exercise \(\PageIndex{13}\) Which types of technologies should a country promote? Should “clean” technologies be promoted over other technologies? Why or why not?

    12.E: Environmental Protection and Negative Externalities is shared under a CC BY 4.0 license and was authored, remixed, and/or curated by OpenStax via source content that was edited to conform to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.