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Economics: Government Intervention Project (Pollution)

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Tasneem Bhindarwala

on 9 December 2012

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Transcript of Economics: Government Intervention Project (Pollution)

Government Intervention:
Pollution Regulation Tasneem Bhindarwala
B Block Economics Theoretical Cases of Pollution Regulation Specific Cases of Pollution Regulation Southern California 1981-1991 Executive Order 12873 (Bill Clinton 1993): "Positions of Federal Environmental Executive and Agency Environmental Executives 2010-2014 Pollution Prevention Strategic Program Theoretical Case:
Pollution Permits Theoretical Case:
Tax Pollution Theoretical Case:
Pigovian Taxes Theoretical Case:
Make Pollution Illegal What problem is government intervention intended to solve? Opinion Why did the free market economy not solve it by itself? Private sectors are pollution the air, the water and the land without limitations causing society to pay the costs through sacrificing their health, property and livelihood. Naturally competitive market that produces too much pollution when pollution rights are not clearly defined, therefore redirection by the government is imperative
Firms are unable to produce Qb units to allow for the best possible allocation of scarce resources because Marginal Social Costs do not equal Marginal Social Benefits
It is impossible to fully stop pollution naturally because it is such an ingrained part of life (i.e. almost all forms of transportation (horses, cars, planes, buses, ships, etc.) emits pollution
Coase Theorem may not work...
1. If transaction costs are very high, it may not pay for two sides to meet
2. If firms engage in strategic bargaining behavior, an agreement may never be reached
3. If either side lacks information about costs/benefits of reducing pollution, a non-optimal outcome is more likely
Political and economic change (which is rampant i.e. Arab Spring, Middle East, change in governments in China, etc.) leads to greater pollution problems I think government intervention is necessary. The free market economy provides essential market freedoms, however it is natural for a free market to also be a very competitive one. In that type of competitive state, it is hard for individuals, businesses, etc. to put the needs of society before their own. Although desirable, the free market economy cannot efficiently reduce pollution without the help and redirection of resources by the government. Penalty for people who break the law
Businesses would have to buy machines to clean the air and water they use before discharging either back into the environment
Labor inputs would increase
Firms' costs would increase
Firms' supply curves would shift upward
Added costs in order to comply with law
Prices would increase due to higher production costs
All costs would be internalized, no negative externalities Could tax input, output or pollution itself (more likely to tax outputs - easier!)
Negative externalities would be ignored
Production would take place where marginal private costs = marginal private benefits
Internalizing pollution costs would make a lower production rate
Firms would have to pay the tax + cost of producing each unit (MPC+Tax=MSC) Give incentives to firms to reduce pollution (higher the tax, the lower the pollution)
Better for the environment
Incentive for making environmentally efficient technology
Move allocation of resources closer to social optimum
Firms pay for pollution (to government)
Internalize the externality of pollution by making it costly for firms to pollute Outcomes:
Market, dictated by supply and demand, to trade these permits will develop
Invisible Hand will ensure that market efficiently allocates the right to pollute
the firms that can reduce pollution at a high cost will be willing to pay the most for permits
the firms that reduce pollution at a low cost will prefer to sell the permits they have
Firms pay for pollution (pay to buy permit)
Internalize the externality of pollution by making it costly for firms to pollute Strict government intervention
Seriously reduced smog when state emission controls on motor vehicles was enacted
Air pollution dropped by 50% Positions intended to bolster support for recycling and procurement of recycled-content products
Set the standard that all federal office paper is to contain at least 30% post-consumer recycled content Identifies a number of opportunities for the EPA's Pollution Prevention Program to help reduce the emission of greenhouse gases and the use of hazardous materials
Use natural resources while contributing to a greener and more sustainable economy
Enhanced collaboration and coordination among federal, state, tribal and local partners in developing unified approaches to promote further environmental programs Executive Order 13423 (George W. Bush 2007): "Strengthening Federal Environmental, Energy, and Transportation Management" Set goals in areas of energy efficiency, acquisition, renewable energy, toxic reductions, recycling, renewable energy, sustainable buildings, electronics stewardship, fleets, and water conservation
Requires use of Environmental Management Systems as framework for maintaining and improving sustainable practices Pollution Prevention Act of 1990 National policy that required that pollution should be prevented or reduced at the source whenever feasible
Pertains to water, air, and land
Expected Outcomes:
Economic benefits
Businesses do not have to spend money on expensive waste management and clean up Executive Order 13514 (Barack Obama 2009): "Federal Leadership in Environmental, Energy, and Economic Performance" Policies of the US that federal agencies shall increase energy efficiency
Measure & report, and reduce greenhouse gas emissions from direct and indirect activities
Conserve and protect water resources through efficiency, reuse, and storm water management
Eliminate waste, recycle, and prevent pollution
Leverage agency acquisition to foster markets for sustainable technologies and environmentally preferable materials, products and services
Design, construct, maintain, and operate high performance sustainable buildings in sustainable locations
Strengthen the vitality and livability of the communities in which federal facilities are located Clean Air Act of 1970 First effective regulation on pollution
Required a substantial reduction in the emissions of a particulate matter from fuel combustion and industrial processes
Led to lower pollution levels
Without it 200,000+ Americans would have died from respiratory diseases
Had it not stopped the use of leaded gasoline- child IQs would have skyrocketed and adult heart disease, hypertension and stroke would be more rampant
Improved yield of certain crops, worker attendance, and production rates The What? Other Important Information Some Unanticipated Outcomes From the Clean Air Act of 1970 - the health benefits quantified would equal close to $20 trillion
(overall) Branches of the government devoted to environmental protection
Altruistic human behavior
Under-the-counter permit transactions
People are concerned that government regulators are accustomed to controlling and commanding that they will not be able to give a market the freedom it needs to function (i.e. redirection will turn into control)
People are unwilling to sacrifice the high level of nutrition, medical care and/or housing in order to make the environment as clean as possible Pros to Regulation More efficient and effective way to save the environment
Increases productivity in the business sector
Leads to new energy efficient technological advances Some Anticipated Outcomes A reduction in pollution
A change in perspective in respect to the environment and natural resources
"Going Green" would be expensive in the individual and business sectors
Greater inclination towards technology
Better, cleaner air Cons to Regulation Expensive for businesses either through taxes and permits
Has the potential to hurt small businesses if they cannot pay up
Regulation could continue infinitely, thus not giving the free market a chance to naturally regulate on its own Key Terms EPA: Environmental Protection Agency - government agency with the task of developing and enforcing regulations aimed at protecting the environment
Social Costs: includes all costs (the private cost + the costs that are shifted to third parties in the form of externalities; higher than private costs
Health Costs: (self-explanatory)
Spillover Costs: some loss or damage that a market transaction causes a third party Economic Concepts Negative Externality: The result when costs are shifted to people who are not directly involved with the production or consumption of a good
Marginal Social Benefit (MSB): the added benefit society gets from increasing an activity by one unit
Marginal Social Cost (MSC): the added cost that society pays to increase an activity by one unit
Command-and-Control: policies to regulate behavior directly
Market-Based Policies: policies that provide incentives so that private decision makers will choose to solve the problem on their own
Pigovian Taxes: a tax enacted to correct the effects of a negative externality
Invisible Hand: the incentive for individuals to choose in the best interest of society by pursuing their own self-interest
The Coase Theorem: interestd parties can bargain among themselves and agree on an efficient solution
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