65 Review and Practice
Summary
Pollution is a by-product of human activity. It occurs when the environment becomes scarce—when dumping garbage imposes a cost. There are benefits as well as costs to pollution; the efficient quantity of pollution occurs where the difference between total benefits and total costs is maximized. This solution is achieved where the marginal benefit of additional pollution equals the marginal cost. We have seen that an alternative approach shows that efficiency is also achieved where the marginal benefit of pollution abatement equals the marginal cost of abatement.
Economists measure the benefits of pollution in terms of the costs of not dumping the pollution. The same curve can be read from left to right as the marginal benefit curve for emissions and from right to left as the marginal cost curve for abatement.
The costs of pollution are measured in two ways. One is through direct surveys. Respondents can be asked how much compensation they would be willing to accept in exchange for a reduction in environmental pollution; alternatively, they can be asked how much they would pay for an improvement in environmental quality. A second approach infers the marginal cost of increased pollution from other relationships. The effects of pollution on house prices or rental values, for example, allow economists to estimate the value people place on environmental quality. Pollution costs can also be estimated on the basis of the costs they impose on firms in production.
Three types of policies are available to reduce pollution. Moral suasion is sometimes used, but it is effective only under limited conditions. Command-and-control regulation is used most commonly, but it is likely to be inefficient. It also fails to provide incentives for technological change in the long run. The most promising policies are the incentive approaches, which include emissions taxes and marketable pollution permits. Both can be designed to reduce emissions at the lowest cost possible, and both create an incentive for firms to search out new and cheaper ways to reduce emissions.
Although public policy has stressed command-and-control methods in the past, pollution rights exchanges are now being introduced. Past policies may have been inefficient, but they have succeeded in improving air quality, at least in the nation’s cities.
The distribution of income in the United States has become more unequal in the last four decades. Among the factors contributing to increased inequality have been changes in family structure, technological change, and tax policy. While rising inequality can be a concern, there is a good deal of movement of families up and down the distribution of income, though recently mobility may have decreased somewhat.
Poverty can be measured using an absolute or a relative income standard. The official measure of poverty in the United States relies on an absolute standard. This measure tends to overstate the poverty rate because it does not count noncash welfare aid as income. Poverty is concentrated among female-headed households, minorities, people with relatively little education, and people who are not in the labor force. Children have a particularly high poverty rate.
Welfare reform in 1996 focused on moving people off welfare and into work. It limits the number of years that individuals can receive welfare payments and allows states to design the specific parameters of their own welfare programs. Following the reform, the number of people on welfare fell dramatically. The long-term impact on poverty is still under investigation.
Federal legislation bans discrimination. Affirmative action programs, though controversial, are designed to enhance opportunities for minorities and women. Wage gaps between women and white males and between blacks and white males have declined since the 1950s. For black males, however, most of the reduction occurred between 1965 and 1973. Much of the decrease in wage gaps is due to acquisition of human capital by women and blacks, but some of the decrease also reflects a reduction in discrimination.
Concept Problems
- We have noted that economists consider the benefits and costs of pollution from the perspective of people’s preferences. Some critics argue, however, that the interests of plants and animals should be considered: for example, if pollution is harming trees, the trees have a right to protection. Do you think that is a good idea? How would it be implemented?
- List five choices you make that result in pollution. What price do you pay to pollute the environment? Does that price affect your choices?
- In any urban area, what group is likely to be exposed to a greater level of pollution—rich people or poor people? (Hint: Utilize the findings of economists concerning the relationship between house prices and pollution levels.)
- Suppose the accompanying graph shows the demand and marginal cost curves, D and MC, for a pollutant in a particular area. How do you think future economic and population growth will affect the efficient rate of emissions per period, Q, and thus the level of pollution?
Figure 10.9
- “Environmental quality is not just a matter of technical efficiency; it’s about how people relate to nature. Economists are completely off base in their analysis of the benefits and costs of pollution.” What is your opinion of this quote?
- Campaigns that exhort us to “Give a hoot—don’t pollute” imply that anyone who pollutes the environment is uncaring—that people who are concerned about environmental quality would not be dumping garbage into the environment. Is that true?
- We have seen that a system of marketable pollution permits achieves the same solution as a system of emissions taxes. Which do you think would be fairer? Why?
- Many environmentalists are horrified by the notion of marketable pollution permits advocated by economists. These environmentalists insist that pollution is wrong, and that no one should be able to buy the right to pollute the environment. What do you think?
- Some people object that charging firms for their emissions will do no good—firms will simply raise their prices and go on doing what they were doing before. Comment on this objection to emissions taxes.
- Suppose firms in a perfectly competitive industry generate water pollution as a by-product of their production, and they are not charged for this. Who benefits from their use of the environment as a dumping ground? If an emissions tax is imposed, costs to these firms increase and emissions drop. Who will bear the burden of this tax? Is that fair?
- The Case in Point on measurement suggested that the demand curve for locating a house farther from a hazardous waste site could be inferred from property value studies. Explain how this could be the case.
- Does the road pricing system in Singapore strike you as fair? Would you like to see such a system in your own area? Why or why not?
- Explain how rising demand for college-educated workers and falling demand for high-school-educated workers contributes to increased inequality of the distribution of income.
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Discuss the advantages and disadvantages of the following three alternatives for dealing with the rising inequality of wages.
- Increase the minimum wage each year so that wages for unskilled workers rise as fast as wages for skilled workers.
- Subsidize the wages of unskilled workers.
- Do nothing.
- How would you define poverty? How would you determine whether a particular family is poor? Is the test you have proposed an absolute or a relative test?
- Why does the failure to adjust the poverty line for regional differences in living costs lead to an understatement of poverty in some states and an overstatement of poverty in others?
- The text argues that welfare recipients could achieve higher levels of satisfaction if they received cash rather than in-kind aid. Use the same argument to make a case that gifts given at Christmas should be in cash rather than specific items. Why do you suppose they usually are not?
- Suppose a welfare program provides a basic grant of $10,000 per year to poor families but reduces the grant by $1 for every $1 of income earned. How would such a program affect a household’s incentive to work?
- Welfare reform calls for a two-year limit on welfare payments, after which recipients must go to work. Suppose a recipient with children declines work offers. Should aid be cut? What about the children?
- How would you tackle the welfare problem? State the goals you would seek, and explain how the measures you propose would work to meet those goals.
- Suppose a common but unfounded belief held that people with blue eyes were not as smart as people with brown eyes. What would we expect to happen to the relative wages of the two groups? Suppose you were an entrepreneur who knew that the common belief was wrong. What could you do to enhance your profits? Suppose other entrepreneurs acted in the same way. How would the wages of people with blue eyes be affected?
- The Case in Point on Income Inequality in the United States versus continental Western Europe argues that people get, in effect, what they expect. People in the United States attribute success to hard work and skill, while people in Continental Western Europe attribute success to connections, luck, and corruption. With what set of views do you agree? Explain.
- The Case in Point on welfare reform in Britain versus that in the United States argues that the British system, before it could be adopted in the United States, would require a change in attitudes in the United States. What sort of change would it require? Do you prefer the British approach? Why or why not?
- James Heckman of the University of Chicago advocates a program of early intervention targeted at low income families. What are the advantages of such an approach? The disadvantages?
- Give five reasons that the income distribution in the United States has become more unequal in the last several decades. Do you regard this as a problem for society? Why or why not?
- Suppose that all welfare aid were converted to programs of cash assistance. Total spending on welfare would remain unchanged. How would this affect the poverty rate? Why?
Numerical Problems
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Suppose the dry-cleaning industry is perfectly competitive. The process of dry cleaning generates emissions that pollute the air, and firms now emit this pollution at no cost. Suppose that the long run equilibrium price for dry cleaning a typical item is $5, and a pollution-control program increases the marginal cost by $1 per item.
- How will the pollution-control program affect the price of dry-cleaning services in the short run? Explain and illustrate graphically.
- Explain and illustrate graphically how the program will affect the output of dry-cleaning services in the short run.
- Explain and illustrate graphically how the $1 increase in cost will affect the price of dry-cleaning services in the long run.
- Explain and illustrate graphically how the cost increase will affect the quantity of dry-cleaning services produced in the long run.
- Who pays for pollution control in the industry? Explain, relating your answer to the basic conclusion about long-run equilibrium in a perfectly competitive industry.
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Now suppose the dry-cleaning industry in the community is monopolistically competitive. Suppose the initial price per unit of dry-cleaning is $6. Suppose that a charge levied on dry-cleaning firms for the pollution they generate increases the cost of a unit of dry-cleaning by $1.
- Explain and illustrate graphically how the $1 charge will affect the price charged by typical firm in the short run.
- Explain and illustrate graphically how the $1 charge will affect the typical firm’s output in the short run.
- Now explain and illustrate graphically how the $1 charge will affect price and output of a typical firm in the long run. Through what mechanism does this occur?
- Compare your answers for a world of monopolistically competitive firms to a world of perfectly competitive firms. Is there any significant difference between the conclusions of the two models?
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Suppose local government regulations allow only a single firm to provide dry-cleaning services to a local community, and this firm generates pollution as in Problem 1. The firm initially charges a price of $4 per item. Now a pollution-control program is imposed, increasing the firm’s marginal and average total costs by $1 per item.
- Explain and illustrate graphically how the program will affect the firm’s price and output.
- Who pays for the pollution-control program?
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Suppose the marginal benefit (MB) and marginal cost (MC) curves for emitting particulate matter are given by the following schedules, where E is the quantity of emissions per period. The marginal benefits and costs are measured at the quantities of emissions shown.
E/period MB MC 0 $230 $0 200 190 10 400 150 30 600 110 50 800 70 70 1,000 30 90 - Plot the marginal benefit and marginal cost curves and state the efficient quantity of emissions per period.
- What quantity of emissions will occur when the price of emissions is zero?
- What tax rate would achieve the efficient rate of emissions?
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Now suppose that rising incomes increase marginal cost as follows:
E/period New MC 0 $0 200 30 400 70 600 110 800 150 1,000 190 - Plot the new marginal cost curve in the graph you drew in Problem 4. What is the new efficient quantity of emissions per period?
- What quantity of emissions will occur when the price of emissions is zero?
- What tax rate would achieve the efficient rate of emissions?
- The text contains the following statement: “All other variables unchanged, increasing the distance from a house to a hazardous site by 10% increased house value by 0.3%.” What is the price elasticity of house prices with respect to proximity to a hazardous waste site?
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Here are income distribution data for three countries, from the Human Development Report 2005, table 15. Note that here we report only four data points rather than the five associated with each quintile. These emphasize the distribution at the extremes of the distribution.
Poorest 10% Poorest 20% Richest 20% Richest 10% Panama 0.7 2.4 60.3 43.3 Sweden 3.6 9.1 36.6 22.2 Singapore 1.9 5.0 49.0 32.8 - Plot the Lorenz curves for each in a single graph.
- Compare the degree of inequality for the three countries. (Do not forget to convert the data to cumulative shares; e.g., the lowest 80% of the population in Panama receives 39.7% of total income.)
- Compare your results to the Lorenz curve given in the text for the United States. Which country in your chart appears closest to the United States in terms of its income distribution?
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Looking at Figure 10.11 “Prejudice and Discrimination” suppose the wage that black workers are receiving in a discriminatory environment, WB, is $25 per hour, while the wage that white workers receive, W, is $30 per hour. Now suppose a regulation is imposed that requires that black workers be paid $30 per hour also.
- How does this affect the employment of black workers?
- How does this the wages of black workers?
- How does this affect their total income? Explain.
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Suppose the poverty line in the United States was set according to the test required in the European Union: a household is poor if its income is less than 60% of the median household income. Here are annual data for median household income in the United States for the period 1994–2004. The data also give the percentage of the households that fall below 60% of the median household income.
Source: U.S Census Bureau, Current Population Reports, P60-229; Income in 2004 CPI-U-RS adjusted dollars; column 3 estimated by authors using Table A-1, p. 31.
Median Household Income in the U.S. Percent of households with income below 60% of median 1994 40,677 30.1 1995 41,943 30.4 1996 42,544 29.9 1997 43,430 29.1 1998 45,003 27.8 1999 46,129 27.1 2000 46,058 26.4 2001 45,062 27.4 2002 44,546 27.8 2003 44,482 28.3 2004 44,389 28.3 - Plot the data on a graph.
- Is this a relative or an absolute definition of poverty?
- Why do you think the percent of households with incomes below 60% of the median fell from 1994 to 2000 and has risen since?
- Discuss the measurement issues involved in the data you have presented.
- Discuss the elements of the system of counting the incomes of low income people in the United States and explain how it relates to your answer in (d).
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Consider the following model of the labor market in the United States. Suppose that the labor market consists of two parts, a market for skilled workers and the market for unskilled workers, with different demand and supply curves for each as given below. The initial wage for skilled workers is $20 per hour; the initial wage for unskilled workers is $7 per hour.
- Draw the demand and supply curves for the two markets so that they intersect at the wages given above.
- How does increased demand for skilled workers and a reduced demand for unskilled workers affect the initial solution?
- How is the Lorenz curve for the United States economy affected by this development? Illustrate the old and the new Lorenz curves.
- Suppose there is an increase in immigration from Mexico. How will this affect the two markets for labor?
- Suppose Professor Heckman’s recommendation for early intervention for low income children is followed and that it has the impact he predicts. How will this affect the two markets today? In 20 years? Illustrate and explain how the demand and/or supply curves in each market will be affected.
- What would the impact of the change in (d) be on the Lorenz curve for the United States 20 years from now?
