chapt 11 2_07 - 11. Welfare and Externalities Are...

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1 11. Welfare and Externalities Are unregulated markets best for society? How much pollution is too much? Can there be such a thing as too little pollution? So far in this book, we have seen how people behave in markets and in the absence of markets. People reveal that they care about environmental goods and are willing to give up other goods to improve environmental quality. We have also seen that improving environmental quality is expensive: it increases costs for producers, and those producers may pass the costs along to consumers. This chapter will explore: Market equilibrium in the absence and in the presence of environmental damages from the good The concept of increasing net benefits to society, also known as increasing efficiency Finding the efficient level of production when a good produces environmental damages. The Benefits and Costs of Automobile Pollution How bad are motor vehicles for the environment? Does driving a car have other external costs? What are all the costs of driving a car? Why do people drive cars anyway? Driving a car is expensive. Parking, insurance, depreciation (reduction in a car’s value as it ages), maintenance, and gasoline are all part of the cost of driving. The U.S. Internal Revenue Service (IRS) estimates the cost of driving a car at $0.485 per mile not including parking (which can be a significant addition; one of your authors pays $1440 per year for a parking permit). Let’s look at what this means for a typical driver. This typical driver goes 12,000 miles per year, with a fleet average miles per gallon around 20,
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2 using about 600 gallons of gasoline. At the current (2006) price of $3.00 per gallon, gasoline costs are $1800 out of a total cost of (12,000 miles * 0.485/mile) = $5820, or about 30%. Also not included in the IRS cost estimate is the cost of the time used in driving. At an average speed of 40 miles per hour, the typical driver spends 300 hours behind the wheel; at the California minimum wage of $6.75, this time is worth $2025. If this cost is added to the IRS cost estimate, gasoline is just 23% of the total cost of $7845, without parking. Why don’t people choose busses or trains instead of driving? In most of the U.S. it is difficult to travel using public transit to a job, shopping, childcare, and other stops. Many of those who use public transit to commute to their jobs (such as your other author) end up driving some of the time. Let’s look at a morning routine. A parent takes a child about 7 miles to school or child care and then drives 20 miles to work. One way to do this routine involves a stiff walk, 3 bus trips, and a train trip for just under $7 in about 2 hours. With the minimum- wage value of time, the total cost is $20.50. Alternatively, driving the route takes about 35 minutes for about $13 of driving cost (using the IRS value) and $4 of time, for a total of about $17. It is cheaper to drive. If the convenience of choosing when to leave for work (rather than just in time for the bus) and not walking to the stop in inclement
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This note was uploaded on 03/03/2009 for the course ECON 370 taught by Professor Helfand during the Winter '08 term at University of Michigan.

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chapt 11 2_07 - 11. Welfare and Externalities Are...

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