chapter19 - > Externalities WHOLL STOP THE RAIN? 19...

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ILLIONS OF PEOPLE IN THE NORTH - eastern United States can think of no better way to relax than fishing in one of the region’s thou- sands of lakes. But in the 1960s avid fish- ermen noticed something alarming: lakes that had formerly teemed with fish were now almost empty. What happened? The answer turned out to be acid rain, caused mainly by coal-burning power plants. When coal is burned, it releases sulfur dioxide and nitric oxide into the atmosphere; these gases react with water, producing sulfuric acid (H 2 SO 4 ) and nitric acid (HNO 3 ). The result in the Northeast, down- wind from the nation’s indus- trial heartland, was rain sometimes as acidic as lemon juice. Acid rain didn’t just kill fish, it also damaged trees and crops and even began to dis- solve limestone buildings. You’ll be glad to hear that the acid rain problem today is much less serious than it was in the 1960s. Power plants have reduced their emissions by switching to low-sulfur coal and installing scrubbers in their smokestacks. But they didn’t do this out of the good- ness of their hearts; they did it in response to government WHO’LL STOP THE RAIN? 455 M What you will learn in this chapter: What externalities are and why they can lead to inefficiency in a market economy and support for government intervention The difference between negative and positive externalities The importance of the Coase theorem, which explains how private individuals can some- times solve externalities Why some government policies to deal with externalities, such as emissions taxes, tradable per- mits, or Pigouvian subsidies, are efficient, although others, like environmental standards, are inefficient How positive externalities give rise to arguments for industrial policy chapter 19 policy. Without such intervention, power companies would have had no incentive to take the environmental effects of their actions into account. When individuals impose costs on or provide benefits for others but don’t have an incentive to take those costs and benefits into account, economists say that the situa- tion includes externalities . You may recall that we briefly noted this phenomenon in Chapters 1, 6, and 13. There we stated that principal sources of market failure are actions that create side effects that are not FPO credit tk For many polluters, acid rain is someone else’s problem. >> Externalities
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The Economics of Pollution Pollution is a bad thing. Yet most pollution is a side effect of activities that provide us with good things: our air is polluted by power plants generating the electricity that lights our cities, and our rivers are damaged by fertilizer runoff from farms that grow our food. Why don’t we accept a certain amount of pollution as the cost of a good life? Actually, we do. Even highly committed environmentalists don’t think that we can
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This note was uploaded on 03/03/2011 for the course MARKETING 101 taught by Professor Singh during the Spring '11 term at Management Development Institute.

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chapter19 - > Externalities WHOLL STOP THE RAIN? 19...

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