Costs: ~ $60 billion/yr Benefits: ~ $2 trilillion/yr
Why is regulating air pollution “profitable”? • “Profitable” implies that costs are smaller than benefits. What about costs and/or benefits makes this possible? • Costs: − Biggest category: catalytic converters, cleaner burning fuel, fuel economy rules. − Next biggest category: power plants, which need cleaner fuels, air pollution control technology, etc. − Seeing a pattern? If technology to manufacture these components was worse, cost of cleaner air would be larger
Why is regulating air pollution “profitable”? • “Profitable” implies that costs are smaller than benefits. What about costs and/or benefits makes this possible? • Benefits: − Vaaaaast majority: avoided air pollution mortality risk. − This is worth a lot (~$8 million per avoided death) because: § Relatively high average income in the US, and as a result: § … people seem to value being alive − If average US citizen preferred taking more mortality risk than they seem to, benefits of cleaner air would be smaller • Preferences + Technology determine whether positive profits are possible
Is the EPA “Profitable” in the same way well-run firms are? • Yes: the thing they care about , difference between benefits and costs of air pollution regulation, is hugely positive. • No: does anyone at the EPA “capture” these “profits”? • Value capture vs. profitability: − some organizations care about benefits that they don’t directly receive (schools?) − others ignore costs they don’t directly pay (firms generating uncompensated externalities) − others have no direct connection to the costs and benefits they care about (the EPA).
Profits, Value Capture, and Scarcity
A Framework for Analysis These are the benefits to buyers… What “curve” is this? Why is it downward sloping? This is what else you could do with the resources… What “curve” is this? Quantity Produced by the Industry $ What does this area represent? Per-Unit Value Consumed by Customers
A Framework for Analysis Demand for the Industry’s Good (Benefit) Supply, or Opportunity Cost of Industry’s Resources Quantity Produced by the Industry $ the “pie”: Potential Industry Earnings Per-Unit Value Consumed by Customers Also called “value created”
What determines who gets what? • When do firms capture most of the PIE? They need: − Price discrimination, on an observable basis § Otherwise, they will use just a few prices to “exclude” or “screen out” low WTP consumers − Not too much competition, relative to demand § Otherwise, your competitor might under-cut you, even on a precisely targeted consumer • When do consumers capture most of the PIE? − Price discrimination must be difficult. Who is a high WTP consumer? Raise your hand please… − Not too little competition, relative to demand
Relative scarcity as the force in allocating the PIE • In both scenarios, a scarce factor determines who gets what • Industry captures most of the PIE. What is scarce?
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- Fall '15