Once again the government can correct the market failure by inducing market

Once again the government can correct the market

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Once again, the government can correct the market failure by inducing market  participants to internalize the externality. The appropriate response in the case of  positive externalities is exactly the opposite to the case of negative externalities. To  move the market equilibrium closer to the social optimum, a positive externality  requires a subsidy. In fact, that is exactly the policy the government follows: Education  is heavily subsidized through public schools and government scholarships. Economist Ed Glaeser says urbanization gets a bum rap. The Lorax Was Wrong: Skyscrapers Are Green By  Edward L. Glaeser In Dr. Seuss' environmentalist fable, “The Lorax,” the Once-ler, a budding textile magnate, chops down Truffula to knit  “Thneeds.” Over the protests of the environmentally sensitive Lorax, the Once-ler builds a great industrial town that despoils the  environment, because he “had to grow bigger.” Eventually, the Once-ler overdoes it, and he chops down the last Truffula  tree, destroying the source of his income. Chastened, Dr. Seuss's industrialist turns green, urging a young listener to take  the last Truffula seed and plant a new forest. Some of the lessons told by this story are correct. From a purely profit-maximizing point of view, the Once-ler is pretty  inept, because he kills his golden goose. Any good management consultant would have told him to manage his growth  more wisely. One aspect of the story's environmentalist message, that bad things happen when we overfish a common pool,  is also correct. But the unfortunate aspect of the story is that urbanization comes off terribly. The forests are good; the factories are bad.  Not only does the story disparage the remarkable benefits that came from the mass production of clothing in 19th-century  textile towns, it sends exactly the wrong message on the environment. Contrary to the story's implied message, living in  cities is green, while living surrounded by forests is brown. By building taller and taller buildings, the Once-ler was proving himself to be the real environmentalist. Matthew Kahn, a U.C.L.A. environmental economist, and I looked across America's metropolitan areas and calculated the  carbon emissions associated with a new home in different parts of the country. We estimated expected energy use from  driving and public transportation, for a family of fixed size and income. We added in carbon emissions from home  electricity and home heating….
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