Text III. Public Policies

A market failure means too much of the rain forest is destroyed, too many emissions are spewed out into the ozone, too many fish are caught, or too many species are decimated by overuse of resources. If the market fails to correct these problems, what is the answer? When people do not like the market outcome or when the market is inefficient, the government is often called on to intervene in the market. This is the case of environmental problems. The government has taken a huge role in environmental policy. In the United States, the Environmental Protection Agency (EPA) has grown more rapidly than any other agency in the last ten years. Faced with environmental problems, what does the EPA do? Externalities can be internalized through the imposition of regulations or taxes, the use of subsidies, or the assignment of private property rights. Regulation. One form of environmental regulation is an emission standard that specifies the maximum level of pollution allowed from a specific source. Each automaker, for instance, must create a line of cars that meets fixed emission standards. Emission standards are also applied to steel factories, electric-power plants, and many other industries.

The government defines an emission level and requires firms to meet the standards. Economists argue that the level should be determined by demand and supply—that is, by equating marginal benefits and marginal social costs.

The marginal cost of dirty air rises at an accelerating rate because of diminishing marginal returns. The first 10 percent increase in pollutants occurs easily and is accomplished by not using the very expensive pollution abatement devices installed on automobiles and smokestacks. As the air gets dirtier and dirtier, the benefits a firm or individual might get from some additional pollution are quite small. The difference between the marginal cost and the marginal social cost is that the marginal cost refers to the i n d i v i d ual's private costs while the marginal social cost refers to society's marginal costs. When I drive my automobile, the costs of the pollution I create are borne by me in the sense that I have to purchase oxygenated fuels and maintain the quality of my car, but costs are also borne by others. Everyone has to breathe the polluted air I create.

In reality, the emission level is seldom set at the optimal level. Moreover, the regulations may cause other problems. One hallmark of the standards approach is uniformity: standards apply to all firms and all areas. However, standards appropriate for small firms may be inappropriate for large firms, or standards appropriate for one area might be inappropriate for another. An emission standard for automobiles that is appropriate for Los Angeles would not necessarily be appropriate for Salem, Idaho. An emission standard applied to fishing might restrict the quantity of fish caught per shift. This might be appropriate in the mountain streams of Vermont, but not in Chesapeake Bay.

The regulatory approach also fails to account for private responses that tend to neutralize its impact. For example, a common regulatory practice is to impose standards for new products that are tougher than standards for existing products. This practice induces producers to remain with older products even though they may be environmentally damaging. As a result, the regulation may raise pollution levels higher than they would have been without regulation. Such was the case with the 1990 Clean Atr -Act. Standards for planned coal plants are tougher than for existing plants. The effect is that firms continue to use old plants even when more efficient or environmentally less damaging plants would he feasible.

Uniform standards can also be problematic if they aid large or existing firms in their attempts to keep smaller or new firms from competing. For instance, the Resource Conservation and Recovery Act, which covers the disposal of more than 450 substances, has 17,000 rulings related to it. These rulings mean that it can cost millions and take years to get approval to operate a business. This is a fixed cost that makes it more difficult for new firms to enter the industry and begin competing with existing firms.

Taxes or subsidies. An alternative to the problems caused by regulatory standards is to levy taxes or provide subsidies to resolve the market failure. Society might want to tax actions that cause a negative externality and subsidize actions that cause a positive externality, by the amount of the externality. In this way, social costs and private costs would be the same. A tax could be placed on automobiles or smokestacks or on products that create litter or damage the ozone layer. The tax would increase the price to the full cost—internal plus external costs—and consumers and producers would have to take the full cost into account in their decision-making.

For instance, instead of mandating that automobile manufacturers install expensive pollution-control equipment on all new cars (the costs of which would be paid by every car buyer nationwide), the government could impose a tax on drivers whose cars exceed federally set emission limits. That way the individual could decide whether or not to drive an old junker that produces a lot of pollution. With the government mandate, new cars become relatively more expensive than the "junkers" and so people drive junkers longer than they otherwise would have.

A common use of taxes on externalities is the effluent charge—a charge on waste produced or emissions generated. With a tax on emissions, polluters can choose to install pollution-abatement equipment, change production techniques so as to reduce pollution-causing activities, or pay the tax and continue to pollute.

A market for the property rights. Economists have been able to create a new approach to applying government environmental policy in recent years. Under the old approach, the amount of pollution allowed from each generator, boiler, baking oven, or other piece of equipment was specified by the smog-control agency. The new approach is to allow a company to choose the least expensive mix of new controls as long as total pollution does not exceed some assigned level. Each business gets a certificate indicating the amount of pollution it is permitted each year; each is given a property right to that amount of pollution. These permits can then be bought and sold in a market, which is referred to as a "smog" market. A firm easily meeting its standards can sell its excess to a firm having some difficulty meeting its standards. For example, Mobil Corporation purchased the permission to spew out an additional 900 pounds of noxious gas vapors each day, for about $3 million, from the city of South Gate, California. South Gate had acquired the credits from General Motors, which closed a plant there and sold the city the property and the pollution permits that went with the property.

In many regions of the country the Environmental Protection Agency uses an emissions offset policy. The EPA owns the air and sells permits to "use" the air. Companies with permits must not produce more pollution than their permits allow. But if they produce less pollution than their permits allow, they can "bank" the difference and use it later, or they can sell it to other polluters. This creates a market for the right to pollute.

Exercises

/. Learn the pronunciation:

To spew, to decimate, to intervene, to internalize, smokestack, abatement device, controversy, inappropriate, tougher, disposal, substance, noxious.

//. Learn the vocabulary;

Assignment of private property rights, to meet fixed emission standard, emission level, marginal benefits, marginal social costs, pollution abatement devices, the standards approach, the regulatory approach, to restrict the quantity, to be environmentally damaging, to levy taxes, to resolve the market failure.

///. Explain the meaning the meaning of the following words and word-combinations:

To internalize the externality, an emission standard, to equate marginal benefits and marginal social costs, to impose standards, the effluent change, to assign private property rights, a "smog" market, the government mandate, an emission offset policy, to provide private subscription, the effluent charge, junkers.

IV. Answer the following questions:

1. Why does the government get involved in environmental policy?

2. What can externalities be internalized through?

3. What are emission standards applied to?

4. Who defines an emission level?

5. What should the emission level be determined by?

6. What is the difference between the marginal costs and the marginal social

cost?

7. Why is the emission level seldom set at the optimal level?

8. What problem does the government face when imposing regulatory

standards for the new products?

9. How would the market failure be resolved?

10. Can a public good be converted to a private good?

11. What is the best solution to provide the right amount of the public good?

V. Fill in the blanks with the preposition where necessary; translate the phrases

from the text into Russian:

To be spewed ...into the ozone: to be decimated...overuse of resources; to take externality...account; to rise...an accelerating rate; to be borne...others; to be set...the optimal level; to relate...it; to install equipment...all new cars; to impose a tax ...driver; a charge...waste produced; to put...fires; to be responsible ...national defense.

VI. Render the article briefly.

VII. Discuss the following topics:

1. Explain how a government policy to lower interest rates might influence the

natural resource markets.

2. The government proposed higher taxes on the use of nonrenewable resources. If implemented, what would be the likely impact of these taxes? How would the

taxes affect saving? Would future generations be better off as a result of the taxes?

VIII. Read and render the text:

Date: 2016-01-03; view: 634