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SEA at ASUStudent Economics AssociationStudent Economics Association
Economics and the Environment
What is Economics?Economics is a social science
concerned with the logic of scarcity, cost, value, and
choice
The Role of The Role of GovernmentGovernment
Economics and the Environment
ACTIVE ECONOMICS
Outsourcing
Do you want the government deciding…..
Who gets a hot dog at a football game?
Who gets seats to a sold out concert?
Obviously not ….
Markets respond to individual choice
But environmental matters are different…
Or are they ???
Economic Food for Thought
Ever wonder why your school textbooks have highlighting,
scribbling, torn pages, and random
comments from other people in them?
What do you think?
In-Class ActivityRound 1
Please form groups of four
The candy belongs to the first person who takes it
Every 20 seconds or so, your candy supply will be increased
… Until someone takes it
In-Class ActivityRound 2
Please keep the same groups of four
The candy in each quadrant is yours; only you may take it
Every 20 seconds or so, your candy supply will be increased
… Until you take it or eat it
Discussion of Activity Economics is about incentives and how incentives
can be used to influence people’s choices:
• What were your incentives to
take/leave the candy
in the first round ?
• What were your incentives to
take/leave the candy
in the second round ?
Back to the Books
What are the
incentives involved
with the books?
Private Property
The puzzle for the noneconomist is why anything is private property. The puzzle for economists is why anything is not. Having found such an elegant solution to the problem of producing and allocating things, why notapply it universally? ... David Friedman
Pollutionion and and EcoEconomics
Two Extremes:Public control or private property
Corrective (Pigouvian) Taxation
A. C. Pigou
Economic Compromise:Economic Compromise: Tax Pollution ??? Tax Pollution ???
Nice idea,but hard toadminister…
Not always… Not always…
In the early 1970’s, CFCs from aerosolcans threatened the ozone layer
The federal government imposed a tax onCFCs, which raised production costs
Higher costs were partially shifted to consumers who searched for substitutes
Enterprising businesses developed, And switched to, pump sprays
Acid Rain: Let’s talk about SO2
The U.S. Acid Rain Program
Title IV of the 1990 Clean Air Act
Objective: Reduce annual SO2 emissions
by 10 million tons below 1980 levels.
Two-phase (1995, 2000) tightening of restrictions
“Allowance trading” system: free-market
incentives to reduce pollution
Affected utility units were allocated allowances
based on their historic fuel consumption.
Each allowance permits a unit to emit 1 ton
of SO2 during or after a specified year.
Allowances may be bought, sold, or banked
For future years.
Tradable Property Rights
SO2 Caps and Forecasts for Phase I Units
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1980 1985 1990 1995 2000 2005 2010 2015
Years
SO
2 in
mil
lion
ton
s
EPA's forecast of "No Title IV"
Ttile IV Emission Limits
SO2 Allowance Prices, 1992-2000 (1995 or Current Vintage)
0
50
100
150
200
250
300
350
7/31
/92
10/3
1/92
1/31
/93
4/30
/93
7/31
/93
10/3
1/93
1/31
/94
4/30
/94
7/31
/94
10/3
1/94
1/31
/95
4/30
/95
7/31
/95
10/3
1/95
1/31
/96
4/30
/96
7/31
/96
10/3
1/96
1/31
/97
4/30
/97
7/31
/97
10/3
1/97
1/31
/98
4/30
/98
7/31
/98
10/3
1/98
1/31
/99
4/30
/99
7/31
/99
10/3
1/99
1/31
/00
Date
Cu
rren
t P
rice
($/
ton
)
Emissions Exchange
Cantor Fitzgerald EBS
Fieldston Publications
Private Trades
EPA Spot Auction
1993 1994 1995 1996 1997 1998 1999 2000
Looks a little like pork belly futures contracts ….
Number of Allowances Sold in the EPA Auction and the Private Market
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
Through March1993
April 1993-March1994
April 1994-March1995
April 1995-March1996
Period
Qu
anti
ty
EPA Auction
Private Market
Total
6
5
4
3
2
1
0
Quantity
(millions)
Trading Volume:EPA Auctions and Private Markets
SO2 Emissions, Caps, and Forecasts for Phase I Units
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1980 1985 1990 1995 2000 2005 2010 2015
Years
SO
2 in
mil
lion
ton
s
Actual SO2 emissions
EPA's forecast of "No Title IV"
Ttile IV Emission Limits* 1995 COUNTERFACTUAL
*
Sulphur Dioxide After Phase I:Forecasts, Caps, and Actual Emissions
Program ResultsProgram Results
• 100% compliance (!)
• Emissions reduced
• No “hot spots” (!)
• Lower cost than expected (!)
• Firms traded allowances (!)
• Al Gore claimed to have
invented the program
Note: (!) denotes outcome was a surprise to industry participants, government, and New York Times reporters.
Markets generate prices; more specifically, prices and costs of alternative quantities.
Prices generate information about costs and benefits.
Information is key to effective social choice about pollution control.
Command and control tends to stifle Meaningful choice and to cause higher costs of obtaining comparable outcomes.
The Social Value of Markets
