(B.3.a) When markets do, and do not, work
Most of us want to be given the freedom to do whatever we like, so long as we do not encroach upon the freedom of other people. That is what we often say, and to a large extent, that is how we live. We generally say that what people eat, the cars they drive, and the television shows they like are none of our business. Likewise, we generally say that the product a company wishes to sell and the price they charge is their business.
Markets are institutions where buyers and sellers come together to engage in voluntary trade, and these buyers and sellers would not do so if it did not benefit them, so why would we ever want to limit people’s ability to trade with one another? Because, sometimes, what happens in markets affects third parties. These spillovers to third-parties are called externalities, and when they are pronounced, there is the possibility that government interference in markets will benefit society overall.
Video 1—About Externalities
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(B.3.b) Examples of negative externalities
Suppose you buy a chicken. You do so because it makes you better off. The company sold it to you because it makes them better off. Win-win, so far, so good. No one should stop you from buying that chicken, or the seller from selling the chicken.
But what if chicken production causes some sort of water pollution? Maybe the harm caused by the pollution are greater than the benefit to you and the seller of chicken? Without knowing the extent of this pollution you cannot tell whether the world is a better or worse place because of your purchase. Being an ethical person, you might prefer that government regulate firms to prevent pollution. Even though you pay a higher price, you know that buying the chicken doesn't harm other people. Or, you might decide that government would only make things worse, perhaps by regulating firms too much. That is the dilemma externalities pose. Examples are important for understanding externalities, so see the video below.
Video 2—Example of an Externality
(must use Internet Explorer)
(Watch the full Koch Brothers Exposed documentary here)
There are two general ways of fixing this externality problem.
- Give property rights of the groundwater to a person or society, and allow the owners of the groundwater the ability to sue Gregory when pollution occurs. Gregory now takes into account any pollution resulting from gas extraction.
- Have government regulate Gregory, making him use only environmentally-friendly technologies. Alternatively, government can tax Gregory an amount equal to the pollution costs he causes society to pay.
(B.3.c) A river on fire
A train passed over the Cuyahoga River on June 22, 1969. It is not uncommon for sparks to fly from the friction of train wheels on the train track, but usually the train is passing over treated wood, rocks, or water, and will not catch fire. On this day, however, it passed over a river so polluted the river caught fire!
That is the best guess of what caused the fire, but what is known is that the river was on fire, and it was horribly polluted. What is even more surprising is that this is not the first time the river caught fire. There was 1868, 1883, 1912, 1922, 1936, 1941, 1948, 1952, and now 1969. Cleveland had been known as a town where businesses could pollute. Steel mills especially apparently dumped waste right into the river with no monitoring, no accountability, no regulation at all. One government official remarked about the river in 1969, "The lower Cuyahoga has no visible signs of life, not even low forms such as leeches and sludge worms that usually thrive on wastes."
This fire in 1969 was different though, because in just thirty minutes it did considerable economic damage. The public attention the fire brought made people realize that there was little concerned citizens could do to prevent the businesses from polluting. The government needed more power to protect the environment. In response, a Republic president (Nixon) proposed creating the U.S. Environmental Protection Agency and later approved by Congress in 1970.(01)(E1)
Figure 1—Ohio River Polluted So Bad It Caught On Fire Cuyahoga river on fire.jpg)
(B.3.d) Fracking
I guess we should just say we are thankful that our rivers do not catch fire anymore. Except they sometimes do! At least, that is what critics of fracking want you to think. Now, even more important things are catching on fire! Like your kitchen sink (critics of fracking say)! For more information on fracking, let me refer you to The Colbert Report.Figure 2—Page 135 of Colbert's America Again
Suppose you are a fans of Stephen Colbert who bought his book, America Again, and you also live near a fracking sight. On page 135 of Colbert's book is a picture of a dragon head with instruction to cut a hole in its mouth and mount the head on your sink faucet, allowing your faucet to become a SA-WEEEET dragon. What ever was he referring to? Watch the following video and find out.
Video 3—Colbert on Fracking
(Depicting conservative's view on environmental issues
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(B.3.e) Markets can fail when positive externalities exist
Vaccinations and education are examples of positive externalities. When you get vaccinated you are also preventing other people from getting sick. When you become more educated society at-large benefits from having enlightened citizens. So when you decide whether to get vaccinated or go to college you generally only think of the benefits to yourself, but if everyone did that there would be too few vaccinations and too little education.
The solution, governments have found, is to force some people to get vaccinations and education. You must go to school, and to go to school you must be vaccinated against an array of diseases. There are alternatives. It could subsidize the two positive externalities, and to some extent governments do, like when they give free flu shots or subsidize education.
(B.3.f) A quote about externalities and global warming
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Much of that profit stems from a single historical accident: Alone among businesses, the fossil-fuel industry is allowed to dump its main waste, carbon dioxide, for free. Nobody else gets that break – if you own a restaurant, you have to pay someone to cart away your trash, since piling it in the street would breed rats. But the fossil-fuel industry is different, and for sound historical reasons: Until a quarter-century ago, almost no one knew that CO2 was dangerous. But now that we understand that carbon is heating the planet and acidifying the oceans, its price becomes the central issue.
If you put a price on carbon, through a direct tax or other methods, it would enlist markets in the fight against global warming. Once Exxon has to pay for the damage its carbon is doing to the atmosphere, the price of its products would rise. Consumers would get a strong signal to use less fossil fuel – every time they stopped at the pump, they'd be reminded that you don't need a semimilitary vehicle to go to the grocery store. The economic playing field would now be a level one for nonpolluting energy sources. And you could do it all without bankrupting citizens – a so-called "fee-and-dividend" scheme would put a hefty tax on coal and gas and oil, then simply divide up the proceeds, sending everyone in the country a check each month for their share of the added costs of carbon. By switching to cleaner energy sources, most people would actually come out ahead. There's only one problem: Putting a price on carbon would reduce the profitability of the fossil-fuel industry. After all, the answer to the question "How high should the price of carbon be?" is "High enough to keep those carbon reserves that would take us past two degrees safely in the ground." The higher the price on carbon, the more of those reserves would be worthless. The fight, in the end, is about whether the industry will succeed in its fight to keep its special pollution break alive past the point of climate catastrophe, or whether, in the economists' parlance, we'll make them internalize those externalities. —McKibben, Bill. August 2, 2012. "Global Warming's Terrifying New Math." Rolling Stone magazine. |
(B.3.g) Government can also fail
Video 4—Does Banning the Pesticide DDT Make Us Better Or Worse Off?
References
(O1) Ohio History Central. Cuyahoga River Fire. Accessed June 25, 2012 at http://www.ohiohistorycentral.org/entry.php?rec=1642.
(E1) Wikipedia. The Environmental Protection Agency. Accessed June 25, 2012 at http://en.wikipedia.org/wiki/United_States_Environmental_Protection_Agency.
