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Economics is concerned with marginal costs and benefits. Since our resources are scarce, we must decide the amount of pollution we are willing to live with. In order to have a pollution-free world, we would have to give up many other things. Money spent to clean up pollution would not be spent on education, roads, crime prevention, public health programs and so on.
The government usually provides for education, roads, etc. It does so because these are things our society considers very important but things that might not be provided for by private enterprise. Economists call these items market failures and have identified several types of market failures.
One type of market failure is a monopoly where there is a failure of competition. One recent example is Microsoft. Microsoft's rivals in the computer software industry showed that Microsoft had attempted to develop its dominant position in operating systems software (such as Windows) to gain a dishonest advantage and so create a monopoly in operating systems. Microsoft also created a monopoly in the sales of its applications software (like Microsoft Word).
PUBLIC GOODS A public good is a good that is provided in the same amount to all consumers if provided at all. A pure public good is non-excludable and non-rival. Once provided it is impossible to prevent agents from consuming it but one agent’s consumption doesn’t reduce the amount available to other agents. Some examples are public TV, World Service Radio, air and etc. A free-for-all public good is non-excludable and rival. It is impossible to prevent agents from using it and one agent’s consumption does reduce the amount available to other agents. Some examples are roads, fish, public beaches and etc. Since public goods are non-excludable, they represent a type of market failure.
TRAGEDY OF THE COMMONS 1832 – William Forster Lloyd observed the devastation of common pastures and the puny and stunted draft animals that grazed on them. 1968 – Garrett Hardin created the economic term tragedy of the commons. The commons refers to any resource shared by a group of people. Each household has the right to take resources from and put waste into the commons. As the population grows, greed runs rampant and the commons collapses … the tragedy of the commons. The plight of the commons in Lloyd's day is similar to the problems of over-fishing in our times. The problem in both cases is directly related to the lack of clearly established property rights, another type of market failure.
Externalities occur when the production or consumption of one agent affects that of another agent. Some externalities are negative such as mobile phone use in public places, toxic waste dumping reducing fishing yields, loud music in residential neighborhoods and so on. Some externalities are positive such as a neighbor who landscapes his property, soothing music in dentists’ offices, a regular exercise program and so on. Because the economic decisions of one agent diminish the economic decisions of another, externalities are a type of market failure.
THE PROBLEM OF POLLUTION The problem of pollution is complex because it involves several kinds of market failures, resulting in disagreement over how to solve the problem. Two methods of dealing with pollution have been suggested by economists.
Arthur Pigou was a British economist who did most of his work in the early part of the 20th century. Pigou said the government should tax a polluting company for each unit of pollution it emits.
Pigou thought that the tax charged should attempt to equal the value of the damage caused. In order to be effective, though, the company would need to internalize the externality … it couldn’t just pass the tax to its customers and thus avoid the cost of its benefit.
COASE THEOREM Ronald Coase was an economist who won a Nobel Prize and wrote two very influential and controversial books in the last half of the 20th century (The Problem of Social Costs and The Firm, the Market & the Law). Coase wrote that private parties could bargain over the allocation of resources and could solve the problem of externalities on their own.
In order for the Coase theorem to hold true, however, the cost of exchange or the transaction or negotiation costs must be low or negligible and the number of parties involved must be small. Coase suggested that in certain cases it might be more efficient for the victim to assume some or all of the costs of pollution.
The chart below can help you understand Coase’s ideas. It shows a hypothetical situation in which the waste from a factory’s production process threatens to pollute the water that supports a fishing industry. Make sure you understand the chart and then look at the questions below it. You do not need to write out answers to those questions but you DO need to develop answers since you’ll need them in the last part of the activity.
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Copyright © 1996 Amy S. Glenn |
FAILURE
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