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Course: Microeconomics > Unit 9

Lesson 2: Bonus articles: Pollution as a negative externality

The benefits and costs of US environmental laws

Read about specific examples of environmental laws in the United States.

Key points

Taken as a whole, the benefits of US environmental regulation have outweighed the costs.
As the extent of environmental regulation increases, additional expenditures on environmental protection will probably have increasing marginal costs and decreasing marginal benefits.
This pattern suggests that the flexibility and cost savings of market-oriented environmental policies will become more important.

Introduction

Government economists have estimated that US firms may pay more than $200 billion per year to comply with federal environmental laws. That's big bucks. Is the money well spent?

Clean air and clean water

The benefits of a cleaner environment can be divided into four areas:

People may stay healthier and live longer.
Certain industries that rely on clean air and water—such as farming, fishing, and tourism—may benefit.
Property values may be higher.
People may simply enjoy a cleaner environment in a way that does not need to involve a market transaction.

Some of these benefits, such as gains to tourism or farming, are relatively easy to value in economic terms. It is harder to assign a monetary value to others, such as the value of clean air for someone with asthma. It seems impossible to put a clear-cut monetary value on still others, such as the satisfaction you might feel from knowing that the air is clear over the Grand Canyon, even if you have never visited the Grand Canyon.

The EPA must estimate the value of saving lives by reducing pollution against the additional costs. In measuring the benefits of government environmental policies, the EPA’s National Center for Environmental Economics , NCEE, values a statistical human life at $7.4 million in 2006 US dollars.

Economists value a human life on the basis of studies of the value that people actually place on human lives in their own decisions. For example, some jobs have a higher probability of death than others, and these jobs typically pay more to compensate for the risk. Examples are ocean fishery as opposed to fish farming and ice trucking in Alaska as opposed to truck driving in the “lower 48” states.

Government regulators use estimates such as these when deciding which proposed regulations are reasonable—in other words, deciding which proposals have high enough benefits to justify their cost. For example, when the US Department of Transportation makes decisions about which safety systems should be required in cars or airplanes, it approves rules only where the estimated cost per life saved is $3 million or less.

Resources spent on life-saving regulations create tradeoff. A study by W. Kip Viscusi of Vanderbilt University estimated that when a regulation costs $50 million, it diverts enough spending in the rest of the economy from health care and safety expenditures that it costs a life. This finding suggests that any regulation that costs more than $50 million per life saved actually costs lives, rather than saving them.

Although estimates of environmental benefits are not precise, they can still be revealing. For example, a study by the US Environmental Protection Agency, or EPA, looked at the costs and benefits of the Clean Air Act from 1970 to 1990. It found that total costs over that time period were roughly $500 billion—a huge amount. However, it also found that a middle-range estimate of the health and other benefits from cleaner air was $22 trillion—about 44 times higher than the costs.

A more recent study by the EPA estimated that the environmental benefits to Americans from the Clean Air Act will exceed their costs by a margin of four to one. The EPA estimated that “in 2010 the benefits of Clean Air Act programs will total about $110 billion. This estimate represents the value of avoiding increases in illness and premature death which would have prevailed.”

Saying that overall benefits of environmental regulation have exceeded costs in the past, however, is very different from saying that every environmental regulation makes sense. For example, studies suggest that when breaking down emission reductions by type of contaminants, the benefits of air pollution control outweigh the costs primarily for particulates and lead. When looking at other air pollutants, the costs of reducing them may be comparable to or greater than the benefits.

Just because some environmental regulations have had benefits much higher than costs does not prove that every individual regulation is a sensible idea.

Ecotourism: making environmentalism pay

The definition of ecotourism is a little vague. Does it mean sleeping on the ground, eating roots, and getting close to wild animals? Does it mean flying in a helicopter to shoot anesthetic darts at African wildlife? Or a little of both? The definition may be fuzzy, but tourists who hope to appreciate the ecology of their destination—ecotourists—are the impetus for a large and growing business. The International Ecotourism Society estimates that international tourists interested in seeing nature or wildlife will take 1.56 billion trips by 2020.

Realizing the attraction of ecotourism, the residents of low-income countries may come to see that preserving wildlife habitats is more lucrative than, say, cutting down forests or grazing livestock to survive. In South Africa, Namibia, and Zimbabwe, for example, a substantial expansion of both rhinoceros and elephant populations is broadly credited to ecotourism, which has given local communities an economic interest in protecting them.

Some of the leading ecotourism destinations include Costa Rica and Panama in Central America; the Caribbean; Malaysia, and other South Pacific destinations; New Zealand; the Serengeti in Tanzania; the Amazon rain forest; and the Galapagos Islands. In many of these countries and regions, governments have enacted policies whereby revenues from ecotourism are shared with local communities, giving people in those communities a kind of property right that encourages them to conserve their local environment.

Ecotourism needs careful management so that the combination of eager tourists and local entrepreneurs does not destroy what the visitors are coming to see. But whatever one’s qualms are about certain kinds of ecotourism—such as the occasional practice of rich tourists shooting elderly lions with high-powered rifles—it is worth remembering that the alternative is often that people with low incomes living in poor countries will damage their local environment in their effort to survive.

Marginal benefits and marginal costs

We can use the tools of marginal analysis—like the diagram below—to illustrate the marginal costs and the marginal benefits of reducing pollution.

When the quantity of environmental protection is low so that pollution is extensive—for example, at quantity

Qa

—there are usually a lot of relatively cheap and easy ways to reduce pollution, and the marginal benefits of doing so are quite high. At

Qa

, it makes sense to allocate more resources to fight pollution. However, as the extent of environmental protection increases, the cheap and easy ways of reducing pollution begin to decrease, and more costly methods must be used. The marginal cost curve rises. Also, as environmental protection increases, marginal benefits are reduced.

As the quantity of environmental protection increases to

Qb

, the gap between marginal benefits and marginal costs narrows. At point

Qc

, the marginal costs exceed the marginal benefits. At this level of environmental protection, society is not allocating resources efficiently because too many resources are being given up to reduce pollution.

As society draws closer to

Qb

, some might argue that it becomes more important to use market-oriented environmental tools to hold down the costs of reducing pollution. These people's objective is to avoid environmental rules that would provide the quantity of environmental protection at

Qc

, where marginal costs exceed marginal benefits.

Summary

Taken as a whole, the benefits of US environmental regulation have outweighed the costs.
As the extent of environmental regulation increases, additional expenditures on environmental protection will probably have increasing marginal costs and decreasing marginal benefits.
This pattern suggests that the flexibility and cost savings of market-oriented environmental policies will become more important.

Review questions

As the extent of environmental protection expands, would you expect marginal costs of environmental protection to rise or fall? Why or why not?
As the extent of environmental protection expands, would you expect the marginal benefits of environmental protection to rise or fall? Why or why not?

Critical-thinking questions

From an economic perspective, is it sound policy to pursue a goal of zero pollution? Why or why not?
Recycling is a relatively inexpensive solution to much of the environmental contamination from plastics, glass, and other waste materials. Is it a sound policy to make it mandatory for everybody to recycle?

Attribution

This article is a modified derivative of "The Benefits and Costs of U.S. Environmental Laws" by OpenStaxCollege, CC BY 4.0.

The modified article is licensed under a CC BY-NC-SA 4.0 license.

References

Ryan, Dave. “New Report Shows Benefits of 1990 Clean Air Amendments Outweigh Costs by Four-to-One Margin.” United States Environmental Protection Agency. November 16, 1999. Accessed December 19, 2013. http://www.epa.gov/oar/sect812/r-140.html.

National Center for Environmental Economics (NCEE). “Frequently Asked Questions on Mortality Risk Valuation.” United States Environmental Protection Agency. Accessed December 19, 2013. http://yosemite.epa.gov/ee/epa/eed.nsf/pages/MortalityRisk Valuation.html#whatvalue

“Tourism 2020 Vision.” World Tourism Organization. Accessed December 19, 2013. http://www.world-tourism.org/market_research/facts/market_trends.htm.

Viscusi, Kip W. Fatal Tradeoffs: Public and Private Responsibilities for Risk. New York: Oxford University Press, 1995.

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alvinunited
Posted 5 years ago. Direct link to alvinunited's post “Could someone help me by ...”
Could someone help me by paraphrasing or explaining what this means? "when a regulation costs $50 million, it diverts enough spending in the rest of the economy from health care and safety expenditures that it costs a life.". Thank you.
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- Hinklet Everest
  Posted 4 years ago. Direct link to Hinklet Everest's post “Whilst I don't know the a...”
  Whilst I don't know the actual intended meaning, I have two theories.
  
  1)Theory One is that if something costs $50 million, then it takes away from money otherwise to be earmarked for Health care and safety expenditure at least "7.4 million 2006 Us Dollars."
  
  2) Theory two is that they mean that it takes away from money otherwise to be earmarked for Health Care and Safety expenditures a sufficient amount that one potentially avoidable death will not be avoided, though I am not sure how they would calculate that. Maybe 7.4 mil 2006 USD pro-rated for how many years of life the person had left, eg 50% of that much money for a person halfway to the expected date of death (or date of retirement maybe).
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Isaac
Posted 4 months ago. Direct link to Isaac's post “Does anyone think there i...”
Does anyone think there is some good material for discussion here? I have posted some thoughts in the tips and thanks section.
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Billie Patterson
Posted a month ago. Direct link to Billie Patterson's post “You will always have thos...”
You will always have those that object to recycling glass, plastics... even though it would help the environment greatly.
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