 %\documentclass[12pt]{book}
 \input{../preamble-regulation.tex}
 \begin{document}

\parindent 16pt

 \setcounter{chaptercounter}{5}
  \refstepcounter{chaptercounter} \label{chap06}
\setcounter{page}{1}

\pagestyle{fancy} \lhead[\ref{chap06}--\thepage]{}    \chead{Pollution}   \rhead[]
{\ref{chap06}--\thepage} \cfoot{}
%--------------------------------------


\vspace*{\fill}

  \begin{center}
\begin{Huge}
{\bf \ref{chap06}  Externalities} \label{s11.0}  \\
\end{Huge}


\vspace*{\fill}

\begin{quotation}
%\begin{Large}

{\it ``So ye shall not pollute the land wherein ye are: for blood it
defileth the land: and the land cannot be cleansed of the blood that
is shed therein, but by the blood of him that shed it.''\\
 \hfill ---Numbers 35:33} 

%\end{Large}
 \end{quotation}

\bigskip
%\vspace*{\fill}

 \includegraphics[width=.9\linewidth]{fig06-pittsburgh.jpg}
\href{http://explorepahistory.com/displayimage.php?imgId=1-2-1D73}{``Pittsburgh from the Salt Works at Saw Mill'' }  by William T. Russell  (1843)   
  \end{center}
\vspace*{\fill}
\noindent
Is Pittsburgh still this scenic? 
 





\vspace*{\fill}

  \hfill {\it August 28, 2016}\\

 


 \hfill \url{http://rasmusen.org/g406/reg-rasmusen.htm}, erasmuse@indiana.edu 
\vspace*{\fill}

%-------------------------------------------------------
\newpage

   


\noindent
 {\bf \ref{chap06}.1: Externalities} \label{s11.1}

 Recall from Chapter 2 that an externality is a spillover effect, any effect on someone else's surplus caused by the involuntary actions of someone else.    Our example in Chapter 2 was  manufacturing newsprint
paper,  which,  if no precautions are taken, generates considerable water pollution.     Neither the
buyer  nor the seller bears the cost of the pollution that results from  newsprint production
unless  law or  regulation  requires them. As a result, even if the marginal benefit of the
newsprint to the buyer  equals the marginal cost to the seller it will still be less than the marginal   social
  cost, which includes the cost to the third parties who lose from the pollution.

Similarly, positive externalities, where someone get a beneficial spillover without having to pay for it, also create market failure. It is not that beneficial spillovers are bad in themselves, but that  whoever is doing the action that creates the externality is ignoring that benefit, and so will not be doing enough of the action. Shovelling snow off of the sidewalk in front of your house creates positive externalities, but since those benefits go to pedestrians instead of yourself, we would expect insufficient show shovelling to happy without laws,  regulations, or social customs to encourage it. 

 On the other hand, in contrast to these ``real'' externalities,  Chapter 2 explained that some  externalities are ``pecuniary'' and do not cause market failure. Pecuniary externalities are spillovers that result from someone's actions changing prices. If more people move into town, that causes rents to rise, which hurts existing renters. Thus, immigration into the city has negative externalities for renters. At the same time, though, it has positive externalities for landlords and the new inhabitants, and the gain to them is greater than the loss to the old renters.  Changes in prices are necessary to achieve the efficient market equilibrium, so although some people are helped and some are hurt by them, they do not  change surplus in the same direct way as pollution or snow shovelling. 





 Figure \ref{chap06}.\ref{fig02-basic-externality.jpg} is  a repeat from  Chapter 2. The competitive
equilibrium results in $Q_0=100$ and $P_0=3$ from the intersection of supply and demand. This,
however, inflicts a total externality cost of $Q_0*X=100$ on the rest of the economy. At $Q_0$, the
marginal cost of the newsprint, which includes the externality cost to third parties, is greater
than the marginal social benefit, the benefit to the   consumer precisely at the margin of buying
versus not  buying. Total surplus is (A+B+C)  for the buyers, but the total externality of $Q_0*X =
100$ must be subtracted from that. That quantity is shown on the diagram as  B+C+D.  Total surplus
is  $A+B+C-(B+C+D) = A-D$.

\begin{minipage}{1.0\textwidth}
% \begin{wrapfigure}{L}{3in}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{fig02-basic-externality.jpg} \\
  A Negative Externality }
\end{center}
\refstepcounter{figurecounter} \label{fig02-basic-externality.jpg}
 \includegraphics[width=\linewidth]{fig02-basic-externality.jpg}
% \end{wrapfigure}
\end{minipage}

  As Chapter 2 said, total surplus could be increased by the government giving out production limits
to each firm that  which keep  industry output down  to $Q^*=80$. The price would then rise to
$P_0+X$ because consumers would bid up the price at that quantity to the height of the demand curve.
This would increase surplus because now consumer surplus would fall to A, producer surplus would
rise to B, and the total externality would fall to B, for a total social surplus of A. The problem
with higher output was that it increased the externality to C+D while only increasing consumer
surplus by C.



\begin{minipage}{1.0\textwidth}
 %\begin{wrapfigure}{L}{3.5in}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{fig11-pollution-device.jpg} \\
Production Limits versus Anti-Pollution Devices }
\end{center}
\refstepcounter{figurecounter} \label{fig11-pollution-device.jpg}
 \includegraphics[width=\linewidth]{fig11-pollution-device.jpg}
% \end{wrapfigure}
\end{minipage}
\bigskip

  
 Let's now add another twist. Suppose pollution control devices could be installed to completely
eliminate the pollution at a cost of $Y$ per unit of newsprint, where $Y=0.50<X$.  A government
requirement that the companies limit their pollution to that amount will be even better than using
production limits.    Figure \ref{chap06}\ref{fig11-pollution-device.jpg}, a continuation of Figure
\ref{chap06}.\ref{fig02-basic-externality.jpg},  shows how limiting output to 80 has social surplus of $A$. If
the government switched its policy to have no limit on output but required every company to install
anti-pollution devices, output would rise to 90 and price would rise to $P_0+Y=3.50$. Consumer
surplus would rise to $A+B_1+C_1$ because the price has fallen and the quantity has risen. Producer
surplus is zero, falling by $B_1+B_2$ because the new price exactly equals the cost of production
plus pollution control. The rest of the economy's negative externality cost has fallen to zero from
$B_1+B_2$, however, because there is no longer any pollution. Total surplus is $A+B_1+C_1$,   better
than $A$.

   One theme of this chapter will be that regulators should keep track of their ultimate objective,
but on the way to that objective they should allow the economy as much flexibility as possible.
Assigning companies production limits and requiring them to use a particular control technology is an extreme example of inflexible {\bf command and control
regulation}\index{command and control regulation}: telling people and companies what to do.
Restricting output is not the objective, nor  getting companies to install a certain pollution-control technology; reducing pollution is. If all firms are identical and the
government has perfect information, then output restrictions can help, but the government doesn't
know how much each firm should produce to maximize surplus, and in any case output restriction gives
no incentive to companies to reduce their pollution per unit of output,  and no incentive to anyone
to develop   pollution control technology. Pollution is actually much higher with production limits
than it is with the second policy we looked at, requiring the pollution control devices.  Requiring
specific devices is another form of command and control, but more flexible because it doesn't say
which firms produce how much. If some firms  have higher costs of production, or cannot so easily
install the pollution devices, this allows market forces to make those firms reduce their output
most.  Even better would be to not require a specific technology, but rather to command firms to
limit their pollution emissions to an efficient level (zero in this example, but usually  positive)
by the cheapest means the firms can find. This is the difference between {\bf
design-based  standards}\index{design-based  standards} and {\bf performance-based standards}
\index{performance-based standards} that OSHA chooses between in making ladders safer. As we will
see, in the case of pollution there are even more flexible policy alternatives: pollution taxes and
cap-and-trade.




%-------------------------

  \bigskip
\noindent
 {\bf The  Optimal Level of Pollution}



 Before we come to policies dealing with externalities, it is worth observing that the surplus-
maximizing level of externalities usually is not zero. Take air pollution
 as an example. It is extremely expensive to reduce the amount of smoke from a tire factory to zero,
either by using special technology or by shutting down the factory completely and sacrificing all
the  producer and consumer surplus from the tire market. As with all economic goods and bads,
surplus is maximized by comparing the marginal cost with the marginal benefit.

\begin{minipage}[c]{ .8 \linewidth}
%\vspace*{-32pt}
% \begin{wrapfigure}[16]{l}{3in}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{fig11mcmbenefit.jpg} \\
 The Optimal Strictness of Air Pollution Regulation}
\end{center}
\refstepcounter{figurecounter} \label{fig11mcmbenefit.jpg}
 \includegraphics[width=\linewidth]{fig11mcmbenefit.jpg}
% \end{wrapfigure}
\end{minipage}

Figure \ref{chap06}.\ref{fig11mcmbenefit.jpg} shows the {\it total} cost and benefit of stricter air pollution
regulations. The horizontal axis shows the strictness of regulation, where 0 means no limits at all
and 52 means that firms are required to reduce their air pollution substantially.  The vertical axis
shows the social benefit from stricter regulation and less pollution, and the social cost from
pollution controls that production more expensive and drive up consumer prices.  The optimal level
of strictness is 30, which has the greatest net benefit--- the biggest difference between total
benefit and total cost. This is where the slopes of the two curves are identical, as shown by the
slanting lines. Since the slope of total benefit is marginal benefit and the slope of total cost is
marginal cost, this is where the marginal benefit equals the marginal cost. Having no pollution
control would be bad because starting at 0 the marginal benefit is much greater than marginal
cost--- the total benefit curve has a much steeper slope than the total cost curve, so  the net
benefit is increasing rapidly. A level of 52 would be just as bad, with a net benefit of zero,
because there the marginal benefit is much less than the marginal cost.




Table \ref{chap06}.\ref{table11-02-mc} shows some real-world estimates of the marginal cost of air
pollution.  The first line shows the percentile nationally of the marginal damages of emissions. In
the 1st percentile is  Klamath, Oregon, a rural area with very little pollution, so that there the
marginal cost per ton of fine particulate matter is only \$250. In the 99th percentile is heavily
polluted Cuyahoga, Ohio, where the cost of that same one of pollution would be \$12,400, and in the
99.9th is Hudson, New Jersey where the cost is \$41,700. The marginal cost of each kind of
pollution in the table increases drastically with its level.  Having one standard for automobile emissions for the entire country will either result in air too dirty in Cuyahoga or too clean in Klamath or both.  It would be interesting to calculate the transfer of wealth from towns and suburbs to cities that has resulted from our one-limit-for-all policy. Public discourse has focussed on the most polluted areas--- Los Angeles, in particular--- while ignoring the cost of limiting emissions on people in Montana and Maine. 



\begin{minipage}{1.0\textwidth}
\begin{footnotesize}
\begin{center}
{\sc Table \ref{chap06}.\ref{table11-02-mc}\\
Marginal Damages of Emissions by Quantile (dollars per ton)}\\
\refstepcounter{tablecounter}  \label{table11-02-mc}

\vspace{12pt}
\noindent
\begin{tabular}{l rrr rrr}
\hline
\hline
 Percentile: & 1st& 25th& 50th &75th &99th &99.9th\\
    & Klamath & Tyler & Bradley &Florence&Cuyahoga & Hudson \\
   & Oregon & Texas&Arizona & Texas & Ohio &  N.J. \\
 Pollutant &  &   &  &  &  & \\
\hline
  &  &   &  &  &  & \\
Fine Particulate   &  250 & 700&  1,170 & 1,970&  12,400&  41,770\\
Matter  &  &   &  &  &  & \\
Coarse Particulate &  60&  120 & 170&  280&  1,960 & 6,550\\
Matter  &  &   &  &  &  & \\
Nitrogen Oxides&  20&  180&  250&  370& 1,100&  1,780\\
Ammonia & 100 & 300 & 900&  2,000 & 20,620&  59,450\\
Volatile Organic  &  40 & 120 & 180&  280&  1,370&  4,540\\
Compounds  &  &   &  &  &  & \\
Sulfur Dioxide&  220&  550 & 970&  1,300&  4,130 & 10,860\\
  &  &   &  &  &  & \\
\hline
\hline
\end{tabular}\\
 \end{center}
\end{footnotesize}
\end{minipage} 




\bigskip




 An extreme example of neglect of cost-benefit analysis is the government's {\bf Superfund program}
\index{Superfund program}, which cleans up  toxic waste sites.
The program was begun in order to  identify and clean up old toxic waste sites that did not meet
current standards. Current producers of toxic waste are taxed for the clean-up of past sites,  since
often the original producer cannot be determined or has gone out of business.  A major fear is that
chemicals abandoned in the sites might cause cancer in people living nearby. Table
  \ref{chap06}\ref{table11-01-superfund} shows how fast diminishing returns set in. Five percent of the
expenditures would prevent   99.47\% of the cancers, though with a very high     marginal cost of
\$145  million per life saved-- far above the estimates of the value of human life we have studied.
Going up to 99.86\% would raise the cost to \$1.107 billion, and increasing it still further to
99.98\% would raise the cost to an astonishing \$241 billion dollars per cancer case.


\begin{minipage}{1.0\textwidth}
\begin{center}
\refstepcounter{tablecounter} \label{table11-01-superfund}
{\sc Table \ref{chap06}.\ref{table11-01-superfund}\\
 Superfund Costs}\\
 \vspace*{24pt}

 \includegraphics[width=5in]{superfund.jpg}

 \end{center}
\end{minipage} 
\vspace{12pt}

  Marginalist thinking is important for looking at externalities for two reasons. First, it is
important to determining the surplus-maximizing level of the externality. Starting with no pollution
control at all,  pollution  would be so high that the the marginal benefit of reduction would be
even greater than in Table  \ref{chap06}.\ref{table11-02-mc}'s Hudson, New Jersey.  Requiring the
entire country to reach the low pollution level of Klamath, Oregon, on the other hand, would  cause
the marginal cost of pollution reduction to rise to a level far beyond its marginal benefit.
Superfund should not try to prevent every death that might result from toxic waste cancer; the
marginal cost per life saved rises too far once we go much beyond 99\% cleanup.

 Second, the concept of marginalism is helpful in determining where pollution should be located
after  we have determined which overall level is efficient.  When pollution  marginal costs are high
in Hudson and low in Klamath, that suggests we might be able to increase surplus by reducing the
amount of pollution in Hudson and increasing it in Klamath.    Rather than imposing regulations that
require equal percentage or absolute reduction of  pollution in different counties,   it makes more
sense to require less reduction in counties where the marginal benefit of pollution reduction is
less.

That is the idea behind the {\bf Larry Summers memo}\index{Larry Summers memo} of  box
\ref{chap06}.\ref{sidebar11-01-summers}. Lawrence Summers\index{Summers} was a prominent economist employed
the World Bank. In the memo, he notes that the marginal cost of pollution and the marginal benefit
of pollution control are much lower for poor countries. Being poorer,  people there put a higher
value on material wealth than on reducing the health costs of pollution or improving the beauty of
the environment. Indeed, the material wealth itself could be used to save more lives than extra
pollution would cost. Total world surplus would rise if  profitable but polluting industries were to
move their operations from rich countries to poor countries.  This, in fact, is what the free market
itself moves toward, if we include supply and demand for government policy as part of the market.
Rich countries demand more pollution regulation, increasing the cost to manufacturing  plants, some
of which find that this extra regulatory cost makes it worthwhile to move operations to a poor
country, which welcomes the employment and taxes. Although the poor country still dislikes the
pollution, it dislikes it less, relative to the employment and tax revenue.




 Contrary to what many people think,
pollution has declined substantially over time in the United
States.\footnote{See\href{https://www.cato.org/pubs/regulation/v26n2-4.pdf} {``Clearing the Air,''}
Joel Schwartz, {\it Regulation},   26,    (Summer 2003).}

  
\begin{center}
%\vspace*{24pt}
\noindent
\begin{boxedminipage}[c]{  .9\linewidth}
 \renewcommand{\baselinestretch}{.8}
 \begin{footnotesize}
% \begin{singlespace}

\refstepcounter{sidebarcounter} \label{sidebar11-01-summers}
 {\sc Box  \ref{chap06}.\ref{sidebar11-01-summers}: 
   Pollution Exports?}\\
{\tt 

\noindent
DATE: December 12, 1991\\
TO: Distribution\\
FROM: Lawrence H. Summers\\
EXTENSION: 33774\\
SUBJECT: \underline{GEP}\\


...[page 5 of 7]\\

 

3. 
\underline{`Dirty' Industries} Just between you and me, shouldn't the World Bank be encouraging \underline{more} migration
of the dirty industries to the LDCs [Less Developed Countries]? I can think of three reasons:\\

1) The measurements of the costs of health impairing pollution depends on the foregone earnings from
increased morbidity and mortality. From this point of view a given amount of health impairing
pollution should be done in the country with the lowest cost, which will be the country with the
lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest wage
country is impeccable and we should face up to that.\\

2) The costs of pollution are likely to be non-linear as the initial increments of pollution
probably have very low cost. I've always thought  that under-populated countries in Africa are
vastly \underline{under}-polluted, their air quality is probably vastly inefficiently low compared to Los
Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-
tradable industries (transport, electrical generation) and that the unit transport costs of solid
waste are so high prevent world welfare enhancing trade in air pollution and waste.\\

3) The demand for a clean environment for aesthetic and health reasons is likely to have very high
income elasticity. The concern over an agent that causes a one in a million change in the odds of
prostrate cancer is obviously going to be much higher in a country where people survive to get
prostrate cancer than in a country where under 5 mortality is  200 per thousand. Also, much of the
concern over industrial atmosphere discharge is about visibility impairing particulates. These
discharges may have very little direct health impact. Clearly trade in goods that embody aesthetic
pollution concerns could be welfare enhancing. While production is mobile the consumption of pretty
air is a non-tradable.\\

The problem with the arguments against all of these proposals for more pollution in LDCs (intrinsic
rights to certain goods, moral reasons, social concerns, lack of adequate markets, etc.) could be
turned around and used more or less effectively against every Bank proposal for liberalization.

}
%  \end{singlespace}
\end{footnotesize}
\end{boxedminipage}
\end{center}
%  

 Let's focus on air pollution, because it is one of the most heavily regulated and one of the
easiest to measure.
  Table \ref{chap06}\ref{table11-03-pollution} shows what has happened in the United States. Carbon monoxide
emissions have fallen from 178 million tons per year in 1980 to 78 in 2008. Lead emissions have
fallen from 74,000 tons per year to 2,000.   The extent of the decline should not really be
surprising, since the country spends perhaps \$79 billion/year on pollution
control,\footnote{\href{http://www.ntu.org/news-and-issues/energy-environment/macro_vs_wtp_v19-
pdf3.pdf}{``Assessment of the Obama
Administration's Cost-Benefit
Analysis of
Clean Air Act Regulations,''}NERA, June 15, 2011, p. 4.   This is a politically sensitive number and
may not be accurate. The EPA has  tried to hide costs and inflate benefits of pollution control in
its recent report.} and the {\bf Environmental Protection Agency (EPA)}\index{Environmental
Protection Agency (EPA)} itself had a budget of \$10.3 billion in
2010.\footnote{\href{http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/environm
ental.pdf}{``Funding Highlights,''} Whitehouse.gov,    p. 149. } If air pollution had not declined,
we would have to wonder whether all that spending was really making any difference.



\refstepcounter{tablecounter} \label{table11-03-pollution}
\begin{center}
{\sc Table \ref{chap06}.\ref{table11-03-pollution} \\
  National Emissions Estimates} \\
(millions of tons per year)\\
\medskip
 \noindent
\begin{tabular}{l rrr rrr rr}
\hline
\hline
  	&   1980 & 	1985 & 	1990 & 	1995 & 	2000 & 	2005 & 	2008& 2017\\
\hline
  	    &  &  &  & &  &  &&  \\

Lead (1,000's tons) &	 74 &	 23 &	 5 &	 4 &	 3 &	 2 &	 2&1\\
Nitrogen Oxides  & 	27 	&26 &	25 	&25 &	22 &	19 &	16 & 11 \\
Sulfur Dioxide   &	26 	&23 	&23 &	19 	&16 &	15 &	11&3\\
Carbon Monoxide   & 	178 & 	170 	& 144 & 	120 & 	102 & 	93 & 	78& 60\\
Volatile Org.    Comp.  
 &	30 &	27 	&23 &	22 &	17 &	18& 	16& 16\\
Particulate Matter  (PM10)  &  &  &8 &7&7& 6& 6&5 \\
    &  &  &  & &  &  &  &\\
\hline
\hline
\end{tabular}
  	\end{center}
Source: 2017: EPA:  \url{https://www.epa.gov/air-emissions-inventories/air-pollutant-emissions-trends-data}. Lead in 2014:National Emissions Inventory  \url{https://www.epa.gov/sites/production/files/2017-04/documents/2014neiv1_profile_final_april182017.pdf}
\bigskip

 In the Third World, pollution has been increasing along with industrialization. This is in line
with the Larry Summers memo.  Compared to rich people, poor people value goods  more than clean air.
Economic reasoning predicts that at a certain point a country becomes wealthy enough that people
start to prefer clean air more and the government starts regulating pollution more heavily, so
income growth slows down,   but   air quality improves.


%-------------------------
  
  \bigskip
\noindent
 {\bf \ref{chap06}.2:  Command-and-Control versus Pollution Taxes} \label{s11.2}

 The obvious way to control any externality is to ban it.  Cigarette smoking creates the negative
externality of smelly smoke that bothers people near the smoker. Many organizations therefore ban
smoking, having calculated that the marginal cost to the non-smoker exceeds the marginal benefit to
the smoker. Other organizations allow smoking, having come to the opposite conclusion for the people
they serve.\footnote{Often dislike of the smell is masked as concern about health, since that is a
more socially acceptable motivation,  but the evidence that second-hand smoke causes lung cancer is
only epidemiological (correlations between lung cancer and being in places with smokers and cancer,
a correlation which could have many causes) and far weaker than is usually required for such
studies. Think about the relative quantities of smoke that the  smoker and  the bystander  inhales,
and you will realize how implausible is the link.   See
\href{http://www.velvetgloveironfist.com/pdfs/passivesmokinglungcancer.pdf}{``The Evidence for the
Passive Smoking Theory,''} from {\it Velvet Glove, Iron Fist: A History of Anti-Smoking},
Christopher Snowdon (2009). }


  In other situations, notably those of industrial pollution,   the producers of the externality are
fixed in place and we neither want them to pollute freely nor to shut  down altogether. Rather,
marginalism tells us that to maximize surplus we wish for the producer to limit the externality's
magnitude  to where the good's  social marginal cost (the private marginal cost plus the
externality) starts to exceed its marginal benefit. Like banning the externality altogether, this
could be done simply by command--- ``Produce no more than 14 tons of sulfur dioxide per month,''  or
by mandating that particular technologies be used ``Every coal-using electrical generating plant
must install Type G scrubbers on its smokestacks.''    One defect of command-and-control regulation
is its inflexibility.  Type G scrubbers might not be the cheapest way to reduce emissions, for
example, or  a plant might have a particularly high benefit for producing more sulfur dioxide this
month.  Also, command-and-control regulation is in a sense too lax, because it gives no incentive to
polluters to reduce pollution down beyond the commanded level,  and it does not allow customization
to fit the cost-benefit situation of particular individual polluters.   The   Environmental
Protection Agency   has long used command-and-control regulation as its main tool, though   in the
milder form of emissions restrictions rather than technology requirements.





\begin{wrapfigure}[15]{L}{2.5in}
\vspace*{-18pt}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{fig11-01-pollutiontax.jpg}\\
 A Pollution Tax }
 \end{center}
 \includegraphics[width=\linewidth]{fig11-01-pollutiontax.jpg}
\refstepcounter{figurecounter} \label{fig11-01-pollutiontax.jpg}
\end{wrapfigure}

An alternative to command-and-control is a {\bf pollution tax.}\index{pollution tax}  Cigarette
taxes might be considered a pollution tax,    though   they    tax the smoker whether he smokes in a
low-externality place (at home) or a high-externality place (a restaurant).
  Figure \ref{chap06}\ref{fig11-01-pollutiontax.jpg} shows how a pollution tax on gasoline could work.
Suppose the marginal production cost of producing gasoline is constant at 3 dollars per unit.  If
each unit of pollution causes    1 dollar  of damage, then a tax of 1 dollars per unit of pollution
gives producers the right incentive to decide how much to pollute. It {\bf internalizes the
externality}\index{internalizes the  externality} by making the private cost to the polluter equal
to the social cost. Once the tax is imposed, sellers reduce the quantity of  gasoline they supply,
and the new equilibrium equates the marginal social cost and the  marginal social benefit.

 We can also calculate the gain in social surplus. Producer surplus is zero  both with and without
the tax (since marginal cost is constant and the supply curve is perfectly elastic).   Imposing the
tax has three effects. First, it reduces consumer surplus by the rectangle (4-3)(100-0)= 100 plus
the triangle 0.5(4-3)(108-100)= 4,  a total of 104. Second, the tax  raises tax revenue of 100---
the same rectangle that consumers lost. That 100 represents merely a shift of surplus from consumers
to taxpayers. Third, the tax benefits anyone hurt by the externality. We have assumed a cost of 1
per unit of externality, so this would be a gain of 8. This gain of 8 to  third parties outweighs
the loss of the triangle of size 4 to consumers, so total surplus rises by 4 as a result of the tax
and the reduced consumption.


\begin{wrapfigure}{L}{3in}
\begin{boxedminipage}[c]{  \linewidth}
  \renewcommand{\baselinestretch}{.9}
\begin{footnotesize}
 \refstepcounter{sidebarcounter} \label{sidebar11-02-nukes}
\noindent
 {\sc Box  \ref{chap06}.\ref{sidebar11-02-nukes}: 
Command-and-Control and Nuclear Armageddon}\\


\hspace*{16pt}``The U.S. Air Force has completed upgrading the guidance systems of its 450 LGM-30
Minuteman III ICBMs.\ldots The air force has also replaced decades old solid fuel rockets in its
missiles. \ldots  The last of the Minuteman III missiles will receive their new motors this year.
\ldots The first six test flights have shown that the new and improved missiles are less accurate
and had shorter range than the missiles they replaced.\ldots
The shorter range can be attributed to Environmental Protection Agency (EPA) regulations. The old
motors did not have to comply with EPA rules, the replacement ones do. This meant the new rocket
motors were heavier, which resulted in shorter range.''  But as one commentator pointed out,

 \hspace*{16pt}   ``If nuclear missiles have to comply with EPA regulations, what about the
warheads?'' \\



\end{footnotesize}
\end{boxedminipage}
\end{wrapfigure}



 Negative externalities are a different kind of market failure than we have seen  so far, because
the market failure is overproduction rather than underproduction. In the case of market power or
overestimates of product quality, the amount of traded goods ends up being too large, but with
negative externalities it is too small, since the buyer and seller don't care about the costs to
third parties.





Gasoline taxes are useful for dealings with other negative externalities  too, not just pollution.
Professors Parry and Small found that the negative externality of  each car on the road slowing down
the others was even more important than the pollution externality.  They compared the United States
with Great Britain, which has a much higher gasoline tax, and concluded that the tax was
inefficiently small in the U.S. and inefficiently great in the U.K. as far as internalizing
externalities.\footnote{ Parry,\index{Parry} Ian W. H.  and   Kenneth A., 
Small\index{Small}``Does Britain or the United States Have the
Right Gasoline Tax?'' {\it  American Economic Review,}
 95 (September 2005).}


Pollution taxes are   a more flexible policy than simply telling companies how much to pollute, and
in some cases, like this one, they don't even  require the government to know the demand or supply
curves in the industry, just the cost of the externality.  Telling companies how much to pollute
requires the government to know not only the marginal cost of pollution, but the marginal cost to
each company of preventing pollution. In addition, telling each  company how much it can pollute via
command and control regulation  gives ample scope for government favoritism and raises no revenue.
Pollution taxes, in contrast, apply equally to everyone and raise revenue without the deadweight
loss \index{deadweight loss}created by sales or income taxes.  Although criticized as a policy which
allows rich companies to just pay and then get away with polluting as much as they want, pollution
taxes can also be framed as a policy which makes companies pay whenever they pollute. Command and
control, on the other hand, lets companies pollute for free. As one might expect, command-and-
control is usually more popular with businesses, especially those that are well connected
politically, since they can pollute without cost up to the limit. Pollution regulation can even be
a competitive tool, if incumbent companies are {\bf grandfathered},\index{grandfathered} meaning
they can pollute at existing levels, whereas entrants must build new plants that pollute much less.



\begin{wrapfigure}{L}{3.4in}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{fig11risingsupplypollutiontax.jpg} \\
  A Pollution Tax with Upward-Sloping Supply}
 \end{center}
 \includegraphics[width=\linewidth]{fig11risingsupplypollutiontax.jpg}
\refstepcounter{figurecounter} \label{fig11risingsupplypollutiontax.jpg}

\end{wrapfigure}




 The example   in  Figure  \ref{chap06}.\ref{fig11risingsupplypollutiontax.jpg} is the simplest situation of a
pollution tax, the situation where the marginal cost of production and the marginal externality cost
of pollution   to third parties is constant.  Once you understand it,  you can advance to  Figure
\ref{chap06}.\ref{fig11risingsupplypollutiontax.jpg}, in which both the     marginal private  cost of
production and the marginal cost of the externality are increasing.  Here, as in the earlier figure,
the  marginal social cost is the sum of the   marginal private production cost (from the supply curve) and the marginal externality. At
an output of 0, the  marginal private cost is 8 and the  marginal externality cost is 1, for a
social marginal cost of 9. At an output of 100, the marginal private production cost is 9 and the marginal
externality cost is 2, for a social marginal cost of 11.
 Since both the  marginal private cost and the marginal externality cost are increasing  the
marginal social cost too will be increasing,  but it is increasing with a steeper slope than either,
since it adds up their rates of increase.

  Surplus is maximized at an output of 100, where the demand curve crosses the marginal social  cost
curve. The  free market would result in output of 310, inefficiently high. To get output down to
100, a tax of 2 per unit could be imposed. That  is  more than the externality's marginal cost at
the output of 0, and less than at 310, but it exactly equals it at  the output of 100. At any market
price less than 11, producers would be eager to increase the supply, but at that price, they would
be willing to supply exactly 100, since the marginal production cost is 9 and the tax is 2.


%-------------------------

  \bigskip
\noindent
 {\bf Cap and Trade}

   Another way to achieve optimal pollution levels is to regulate how much each firm can pollute,
but allow firms to sell their rights to pollute.  In effect, this caps the total quantity of
pollution rather than charging companies a price to pollute.  Thus, this is called {\bf cap and
trade}.\index{cap and trade} If it is very important to avoid letting total pollution cross some
particular threshold where its marginal cost rises sharply, regulating quantity this way is better
than imposing a tax, because if the tax level is picked to be just a little too low, pollution may
cross the threshold for sharply higher marginal costs of damage.\footnote{Weitzman,\index{Weitzman}
Martin, ``Prices vs. Quantities,'' {\it  Review of Economic Studies}, 41: 477--491, October 1974.}
If companies must buy their initial pollution permits, the quantity policy can, like the tax policy,
raise revenue for the government that  can use to replace distortionary taxes. This is like the
spectrum auctions used in  telecommunications.  While not using property rights  as much as for telecom, some
countries have indeed tried using emissions trading, both for pollution and for carbon
dioxide.\footnote{\href{http://www.epa.gov/airmarkets/trading/2010/10summary.html} {``2010 EPA Allowance Auction Results.''}}\\


\begin{minipage}[c]{\linewidth}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{11-03-emissiontrading.jpg} \\
 Cap and Trade }
  \end{center}
\refstepcounter{figurecounter}.\label{11-03-emissiontrading.jpg}
 \includegraphics[width=\linewidth]{fig11-6-captrade.png}
\end{minipage}
%\vspace{-12pt}

  Figure \ref{chap06}.\ref{11-03-emissiontrading.jpg} illustrates how emissions trading can raise total
surplus compared to command-and-control. A firm with a high cost of reducing pollution can buy
permits from a firm that has a lower cost of reducing pollution.

The government begins by allocating 40 units of pollution licenses to Apex and 40 to Brydox. The two
companies differ in their marginal benefits from polluting.    At the initial allocation, Apex's
marginal benefit of pollution is \$25/unit, while Brydox's is \$5/unit. This could be because Brydox
gets less profit  from selling extra output (which requires extra pollution) or   because    Brydox
could have bought   pollution-reducing equipment at a lower cost.


\begin{center}
%\begin{wrapfigure}{L}{3in}
 \noindent
\begin{boxedminipage}[c]{ .8\linewidth}
\renewcommand{\baselinestretch}{.8}
 %\begin{singlespace}
\begin{footnotesize}
\refstepcounter{sidebarcounter} \label{sidebar11-02a-steel}
\noindent
 {\sc Box  \ref{chap06}.\ref{sidebar11-02a-steel}:
  Selling Allowances Pays Better than Steelmaking}\\

\hspace*{16pt}  The Kyoto Protocol of 1997 required signatories to reduce  carbon emissions.  In
2005, the European Union
started a   cap-and-trade system. Companies  were issued free   carbon permits that they could sell.

\hspace*{16pt}In 2009,  Corus, the EU's second-largest steel producer closed a plant in the United
Kingdom,    cutting 1,700 jobs.   The closed plant's capacity was  three million tons of steel,
which would also produce   six million  tons of CO$_2$.

\hspace*{16pt} The  market price of a permit had ranged from  \$21 to  \$50.  At the high price,
Corus could make  \$300 million a
year.  Corus was essentially being paid to lay off British workers.  But that's the whole point of
cap-and-trade: restrict carbon emission to the companies that value it most.
({\it The Wall Street Journal Asia},  ``Cap and Trade in Practice,''
  (December 18 2009).)

\end{footnotesize}
% \end{singlespace}
\end{boxedminipage}
%\end{wrapfigure}
\end{center}
\medskip

  The initial allocation does not maximize surplus. If the licenses are tradable, then Brydox could
sell one license to Apex for \$10 and  Apex would gain \$15 while Brydox gained \$5, a gain in total
surplus of \$15. We would expect the two companies to keep trading licenses until their marginal
benefits are equal--- perhaps at Apex using 70 of them and Brydox using 10, with each company's
marginal benefit of pollution being \$6/unit.

One problem with tradable permits, though, is that the government will  be tempted to violate the
property rights it established earlier. Seeing that Brydox is making more money from selling
pollution licenses than it is from selling goods, the electorate may be offended and tell its
leaders to confiscate Brydox's licenses.  Foreseeing this, Brydox may be reluctant to sell licenses
to Apex in the first place.


%-------------------------

  \bigskip
\noindent
 {\bf \ref{chap06}.3:  The Coase Theorem} \label{s11.3}

 I said earlier that clear allocation of property rights can obviate the need for
regulation.\footnote{``To obviate'':    to make unnecessary.} This is most clearly expressed in the
{\bf Coase Theorem}.\index{Coase Theorem}
This  idea was never stated as a theorem  or called one  in Coase's
1960 article, which was non-mathematical, but   the name caught on. Here
is one statement of it.\footnote{ ``The Problem of Social Cost,'' Ronald H. Coase,\index{Coase},
{\it  Journal of Law and Economics}, 3: 1--44 (1960). The Coase Theorem was
stated and named by   {\it  The Theory of Price},  George J. Stigler,\index{Stigler}  3rd edition, p.
133  (1966; 1st edition 1942). On the link, see   \href{http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1650649}{``A Case of
Mistaken Identity: George Stigler, 'The Problem of Social Cost,' and the Coase Theorem,''}  \index{Medema} Steven G.  Medema,
{\it
European Journal of Law and Economics}, forthcoming,
 (July 29, 2010). There is no
standard statement of the Theorem; what I give here would not  be   controversial as a version  of
it.    See also the interview:    \href{http://reason.com/archives/1997/01/01/looking-for-results/singlepage}{  ``Looking For Results
Nobel Laureate Ronald Coase on Rights, Resources, and Regulation,''} Thomas W. Hazlett, {\it Reason}, 
( January 1997) .  }

\begin{bigquote}
\noindent
{ THE COASE THEOREM:  If   information is symmetric,  negotiation is costless, and  contracts are
costlessly  enforceable,  then people will choose  surplus-maximizing actions regardless of whether
there are externalities and regardless of who has the property rights.}
\end{bigquote}

   Coase used the example of a cattle rancher who lives next to a wheat farmer. Occasionally, the
cattle get through the fences and trample down  wheat. The Coase Theorem claims that the amounts of
wheat grown   and  cattle raised   do not depend on whether the law requires the rancher to pay
compensation to the farmer.




 \begin{wrapfigure}{L}{2.4in}
\noindent
\begin{boxedminipage}[c]{.9 \linewidth}
 \renewcommand{\baselinestretch}{.8}
\begin{footnotesize}
\refstepcounter{sidebarcounter} \label{sidebar11-03-chesire}

 {\sc Box  \ref{chap06}.\ref{sidebar11-03-chesire}: 
  The Town of Cheshire Buyout}\\

\hspace*{16pt}``Two years after the Environmental Protection Agency accused
the plant's owner, American Electric Power, of violating
the Clean Air Act in this southeast Ohio hamlet, the
company, which is contesting that accusation, is solving at
least some of its problems by buying the town, for \$20
million.\\

\hspace*{16pt}  Over the next few months, all 221 residents of Cheshire
will pack up and leave. The 90 homeowners here will get
checks for about three times the value of houses they
probably could not have sold anyway. In return, they have
signed pledges never to sue the power company for property
damage or health problems.'' (Katharine Q.
Seelye,\href{http://www.nytimes.com/2002/05/13/national/13OHIO.html?ex=1022330994&ei=1&en=
9cd34398aad56935}{ ``Utility Buys Town It Choked, Lock, Stock and Blue Plume,''} {\it The New York
Times},  (May 13, 2002).)

\end{footnotesize}
\end{boxedminipage}
 \end{wrapfigure}


   The reason for the paradox is that even though the rancher would not ordinarily have the
efficient incentive to make sure his cattle don't break through the fence if he doesn't have to pay
for the damage they cause, the farmer will pay him to take the efficient level of care.   One way to
do this would be for the farmer to pay the rancher a large lump sum on the condition that the
rancher pay for any cattle damage.    If that efficient level of care is zero, then the farmer won't
pay the rancher, and the cattle will break in once in a while.


\begin{wrapfigure}{L}{2.4in}
\noindent
\begin{minipage}[c]{\linewidth}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{fig11-coase.jpg}\\
  Ronald Coase and  George Stigler } \\
\vspace*{24pt}
\refstepcounter{figurecounter}.\label{fig11-coase.jpg}
 \includegraphics[width=.4\linewidth]{fig11-coase.jpg}  \hfill \includegraphics[width=.4\linewidth]
{fig11-stigler.jpg}
 \end{center}
\end{minipage}
\end{wrapfigure}


  A numerical example will help.
    Suppose a paper mill is polluting a river. The farmer downstream had been selling trout fishing
rights to rich tourists for \$20,000. Now the trout have fled, and he gets zero. The factory could
install filtering machinery that would eliminate the pollution, at a cost of  \$4,000. What happens?

The Coase Theorem starts off with   rights being well-defined. Here, the right in question is the
right to control the river's water quality. One way to define it for the law to say   that the
factory has the right to dump its waste water into the river. Another way is for the law to say that
the farmer has the right to a clean river. We have to see what happen under each system.

First, suppose the farmer has the right to a clean river. He will tell the factory to stop
polluting. If the factory refuses, the farmer will go to court and tell the judge that the factory
is infringing on his right.  The judge will then tell the factory to stop polluting. If the factory
does not stop, the judge will fine the factory or order its president to go to jail for contempt of
court. The factory (or, rather, its president)  will decide to pay the \$4,000 for new machinery to
stop the pollution. That is the surplus-maximizing result, since it will save the farmer \$20,000 in
lost income.

  Second, suppose the factory has the right to dump its waste water into the river. Now the farmer
can't go to court to stop it. Coase's insight is to see that this inability isn't the end of the
story. What the farmer will do is   go to the factory and offer to buy the factory's  right. The
farmer will say, ``Factory, I wish the law didn't let you pollute, but since it does, how about if I
give you \$5,000 and you stop polluting?'' The factory will agree, and pay the \$4,000 for new
machinery to stop the pollution. That is the surplus-maximizing result, since it will save the
farmer \$20,000 in lost income.

 Thus, either way, we get the surplus-maximizing result. The only difference is that if the factory
has the right to pollute, the farmer has to buy that right, so the farmer is worse off by \$5,000.
But we do get allocative efficiency.

 Think back to   cap-and-trade.  The important thing is to allow the emissions to be tradable.


\begin{wrapfigure}{L}{3.4in}
\vspace*{24pt}
\begin{boxedminipage}[c]{.9 \linewidth}
 \renewcommand{\baselinestretch}{.5}
\begin{footnotesize}
\refstepcounter{sidebarcounter}   \label{sidebar11-03a-chicago}
 {\sc Box  \ref{chap06}.\ref{sidebar11-03a-chicago}:
   Coase Converts Chicago} \\

\hspace*{16pt}  ``When, in 1960, Ronald Coase criticized
Pigou's theory rather casually, in the course of a masterly
analysis of the regulatory philosophy underlying the Federal
Communications Commission's work, Chicago economists
could not understand how so fine an economist as
Coase could make so obvious a mistake. Since he persisted,
we invited Coase (he was then at the University of
Virginia) to come and give a talk on it. Some twenty
economists from the University of Chicago and Ronald
Coase assembled one evening at the home of Aaron Director.
\ldots\\

\hspace*{16pt}Coase then asked us to infer that in this abstract world
there would be no external economies or diseconomies \ldots\\

\hspace*{16pt}   Ronald asked us also to believe a second proposition
about this world without transaction costs: Whatever
the assignment of legal liability for damages, or whatever
the assignment of legal rights of ownership, the assignments
would have no effect upon the way economic
resources would be used! We strongly objected to this
heresy. Milton Friedman did most of the talking, as usual.
He also did much of the thinking, as usual. In the course
of two hours of argument the vote went from twenty
against and one for Coase to twenty-one for Coase. What
an exhilarating event! I lamented afterward that we had
not had the clairvoyance to tape it.'' \\


\end{footnotesize}
\end{boxedminipage}
\end{wrapfigure}






  The Coase Theorem does not always apply,   because it has   premises which are sometimes invalid,
depending on the particular situation. Professor Coase\index{Coase} spent most of his career
thinking about situations in which    his theorem fails--- reasonably enough since that is when
government policy   is important and interesting.  Here are how some of the premises  of the Theorem
enter  in the trout example. \\

\noindent
{\bf If   information is symmetric \ldots} \\
  \hspace*{12pt} Suppose the farmer doesn't know that the factory's cost of pollution control
equipment would be \$4,000. Instead, he thinks it's probably around  \$1,000.  In that case, he
wouldn't offer the factory \$5,000 to stop polluting. Instead, he might offer   \$1,500, and the
factory would turn him down. The result would be inefficient pollution. \\



\noindent
{\bf If  negotiation is costless \ldots} \\
 \hspace*{12pt}  If it cost \$25,000  in lawyer fees and management time for the farmer and the
factory to work out a deal, then     the factory would end up polluting even though it would prefer
to have a deal with the farmer and be paid \$5,000 not to pollute. Or, if  the two parties are
afraid they will end up spending too much of their time on haggling and working out the details of
an enforceable contract, they won't try. \\




\noindent
{\bf If contracts   are costlessly  enforceable  \ldots} \\
 \hspace*{12pt} Suppose the farmer and the factory do make a deal to curb the pollution, but the
factory violates it. The farmer must then go to court to force the factory to keep the contract. If
it would cost the farmer
  \$30,000 in legal fees, time, and bother to go to court, he won't. But if he foresees that,   he
won't make the deal with the factory in the first place.  The factory will keep on polluting because
it can't make a credible commitment to stop. The factory  would like to be cheaply suable, because
then the farmer would believe it when it said it would stop polluting in exchange for money. (Note:
Would it be better for the farmer to delay payment till after he sees the factory has stopped
pollution?)\footnote{There can be other problems too. One is extortion: maybe the  factory locates
there just to extract payments from the farmer.
See   ``Donate Now!''
\url{http://rasmusen.org/g406/readings/Savetoby2005.htm} and ``Toby Has Finally Been Saved!!!!!''
\url{http://www.savetoby.com/.} }   \\



 So far we have been staying with the original example in which the surplus-maximizing outcome was
for pollution not to occur.
The outcome would change if the trout fishing income was only \$3,000, not \$20,000. Then if the
farmer owned the property right  he could still stop the factory from polluting, but he wouldn't.
Instead, he would   say, ``Factory, if you give me \$3,500, I'll agree that that's fair
compensation, and I'll let you kill my fish.'' The factory will agree--- which is, with the new
numbers, the surplus-maximizing result. If the factory has the right to pollute, the farmer will
only offer \$3,000 to the factory to stop polluting, and the factory will refuse his offer--- again
the surplus-maximizing result.






%-----------------------------------------


\bigskip
\noindent
 {\bf \ref{chap06}.4: Global Warming}\index{Global Warming} \label{s11.4}

    There is wide disagreement as to whether we control air and water pollution too strictly or too
laxly, but pollution is not one of the main political issues of the year 2011 in the United States
and Europe. Global warming, on the other hand, is frequently in the news. The controversy is over
whether the world is getting warmer because of increased levels of carbon dioxide and  how much harm
higher temperatures would cause compared to the cost of reducing carbon dioxide somehow.


  
 %\begin{wrapfigure}[14]{l}{.4\linewidth}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{CO2scripps.jpg}}\\
{The Rise in CO$_2$ from 1960 to 2010 } \\
 \end{center}
 \includegraphics[width=.8 \linewidth]{CO2scripps.jpg}\\
\refstepcounter{figurecounter} \label{CO2scripps.jpg}
%\end{wrapfigure}

 Carbon dioxide is   breathed out by animals, and absorbed by plants.
 Carbon dioxide is also generated when people burn coal, oil, or
wood, or  when they make  cement from calcium carbonate (the main  mineral in limestone).   This
man-made carbon dioxide is the source of the current concern, because  carbon dioxide in the
atmosphere   increased  over the 20th century from about 300 parts per million to 395, as shown in
Figure \ref{chap06}\ref{CO2scripps.jpg}.\footnote{Intergovernmental Panel on Climate Change (IPCC),
\href{http://www.ipcc.ch/publications_and_data/ar4/syr/en/spm.html}{``Climate Change 2007:
Synthesis Report;
Summary for Policymakers,''} (November 2007), p. 38.}



   Carbon dioxide matters because scientists do not not understand what has caused the earth's
climate to change over its history, including why the Ice Ages came and went or why the temperature
fluctuated between 1850 and 1970,  but they do know that carbon dioxide could warm the earth due to
{\bf the   greenhouse effect.}\index{the   greenhouse effect.} Greenhouses stay warmer than the air
outside. Since glass is transparent, the rays of the sun go through it  into the greenhouse,
including the warm infrared rays at the low-frequency end of   the spectrum. The rays lose   energy
in going through the glass and hitting what is inside,  and when they reflect  or when the earth
gives off infrared heat at night many  rays are too weak to go back through the glass.  Thus, heat
is trapped inside.\footnote{Another important effect is that the greenhouse traps a layer of air
that cannot mix with the outside air and dissipate heat. That is important for glass greenhouses,
but not for the earth's greenhouse gases.} Carbon dioxide, along with other less important gases
such as methane, are called {\bf greenhouse gases}\index{greenhouse gases} because they too can
create a greenhouse effect. The sun's radiation can get through greenhouse gases to the earth's
surface but cannot radiate back so easily into space. Much of this is desirable, of course, but the
burning of fossil fuels has increased the size of the effect, and can be expected to warm the earth.

Where the theory becomes speculative is in the feedback effects of carbon dioxide on water vapor.
Not enough carbon dioxide is being generated by burning to cause important climate change by itself.
The real danger is from water vapor, which is also a greenhouse gas. When carbon dioxide warms the
earth a little, that results in evaporation of water, and the water vapor will warm the earth more,
a multiplier effect. The interactions become quite intricate,   because the extra water vapor can
also result in clouds, which can block  radiation from the sun  and  partially reverse the  warming.
A key element of models of global climate is the size of the positive and negative feedback effects
that they assume. The theory that carbon dioxide emissions are big enough to increase world
temperatures significantly depends on knowledge about feedbacks that  we  do not yet have. It is
natural, then to turn to look at what has happened to world temperatures.



%-------------------------



  \bigskip
\noindent
 {\bf What Has Happened to Temperatures around the World?}

Figure \ref{chap06}\ref{global1880.jpg} shows what has happened to the average temperature at weather
stations around the world. It shows  the temperature ``anomaly,'' putting 0 on the axis as the
temperature in the middle part of the period and measuring changes relative to that period. It shows
the periods from 1880 to 2010. Temperatures vary considerably from year to year, but they tended to
rise  from 1890 to 1940, by a total of about 0.4$^\circ$F  (0.2$^\circ$ C),   showed little pattern
of change from 1940 to 1970, and then rose by 1.1$^\circ$F  (0.6$^\circ$ C) more up to 2000. Figure
\ref{chap06}\ref{global1996.jpg} shows just the period from 1996 to 2010.  Over that period there has been no
clear trend, though temperatures have stayed well above where they were in 1970.\footnote{For
surface station temperature   data, go to the NASA site at
\url{http://data.giss.nasa.gov/gistemp/tabledata/ZonAnn.Ts+dSST.txt}.} \\

\noindent
 \hspace*{36pt}\begin{minipage}[c]{.4\linewidth}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{global1880.jpg}\\
Average Surface Station Temperatures after 1880 } \\
\vspace*{8pt}
 \includegraphics[width= \linewidth]{global1880.jpg}\\
\refstepcounter{figurecounter} \label{global1880.jpg}
 \end{center}
\end{minipage} \hspace*{24pt}
\begin{minipage}[c]{.4\linewidth}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{global1996.jpg}\\
 Average Surface Station Temperatures after 1996  } \\
\vspace*{8pt}
 \includegraphics[width= \linewidth]{global1996.jpg}\\
\refstepcounter{figurecounter} \label{global1996.jpg}

% \includegraphics[width=.5\linewidth]{us1880.jpg}
 \end{center}

\end{minipage} \\

\vspace{18pt}

Climatologists  try to correct for something called the {\bf urban heat island  problem}\index{urban
heat island  problem}. This is the increase  in the average temperature of cities as they grow.
Cities have roads, buildings, and parking lots that can  make night-time temperatures, especially,
warmer than they would be in a natural setting. Cities  also release heat in  innumerable ways, from
industrial machinery to home heating. A weather station in a city would experience a gradual
increase in temperature over time even if there were no trend in the region's temperature outside of
the city.\footnote{ The placement of temperature stations can be seen at:
\url{http://www.surfacestations.org/} and by state at
\url{http://gallery.surfacestations.org/main.php?g2_itemId=
20}.}


  \begin{wrapfigure}[12]{L}{2.4in}
  \vspace*{-24pt}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{fig11-5-satellite-temp.jpg} \\
  Satellite-Measured Temperatures    } \\
 \end{center}
\refstepcounter{figurecounter} \label{fig11-5-satellite-temp.jpg}
 \includegraphics[width=\linewidth]{fig11-5-satellite-temp.jpg}

\end{wrapfigure}
%\vspace*{24pt}



   For the past thirty years, there is a more uniform source of temperature data: satellite
measurements. Satellites carry instruments that can measure temperatures by measuring the microwave
emissions of oxygen molecules at different depths in the atmosphere. This kind of measurement is no
harder over the sea than over land,  and does not have to correct for the urban heat island effect.
As Figure \ref{chap06}\ref{fig11-5-satellite-temp.jpg} shows, however, there is a different warming pattern
with satellite measurements,  though   2000--2010 is a little  warmer than 1979--2000.

   Thus, it seems that global warming has indeed occurred, but in a puzzling pattern where
temperatures increased during the 1980's and 90's and   levelled off  after 2000.  The puzzle
is made even more difficult by the scandal known as {\bf Climategate}\index{Climategate}. One of the
sources of global temperature data is the Climate Research  Unit \index{Climate Research  Unit}  in
the United Kingdom. Weather stations all over the world collect data, but that mass of data  needs
to be organized, averaged across regions, corrected for the appearance and disappearance of
stations, and adjusted for the urban heat island effect. Someone whose identity is still unknown
leaked a large amount of emails and computer code from the Climate Research Unit in 2009. The emails
revealed a strong bias towards finding global warming in the data and  personal hostility towards
scholars who were skeptical of global warming.  The computer code was messy enough to raise doubts
about the accuracy of the data. Nonscientists were left wondering who could be trusted. More recent
analysis at Berkeley seems, however, to have confirmed the general picture of temperature rising in
the 80's and 90's and flattening out after 2000.\footnote{
\href{http://www.dailymail.co.uk/sciencetech/article-2055191/Scientists-said-climate-change-
sceptics-proved-wrong-accused-hiding-truth-colleague.html}{``Scientist who said climate change
sceptics had been proved wrong accused of hiding truth by colleague,''} {\it Mail Online}, David
Rose, (October 30, 2011).}

 What will happen to the temperature in the future if CO$_2$ rises? The IPCC, a U.N. organization
that summarizes climate science, estimated that if nothing were done then by 2099 the average
temperature would rise  7.2$^\circ$F (4$^\circ$C).\footnote{ ``The IPCC Fourth Assessment Report:
Climate Change 2007:Synthesis Report,''
\href{http://www.ipcc.ch/publications_and_data/ar4/syr/en/spms3.html}, {``A1F1 scenario,''} worst-case,
Table SPM-1.}

 A survey in the {\it Journal of Economic Literature}  says that limiting atmospheric CO$_2$ to 450 parts per million (ppm)  would limit the temperature rise to 4.9$^\circ$F  (2.7$^\circ$ C). This would require emission prices of \$40-\$90 per ton of CO$_2$ by 2025 (\$140--\$330 per ton of carbon), a present value  cost of \$8-\$40 trillion dollars if we cut off the costs at 2050.\footnote{ ``Designing Climate Mitigation Policy,''   J. E. Aldy,\index{Aldy}, A. J. Krupnick, \index{Krupnick}, R. G. Newell,\index{Newell}  \& I. W. H.    Parry,\index{Parry}  {\it Journal of Economic Literature}, Vol. 48, p. 910 (December 2010). }

   What is the cost or benefit  of global warming?  It is hard to estimate costs as far out as the
year 2100.  The IPCC says the effects of  a 7.2$^\circ$F increase would be increased water supply in
the moist tropics and high latitudes, water stress for many people, significant species extinctions,
widespread coral mortality, coastal wetland loss, increased damage from floods and storms, and both
good and bad changes in farm productivity. It also lists increased mortality from heat waves,
though, oddly, it doesn't mention the much greater diminution in mortality from cold.\footnote{\href{http://www.ipcc.ch/publications_and_data/ar4/syr/en/spms3.html} {``The
IPCC Fourth Assessment Report: Climate Change 2007: Synthesis Report.''}
} The effects would be unevenly
distributed, even if the temperature increases were equal worldwide. Siberia and Canada would enjoy
milder winters, and rainfall would on average increase, but the tropics would be even hotter than
today, and some places (such as the Mediterranean) would have more frequent droughts.  

  One of the main concerns is that the sea level will rise, because (a) water expands when heated, and (b) if non-floating ice melts--- and in particular Greenland's ice, since Antarctica isn't getting warmer--- that raises sea level. Note that melting of the  Arctic Ice doesn't do this, because that ice floats on the water.  Figure  \ref{chap06}\ref{fig06-12sealevel} shows that the sea level has increased by almost 4 inches  from roughly 1980 to 2020. Oddly, though, it had already increased 6 inches from 1880 to 1980, so there is something else unknown besides global warming going on that is increasing sea levels. 

 \begin{wrapfigure}[12]{L}{2.4in}
  \vspace*{-24pt}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{fig06-12sealevel} \\
  Sea Level over Time    } \\
 \end{center}
\refstepcounter{figurecounter} \label{fig06-12sealevel}
 \includegraphics[width=\linewidth]{fig06-12sealevel}

\end{wrapfigure}
%\vspace*{24pt}

%-------------------------

  \bigskip
\noindent
 {\bf What Should Be Done about Carbon Dioxide?   }

  Suppose carbon dioxide is indeed contributing to global warming, and that global warming is bad
for the world. What should we do?  We could try to limit output of carbon dioxide, we could try to
limit the effect of carbon dioxide,  or we could try to  soften   the effects of the warming.


 Most attention has been focused on international efforts to limit output of carbon dioxide. This
could  be  regulated in the same way as  pollution  such as sulfur dioxide   by command-and-control,
pollution taxes, pollution taxes,   or   cap-and-trade. Both the costs of limiting carbon and the
potential benefits are vast. A survey in the {\it Journal of Economic Literature}  says that keeping
atmospheric CO$_2$  down to 450 parts per million (ppm) would  limit  the temperature rise to
4.9$^\circ$F  (2.7$^\circ$ C) and  require emission prices of \$40-\$90 per ton of CO$_2$ by 2025
(\$140--\$330 per ton of carbon).\footnote{The price per ton of carbon is 3.5 times more than for
C02 because each molecule of CO$_2$ has two oxygen atoms as well as one carbon atom.}   The cost-
side surplus loss from that policy   would have  a present value  cost of \$8-\$40 trillion dollars
(if we cut  off the costs at 2050).  At a discount rate of 5\%, that comes to \$400 billion to \$2
trillion per year, compared to a world GDP of  \$66 trillion in
2007.\footnote{\href{http://www.economywatch.com/world_economy/world-economic-indicators/world-
gdp.html}{``World GDP, World Gross Domestic Product, GWP, Gross World Product,''} {\it EconomyWatch}
(2010).}

 In estimating the costs of temperature rises and  and carbon reduction policies, much depends on
the discount rate used to calculate the present value of a dollar of benefits  100  years into the future. At a discount rate of 7\%, the present value of that dollar is a penny.  At a discount rate of 1\% it is 37 cents.  William  Nordhaus\index{Nordhaus} found \$8/ton using market interest rates as the discount
rate, and Richard Toll\index{Toll} gave a range of \$4--\$20/ton in his 2009 analysis.
Lord Nicholas Stern\index{Stern} came up with an optimal emission price of \$85/ton of CO$_2$, using a
discount rate much lower than the market interest rate because he viewed people and markets as short-sighted, perhaps  in the tradition of Ramsey.\footnote{ ``Designing Climate Mitigation Policy,''   J. E. Aldy,\index{Aldy}, A. J. Krupnick, \index{Krupnick}, R. G. Newell,\index{Newell}  \& I. W. H.    Parry,\index{Parry}  {\it Journal of Economic Literature}, Vol. 48, p. 910 (December 2010). } Thus, Lord Stern believes that all kinds of investment should be drastically increased, not just investment in preventing global warming.\footnote{ ``A Mathematical Theory of Saving,''  Frank P. Ramsey,  {\it The Economic Journal}, 38: 543--549  (1928). For a history of the issue from then till 2003 see   \href{http://www2.ulg.ac.be/crepp/papers/crepp-wp200302.pdf}
{``Should We Discount Future Generations' Welfare?
A Survey on the `Pure' Discount Rate Debate,''}  
Gregory Ponthiere, University of Liege  (2003).}  
 



 \begin{wrapfigure}{L}{3in}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{figchina.jpg} \\
  A Negative Externality }
\end{center}
\refstepcounter{figurecounter} \label{figchina.jpg}
 \includegraphics[width=\linewidth]{figchina.jpg}
 \end{wrapfigure}



 The {\bf  Kyoto Protocol}\index{Kyoto Protocol} of 1997 is an international agreement that has
tried to limit carbon dioxide emissions, an agreement signed by many countries but not by the United
States, where  the Senate unanimously passed a resolution opposing it. Under it, OECD countries were
to reduce their emissions by 28\% by 2012 over what they would have been with ordinary growth, but
Kyoto was only claimed to be a first step. since its effect  by 2100 would only be a lowering of
0.12$^\circ$ C  at a cost (if the US were included) of \$180 billion per year.\footnote{Lomborg, pp.
24--29.  I find this number puzzling given the \$400-\$2,000 billion figure I cited earlier (though
for a much   bigger CO$_2$ reduction). Probably it reflects how uncertain we are of the potential
costs.} The biggest growth in emissions is expected in developing countries like China and India,
where rising standards of living will cause rising use of energy.   The European Union has
implemented a cap-and-trade system, with uneven success.   How to allocate the initial carbon
allowances has been politically controversial.  Transportation is not covered at all; only
industrial uses.  There was much complaint because utility companies that generated electricity from
coal were given large initial allowances, but not quite large enough to cover all the carbon they
needed to burn. As a result, they bought carbon allowances on the open market, at a price, and since
this was  part of their marginal cost, they were able, under the countries'  regulatory systems  to
pass on the cost to consumers via higher prices. This, of course, is how cap-and-trade is supposed
to limit carbon use--- by making carbon products such as electricity more expensive--- so   the
complaints were inevitable.

A different problem is that  regulating   carbon emissions in just  Europe  raised costs for
carbon-burning European companies  but not  for companies in other parts of the world such as China.
One manager of a French cement plant said, ``I've been yelling about this. What do you want me to
do? Put a plant in Mauritania or Morocco
and close this one?''.  Unlike in the case of ordinary pollution, carbon dioxide causes the same
problem wherever in the world it is emitted--- the problem is {\it global} \index{global}warming---
and so shifting output overseas has no overall benefit.\footnote{   ``Europe's Problems
Color U.S. Plans to Curb Carbon Gases,''
{\it
Washington Post}, p. A01
(April 9, 2007).}  This unintended policy effect of shifting of where or when carbon dioxide is
generated is known as {\bf emission leakage}.\index{emission leakage}\footnote{See ``On Hotelling,
Emissions Leakage, and Climate Policy Alternatives,''
                  Carolyn Fischer and Stephen Salant, Resources for the Future (2010).} Emissions
leakage appears in other ways too. If less oil is used in Europe because of cap-and-trade, then the
world price of oil falls and more will be demanded on other continents. If coal  producers expect
oil demand to fall in the future because more countries will  adopt anti-carbon policies or work
hard on carbon-free substitutes  for coal, they will produce more coal now, while they can still
sell it. Thus, green policies can actually accelerate carbon emissions.

 An alternative to cap-and-trade (though one with an equal problem of emissions leakge)  is the
{\bf carbon tax}\index{carbon tax}. Instead of auctioning off permits or giving them away, the
government would charge  a tax  on emissions, collecting revenue without constraining the total
amount of carbon output.    Five Scandinavian countries,  the United Kingdom, and the province of
British Columbia in Canada  impose carbon taxes, which they use to attain the national carbon
emission goals negotiated in the European Union.  About  80\% of U.S. carbon output could be covered
by a system that taxed only 3,000 companies and government units.   There are about  247 million
registered motor vehicles in the United States, but only
146 petroleum refineries--- and many other  industries use petroleum products.\footnote{``The Design of a Carbon Tax,'' Gilbert E. Metcalf,
\index{Metcalf}  and  David Weisbach,\index{Weisbach}  
{\it  Harvard Environmental Law Review}
   33(2):   499--556 (2009). }  Carbon tax revenue could be used to reduce income taxes, and though
the impact of carbon taxes would be particularly hard on the poor (via the rise in the prices of
such things as electricity and gasoline) their taxes could be particularly reduced, or, if they were
already below the tax threshold, they could be provided tax credits. Since carbon is used in so much
of the economy, a carbon tax would have an effect similar to that of   a sales tax on goods that
exempted services. A \$1/ton tax on carbon, which would amount to  about a 1 cent per gallon tax on
gasoline, would reduce emissions by 2\%.    Economist William Nordhaus has argued that  a carbon tax
would be superior to cap-and-trade because it would be easier to implement one country at a time,
because of our uncertainty over the appropriate year-to-year cap to put on emissions, and because it
avoids the political problem of how to assign permits. As mentioned earlier, he estimates \$8/ton of
CO$_2$ (\$28/ton of carbon)  as the optimal tax level,\footnote{
\href{http://aida.wss.yale.edu/~nordhaus/homepage/documents/BAS_Nordhaus_Jan11.pdf}{``The
Architecture of Climate
Economics: Designing a Global
Agreement on Global Warming,''}  William D.  Nordhaus,\index{Nordhaus} {\it Bulletin of the Atomic
Scientists}, 67: 9--18 (2011).}

 
{\bf Carbon sequestration} \index{Carbon sequestration}refers to the capturing of carbon dioxide
that is in the air or would be emitted there and immobilizing it in some other chemical form. This
is the reverse of burning carbon to produce carbon dioxide; instead, one starts with the carbon
dioxide and turns it into some chemical form that does not cause global warming. Trees and other
plants do this, so reforestation is one tool for reducing global warming.  Or, carbon dioxide can be
reacted with magnesium- and   calcium-based rocks. To do that, the gas is captured at the site of
emission, compressed, and transported to some site where it can be injected into underground  rocks.
Using current technology, that would add 75 percent to the cost of electricity for a  new pulverized
coal plant  and around 35 percent    for a new  gasification   coal
plant.\footnote{\href{http://fossil.energy.gov/sequestration/overview.html}{
``Carbon Capture and Storage R\&D Overview,''} U.S. Department of Energy.}

 Carbon sequestration could be implemented by command-and-control  as a requirement for new power
plants, but it could  also  be  part of a cap-and-trade or carbon tax scheme. In that case, power
plants would consider the costs of sequestration via chemical reaction and  could use that
instead of purchasing extra carbon allowances or paying extra carbon tax if sequestration were more
cost-effective. Sequestration by means of tree planting would not be so automatic, but it could be
achieved by giving out extra carbon allowances to anyone planting trees or by allowing that to
substitute for paying the carbon tax for emissions.




  A quite different approach is to use {\bf geoengineering solutions},\index{geoengineering
solutions} which  try to change the relationship between emissions and climate change. Under one
approach,    tons of iron would be dumped into the Antarctic Ocean, a part of the world's oceans
having enough other nutrients that with the addition of iron, green algae would bloom and absorb
more carbon dioxide. When the algae died, it would sink to the ocean floor, permanently removing the
carbon. Under another approach, aerosols such as sulfur dioxide would be  inserted into the upper
atmospheres using converted jetliners, simulating the effects of volcanic eruptions, which are known
to cause enough blockage of the sun's rays to reduce world temperatures. In 1991   the eruption of
Mount Pinatubo in the Philippines poured such a  large amount of sulfur dioxide into the atmosphere
that the average   global temperature dropped 0.5 degree Centigrade for almost two years, which is
about the same as the amount of global warming we have experienced.\footnote{\href{http://www.ncpa.org/pub/ba607} {``Geoengineering: A
Global Warming Fix?'' } Pete Geddes, National Center for Policy Analysis   (January 30, 2008)
. } Or, geoengineering could proceed on a small scale. One reason
cities are warmer is because they have a lot of black surface that absorbs heat from the sun.
Planting 11 million trees, and reroofing 5 million homes and painting a quarter of the roads with
more reflective surfaces might reduce  Los Angeles temperatures by 5.2$^\circ$ F (3$^\circ$
C).\footnote{{\it Cool It}, Bjorn Lomborg\index{Lomborg}   (2007), p. 24.}


  The main disadvantage  of geoengineering solutions is   the  fear  of unanticipated  consequences
from   large interventions.
Geoengineering would seem to be much cheaper than emission control, however. William Nordhaus  has
estimated the present value of the cost of implementing the Kyoto Protocol with U.S. participation
as \$0.54 trillion,  with a benefit of \$1.17 trillion. He estimates that the  more drastic policies
advocated by the United Kingdom's Stern Review would cost \$27.70 trillion and have a benefit of
\$13.53 trillion, while the carbon tax Nordhaus himself finds optimal would cost \$2.16 trillion and
have a benefit of \$5.23 trillion.\footnote{  \href{http://nordhaus.econ.yale.edu/dice_mss_072407_all.pdf} {  {\it The Challenge of
Global Warming:
Economic Models and Environmental Policy}},  William Nordhaus,\index{Nordhaus}
Table V-3, p. 218, (July 24, 2007).}
All these estimates are   uncertain, but estimates of the cost of geoengineering solutions are in
the billions rather than trillions of dollars. In addition, the cost of geoengineering solutions can
be delayed until the amount and cost of warming becomes clearer, and geoengineering  would work
faster as an emergency policy if we have underestimated the speed with which warming could proceed
and the severity of its consequences.

  To be sure, government failure is a danger when large sums of money are invested. The solar panel company Solyndra received half a billion
dollars in loan guarantees  soon before it filed for bankruptcy in 2011.   From 1961 to 2008 the
federal government spent \$172 billion (in 2005 dollars) on energy projects, a quarter of it from
1974 to  1980.\footnote{\href{http://www.wired.com/images_blogs/wiredscience/2009/08/federal-investment-in-
energy-rd-2008.pdf} {``U.S. Federal Investments in
Energy R\&D: 1961--2008''}  J.J. Dooley,\index{Dooley}  U.S. Dept. of Energy 
(October 2008). } Much of that was on basic research, the  payoff from which is hard to
measure. The projects  included  notorious   failures
in trying to develop new technology on a commercial scale when private companies were unwilling to
take the risk without government support. In 1971, the Clinch River Breeder Reactor project was
started to provide a cheaper source of nuclear fuel. In 1983 the program terminated after billions
of dollars in spending but without producing any new fuel. In the late 1970's, President Carter called
the Synthetic Fuels Corporation, which was to turn coal into oil as the Germans did in World War II,
the ``keystone'' of U.S. energy policy. In 1986 it closed down, a failure. President George W. Bush
called in 2003 for hydrogen-powered  car subsidies to  ``overcome obstacles to taking these cars
from laboratory to showroom,''  but they never did make it to the showroom.  The Congressional
Budget Office estimated that a quarter of the funds were diverted to congressmen-favored projects
outside the scope of the main effort.   Currently, carbon sequestration projects are looking
increasingly dubious.\footnote{\href{http://www.washingtonpost.com/opinions/before-solyndra-a-long-
history-of-failed-government-energy-projects/2011/10/25/gIQA1xG0CN_print.html}{``Before Solyndra, a
Long History of Failed Government Energy Projects,''}   {\it The Washington Post}
(November 12, 2011).} There are no matching   successes, except perhaps for the government-
subsidized development of nuclear power in the 1960's.

   Geoengineering for climate change is
  like basic research  in that  lack of interest by private companies
does not indicate lack of potential benefit.  There is no profit potential from changing the world's temperature, unless it be from extortion, which the government could easily  shut down.  Thus, it requires government funding, though on such a small scale relative to alternative energy or reduction in energy use that a single country might find the benefit worth the cost.  Besides its relative cheapness, moreover, geoengineering  has {\bf option value}, meaning that its implementation can be delayed until the true scope of temperature change becomes apparent. Efforts to control carbon dioxide need to begin now, before the temperature has risen significantly, and would be wasted if it turns out that temperatures are not going to rise much more.      Mankind has survived  experts' predictions of  disaster ranging from  DDT (1970's),   the ozone hole (1990's), acid rain (1980's), bird flu (2005), swine flu (1976), Ebola virus (1970's, mad cow disease (1980's), SARS (2003), and the  Y2K computer collapse (1999).\footnote{  \href{http://www.wired.com/wiredscience/2012/08/ff_apocalypsenot/all/}{
``Apocalypse Not: Here's Why You Shouldn't Worry about End Times,'' }  Matt Ridley, 
(August 17, 2012 ).}  Policymakers should  listen to experts such as scientists, lawyers, and economists, but they should listen critically and make sure that claims are backed up by evidence and reasoning rather than just  expert authority.   In addition, even if we manage to halt the growth in carbon dioxide emissions, unless we halt emissions completely the atmospheric level will increase, so reducing growth merely delays the problem of high temperature rather than solving it. Geoengineering, on the other hand, could   be implemented relative quickly, or on a bigger or smaller scale depending on what happens to the climate. As President Eisenhower said  about what he learned in the army: ``Plans are worthless, but planning is everything. There is a very great distinction because when you are planning for an emergency you must start with this one thing: the very definition of ``emergency" is that it is unexpected, therefore it is not going to happen the way you are planning.''\footnote{
          From a speech to the National Defense Executive Reserve Conference in Washington, D.C. (November 14, 1957) ; in {\it Public Papers of the Presidents of the United States, Dwight D. Eisenhower, 1957,}  National Archives and Records Service, Government Printing Office, p. 818.} Plans that can be changed are especially valuable when the  situation is one that we have not encountered before. 

 Still another solution to global warming is to not try to control the temperature at all, but
  to control its effects instead. In the summer,  you do not try to change the weather; you install air conditioning. 
 Similarly, if the problem is poor crop yields because  of  a permanent drop in rainfall,   one solution is to try to lower the temperature to try to  increase rainfall, but a more straightfoward solution    is irrigation and the use of different crop
varieties. With  fifty years and 27 trillion dollars  saved from not trying to adjust carbon dioxide levels, it would be  possible to make a lot of adaptions to the
increase of  7.2 degrees Farenheit expected by the IPCC.\footnote{ \href{ http://www.global-
greenhouse-warming.com/global-temperature.html}{``Global Temperature,''} GlobalGreenhouseWarming.com
(January 21, 2011). } This policy of adjustment to temperature change is called {\bf amelioration}. 

     On the other hand, many countries might prefer not even to engage in amelioration, but instead to spend the emissions restriction or amelioration budget to raise their standard of living. In poor countries, clean water supplies, malaria, medical facilities, and literacy are higher priority than temperature change. Climate scientist Roy Spencer notes that ``22,000 children die each day in the world due to poverty; in contrast, we aren’t even sure if anyone has ever died due to human-caused global warming.”\footnote{\href{http://www.drroyspencer.com/2016/12/science-under-president-trump-end-the-bias-in-government-funded-research/ }{``Science under President Trump: End the Bias in Government-Funded Research,'' }  Roy Spencer,  {\it Climate Change} blog (2016). }
 

 This suggestion, however, takes us into the difficult question of countries' differing objectives. Spending a trillion dollars on poverty aid  in Africa has no direct benefit to the
United States. Even spending a trillion dollars on  reducing the growth rate of  CO$_2$ output  has more benefit to  the
rest of the world than on the United States. The free rider problem\index{free rider problem} is 
severe.  Ideally, most countries (except for the few that would actually benefit from warmer temperatures)  would  like
other countries to restrict carbon dioxide but not to bear any  costs  themselves. Since each country is
independently governed, it is hard to force cooperation.  Moral
suasion--- that is, shame--- has diminishing returns when it comes to inducing countries to give up
significant chunks of   GDP. Thus, even if there were unanimous agreement as to the ill effects
of global warming, some  solution to free riding would need to be found.  

Indeed, Figure \ref{chap06}.\ref{fig06-14-global-emissions.jpg} suggests that at first cut, we can simplify the problem to just that of keeping China's carbon dioxide from growing. China is so big, and growing so fast, that the rest of the world is trivial by comparison.  China is also militarily powerful, and cannot be intimidated.  It could be paid--- but the Coase Theorem does not apply here, because of free riding in the bargaining over who would pay. How would you address this? 

 \begin{wrapfigure}{L}{3in}
\begin{center}
 {\sc Figure \ref{chap06}.\ref{fig06-14-global-emissions.jpg} \\
 Only China Matters }
\end{center}
\refstepcounter{figurecounter} \label{fig06-14-global-emissions.jpg}
 \includegraphics[width=\linewidth]{fig06-14-global-emissions.jpg}
 \end{wrapfigure}




%-------------------------

  \bigskip
\noindent
 {\bf EPA vs. Massachusetts }

 The United States President and Congress have not been able to come to agreement on a policy to
deal with global warming, so  in effect American  policy  has been to wait and see. The
Environmental Protection Agency, however, is granted broad and indefinite authority to deal with
pollution. Is CO$_2$ pollution?
Part of the Clean Air Act is U.S. Code Title 42. \S  7521,  ``Emission standards for new motor
vehicles or new motor vehicle engines,''  which says:

\begin{bigquote}
\noindent
(a)(1) The Administrator shall by regulation prescribe (and
from time to time revise) in accordance with the
provisions of this section,
standards applicable to the emission of any air pollutant
from any class or classes of new motor vehicles or new
motor vehicle engines,
which in his judgment cause, or contribute to, air pollution
which may reasonably be anticipated to endanger public
health or welfare.
\end{bigquote}

Title 42    \S 7602 ``Definitions'' says:
\begin{bigquote}
\noindent
(g) The term ``air pollutant'' means any air pollution agent or combination of such agents,
including any physical chemical biological radioactive physical, chemical, biological, (including
source material, special nuclear material, and byproduct material) substance or matter which is
emitted into or otherwise enters the ambient air.
 \end{bigquote}


In 1999, 19 private organizations filed a rulemaking petition asking the EPA to regulate greenhouse
gas emissions from new motor vehicles under   the Clean Air Act. Fifteen months later, the EPA
requested public comment.  The EPA received more than 50,000 comments over the next five months.
In September, 2003  the EPA entered an order denying the
rulemaking petition, saying:

\begin{bigquote}
 (1) that contrary to the opinions of its former general
counsels, the Clean Air Act does not authorize EPA to issue
mandatory regulations to address global climate change;
and

(2) that even if the agency had the authority to set
greenhouse gas emission standards, it would be unwise to
do so at this time.
\end{bigquote}

The EPA's denial was challenged in court by the state of Massachusetts on the grounds that the EPA's
refusal to regulate was contrary to the Clean Air Act. In {\bf {\it  Massachusetts v. Environmental
Protection Agency}}, 549 U.S. 497 (2007), the Supreme Court ruled that the EPA did have authority to
regulate greenhouse gases and must do so. Since then, the EPA has slowly been moving to do just
that. In 2009 it issued  a finding that six major greenhouse gases were  a threat to public safety,
and in 2010 it issued rules  establishing a program to require permits and carbon dioxide control
efforts  for major new industrial sources and, with the   National Highway Traffic Safety
Administration, for cars and trucks. These will be phased in over several years starting in
2011.\footnote{  \href{
  http://www.epa.gov/climatechange/initiatives/index.html} { ``Climate Change--- Regulatory Initiatives,'' } EPA. }

%-------------------------


  \bigskip
\noindent
 {\bf\ref{chap06}.5: Concluding Remarks} \label{s11.5}

    Externalities are a major source of market failure and pollution regulation is the prime example
of government response to them. The three   main  ways to regulate are command-and-control,
tradable emissions permits, and pollution taxes. Command and control is the most direct way to
regulate, but is inflexible and costly. tradable permits allow the total quantity to be controlled,
and if the permits are auctioned off they can also raise revenue for the government. Pollution taxes
always raise revenue, and they avoid the problem of unduly constraining the economy's growth by
limiting emissions, but they don't allow for fine control of the emissions quantity. In recent
years, concerns over carbon dioxide have taken center stage in the regulation of externalities.
Carbon dioxide is  the opposite of  other pollutants  in the sense that  each ton emitted   is
harmless in isolation to the place where it is emitted, but in conjunction with emissions around the
world it  may well be causing the world's temperature to warm  with unpredictable consequences. This
makes effective regulation difficult, since each country would like to behave as a free rider. The
science remains uncertain, and the political future of global warming even more so.


%--------------------------------------------------



 \vfill
%\cleardoublepage

\begin{center}
{\sc   Review Questions  }
\end{center}
 \begin{enumerate}

\item
  When is pollution a sign of market failure?
\item
  How are command-and-control regulation, pollution taxes, and cap-and-
   trade policies similar to each other and how are they different?
\item
  What is the effect of different kinds of pollution regulation on market prices
   and quantities?
\item
  What determines the optimal amount of regulation of an externality?
\item
  What does the Coase Theorem say about when regulation of externalities is
   useful?
\item
  Why is determining the optimal response to global warming especially difficult compared to
pollution regulation?

 \end{enumerate}

 




   \vspace{.2in}
%\cleardoublepage
\begin{center}
{\sc  Readings}
\end{center}
 \begin{enumerate}

\item
\href{http://www.freakonomics.com/2009/10/23/the-superfreakonomics-global-warming-fact-quiz/}{``The SuperFreakonomics Global-Warming Facts Quiz,'' } Stephen Leavitt.

 

\item
 \href{http://reason.com/archives/2010/10/11/abolish-drunk-driving-laws} {``Abolish Drunk Driving Laws:
If Lawmakers Are Serious about Saving Lives, They Should Focus on Impairment, Not Alcohol,'' } Randy Balko.
 
 

\item
\href{https://www.bloomberg.com/news/articles/2014-08-29/poor-countries-shouldn-t-sacrifice-growth-to-fight-climate-change} {``Poor Countries Shouldn’t Sacrifice Growth to Fight Climate Change,''}  Charles Kenny,  {\it Bloomberg BusinessWeek}.



\item
\href{https://www.theguardian.com/us-news/2015/dec/20/leafblower-opponents-lawn-care-feud} {\it ``Lawn Wars: Leaf Blower Opponents Seek
Peaceful Resolution to Neighborly Feud,"} {\it The Guardian}. 


 \item
\href{http://www.guardian.co.uk/environment/2011/aug/31/pipe-balloon-water-sky-climate-experiment} {``Giant Pipe and Balloon To  Pump Water into the
Sky in Climate Experiment,'' } {\it The Guardian}.
 

\end{enumerate}



 \end{document}