. I'm Jonathan Tomkin from the University of Illinois. We've looked at a range of measures to help the earth reach more sustainable place. A lot of times, we've considered technological changes. For example, by changing the sources of our energy. There's another way that we can look about making changes or by bringing these technologic-, technological changes about. And that's by making changes to policy. Good policy requires, not just an understanding of the natural world, but also an understanding of the social world. That is what makes people and societies function. One of the branches of science that examines this, a social science is economics. So we will be using economics this week in conjunction with politics to look at what makes good policy. Now I know that economics has a reputation in the minds of many who care about the environment. But here I'd like you to approach the concept of economics with the following frame in mind. Economics is a social science that studies the pattern and movement of goods and services, things that we all rely on including food, energy, healthcare and so on. As an academic discipline it attempts to tell us what is going on, not what should be going on. Think about it the same way we have been using ecology in climate science. It's a tool to help us to plan better for the future. One of the ideas behind economics is that individual people want to do things that make them happy. This means that we form family and make friends we go to jobs that let us earn money to buy things that we want it means that we look for good food and shelter. This is sometimes called utility or welfare. In economics, utility is a representation of preferences over some set of goods and services, that is we prefer some goods and services to others. And then we have an equation that we can use is that the net benefit to us is all the benefits minus all the costs, so the idea in economics is that we want to maximize our individual benefit, we want to do things that make us happy. Let's take an example and see how this can go wrong. To a good approximation individuals act like they want to maximize their own welfare or their own utility, i.e. Their own happiness. For example, all else being equal, we prefer to be in a job that pays more rather than less. Or if there are two identical shirts for sale and one is blue and one is orange and we prefer blue shirts over orange shirts, then we would buy the blue shirt. Nobody is always maximizing their own utility, but it does explain why we do a lot of the things that we do. Another way to talk about this is that we're trying to increase our welfare. That is the benefits we gain from doing something minus the costs of that action. Remember that net benefits equation. You might not like to clean the kitchen, however, but the benefit, having a clean kitchen, outweighs the cost of having to scrub the sink. For some people having a clean kitchen is worth cleaning everyday, for others it's every week or every month and for some it's never. If having a clean kitchen is not important to you, you don't value it highly or you value it less than the effort of cleaning the kitchen itself, it's perfectly rational and understandable that you couldn't clean your kitchen. What if you share this kitchen with other people? If you make it messy, everybody else has to share that mess. So, you're okay, but your reasonable choice, if you as an individual, is bad for society as a whole. Now, you should be sighing your self, I know this scenario, this is a tragedy of the commons. There is another line we can call that. We can also call it using the language of economics, which is to say negative externality. Before I explain any more detail, let's take a more serious example. I drive a car. I need to purchase petroleum, so depending on where you leave it's either gasoline or petrol for it to run. This cost me some money, I have to pay to buy the petrol but for me it's worth it. I lose some money, that's my net cost, but I gain the ability to move somewhere that I want to go, I gain transport. So my utility outweighs the cost. Similarly the oil company is happy too, because although they went to some expense and effort to get the oil out of the ground and get it to the consumer. The cost for them doing that is lower than the amount of money I gave them so they, they also have a net benefit, the benefit the money they get from me out weighs the cost of all the effort of extracting the oil. So all is good, right? I'm happy. And in some sense, some giant multinational company is happy. So if everybody's happy, then this is a good result. That's what a, a classic market reading of this transaction would say. But not so fast. As we know, when we burn fossil fuels, we create pollutants. One of these pollutants is carbon dioxide. When I release carbon dioxide into the atmosphere, I'm changing the climate. For many people this is a negative impact. In, in a sense in fact, everything I drive my car. On injuring seven billion people, as well as every natural ecosystem on the planet. Not injuring them very much. But nevertheless, they are negatively impacted by my choice to buy petrol and drive my car. This negative impact on these people who are not involved in the transaction between me and the multinational oil company is called a negative externality. So, they're external to the transaction. And their impact on them is negative, hence, negative externality. Not all externalities are negative. For example I also have a rain barrel on my, on the side of my house. This collects rain and I can use that rain water to water my garden. It also lessens the run off to going into the local sewer system. And so in that sense, it prevents some pollutants reaching their way into natural habitats. So this is actually a positive externality. I bought the rain barrel of somebody who sells rain barrels so we were involved in the transaction. I gave him some money, and he gave me a rain barrel but everybody in my community benefits in a very small way from less runoff water polluting the storm water trains. So this is called a positive externality. We'll be focusing on negative externalities in this course because that's another way to think about most pollutants. So, does this mean that economics is unable to properly take into account? Market transactions. It turns out that it can account for it, if instead of looking at the private benefits of driving my car, if instead we look at total net benefits, so this is a sense where we do an account of everybody involved in the entire system. So now when I drive my car what is the total net benefit now that I have a personal benefit. But also there is a negative impact on seven billion people plus natural ecosystems. So if we define welfare as encompassing more than just the individual person, organizational country and extend it to include everyone and everything in the system we call this a total net benefit. So we can use this kind of accounting system to describe the trench of the commons. As a case where the individual benefit is positive, but the total net benefit is negative. That is, if we take into account, more than just the individuals associated with the market transaction. That is the person who owns the cows, the person who does the fishing. Those classic examples. But to everybody in the system, the total net benefit is negative. In some sense, societies have increased their total net utility through development. Anotherq way I'm thinking about this, is that we're much richer than we were in the past. The quality of our food is much higher, we have better housing, we have better healthcare, we have better education. The jargon for this is that we are more efficient by trading goods and services we are able to specialize, we are able to allocate those goods and services to where they bring the most welfare. An allocation is efficient if it maximizes social well being or welfare, so we, if we efficiently allocate resources than we're maximizing that social welfare. So by itself efficiency is a good thing. We all want to maximize welfare in some sense, perhaps not at total exclusion of some things, But all else being equal, we would rather not just for ourselves to be better off we would like everybody to be better off. So efficiency is a useful goal in any political process. Now, efficiency is an economist term, and note that it doesn't mean that this allocation is necessarily fair or just. There's plenty of evidence that markets are wonderfully efficient at allocating goods and services. But this isn't an economics course. You could argue that we should use markets as much as possible. You could argue that markets fail too often. Here we will restrict ourselves to noting that markets sometimes fail to bring about this most efficient outcome. That is the total social welfare is not always maximized by markets. This is called a market failure. What are some examples of that? Well, if you think back to tragedy of the commons, you can come up with many. So, for example, there's emissions to the atmosphere. Not just carbon dioxide, but plenty of other pollutants. Things like, like smog, or chloro-, chloroflurocarbons destroying the ozone. There's particulate pollution, In many countries around the world today. the market transaction of industry is making things for consumers, hurt local residents by depleting the air quality. And we could think of much of China as a good example of that. Another, more esoteric example is light pollution. If you're an astronomer, you are harmed by the fact that we have street lights and house lights and car lights and so on. Or if you think an absence of light helps you get to sleep when Oneida has their outdoor light on all night that's a negative externality. Another sort of pollution is sound pollution. If you live on a major runway and 747s go over your head every twenty minutes, well that's a negative impact on you. Or similarly, if someone drives past on their motorbike when you're trying to get your baby asleep at three o'clock in the morning, that might be another case of negative impact of sound pollution. So what do we do about these events where we have these, if you like, tragedy of the commons or negative externality events occurring. How do we reduce or mitigate these effects? In each case, an economist would describe a negative externality as a market failure. In other words, the market, which is supposed to bring about the most efficient transaction of goods and services, is not succeeding to maximize social welfare. The reason is the environmental impact is not being taken into account by the traditional market mechanism. So remember how I buy petrol to drive my car, or by doing that traditional market mechanism is good for me, and it's good for the multinational oil company but it has a negative impact that is not in the accounting system anywhere. I don't pay somebody for the damage that I did to their environment. I don't pay a polar bear for the fact that there's less ice then it used to be. So what do we do about these forms of pollution? In each case, we would describe them as a negative externality, and negative externalities is a market failure. A successful market, maximize social welfare. Because of the transaction. But by not taking into account the environmental effects, we are not maximizing the social welfare in each of these cases. If we go back to the example of me driving my car. I buy petrol, I maximize my private welfare, by get, going where I want to go. The multinational maximizes their private welfare by increasing their profits. But, society as a whole has to suffer the cost of the congestion on the roads the particular matter I might put into the local atmosphere and the carbon dioxide I put into the global atmosphere. So how do we increase the net welfare and fix the situation, correct this failure? In many cases, tragedy of the commons and negative externalities are similar ideas and so have similar solutions. But by using this precise economic language, we can identify way to fix the market failure in particular. Traditionally, this is done through policy. If we use good policy, we can actually increase the net social welfare. In other words, we can correct the market failure and make everybody better off. In the next lecture, we'll be looking at various environmental policies and see how they can correct this market failure. Produced by OCE Atlas Digital Media at the University of Illinois, Urbana Champaign.
