Ten Principles of Economics - Part 22. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 10 EXTERNALITIES 219 with the demand curve determines the quantity of pollution. determines the price the quantity of pollution. of pollution . . . The Equivalence of Pigovian Taxes and Pollution Permits. In panel a the EPA sets a price on pollution by levying a Pigovian tax and the demand curve determines the quantity of pollution. In panel b the EPA limits the quantity of pollution by limiting the number of pollution permits and the demand curve determines the price of pollution. The price and quantity of pollution are the same in the two cases. Figure 10-5 achieve any point on the demand curve either by setting a price with a Pigovian tax or by setting a quantity with pollution permits. In some circumstances however selling pollution permits may be better than levying a Pigovian tax. Suppose the EPA wants no more than 600 tons of glop to be dumped into the river. But because the EPA does not know the demand curve for pollution it is not sure what size tax would achieve that goal. In this case it can simply auction off 600 pollution permits. The auction price would yield the appropriate size of the Pigovian tax. The idea of the government auctioning off the right to pollute may at first sound like a creature of some economist s imagination. And in fact that is how the idea began. But increasingly the EPA has used the system as a way to control pollution. Pollution permits like Pigovian taxes are now widely viewed as a costeffective way to keep the environment clean. OBJECTIONS TO THE ECONOMIC ANALYSIS OF POLLUTION We cannot give anyone the option of polluting for a fee. This comment by former Senator Edmund Muskie reflects the view of some environmentalists. Clean air and clean water they argue are fundamental human rights that should not be debased by considering them in economic terms. How can you put a price on clean air and clean water The environment is so important they claim that we should protect it as much as possible regardless of the cost. 220
