what's more important: the ONE Earth resource we have, or economic efficiency? You're failing to see the larger picture, in the name of economics.

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Course: Microeconomics > Unit 9

Lesson 2: Bonus articles: Pollution as a negative externality

The tradeoff between economic output and environmental protection

Key points

Depending on their income levels and political preferences, different countries are likely to make different choices about how to balance economic output and environmental protection.
All countries benefit from making a choice that is productively efficient—that is, a choice somewhere on the production possibility frontier rather than inside it.

The tradeoff between economic output and environmental protection

Unfortunately, it's not possible for a country to maximize both its environmental protection and its economic output. Each country must make a decision about how the two goals should be balanced—and how to achieve that balance.

Using a production possibility frontier to analyze economic output and environmental protection

One of the tools we can use to analyze the tradeoff between economic output and environmental protection is a production possibility frontier, or PPF, like the one below.

The PPF shows the opportunity cost of choosing either more environmental protection or more economic output. Notice that at the far left of the graph—at point

P

—a country would be selecting a high level of economic output but very little environmental protection. At the other extreme—point

T

—a country would be selecting a high level of environmental protection but little economic output.

Countries with low per capita gross domestic product, or GDP—such as China—tend to place a greater emphasis on economic output, which in turn helps to produce nutrition, shelter, health, education, and desirable consumer goods. Countries with higher income levels, where a greater share of people have access to the basic necessities of life, may be willing to place a relatively greater emphasis on environmental protection.

All choices represented by points on the PPF are productively efficient—they just represent different balances of environmental protection and economic output. A choice that is inside the PPF, however—like

M

—is productively inefficient.

Economists tend to have milder opinions about the choice between

P

Q

R

S

and

T

than environmentalists, because all of these points lie along the production possibility frontier and thus are productively efficient.

So how would an economist respond to claims of environmental damage caused by the Keystone XL project? Clearly the environmental cost of oil spills would be considered a negative externality, but how many external costs would arise? And are these costs “too high” when measured against any potential for economic benefit?

As this chapter indicates, in deciding whether construction of the pipeline is a good idea, an economist would want to know not only about the marginal benefits resulting from the additional pipeline construction, but also the potential marginal costs—and especially the marginal external costs of the pipeline. While the economic benefits of additional oil in the United States may be fairly easily quantified, the social costs are not. One way to analyze the external costs is through environmental impact statements, which are usually required for these kinds of projects.

Economists are, however, are united in their belief that an inefficient choice such as

M

is undesirable. Rather than choosing

M

, a nation could achieve either greater economic output with the same environmental protection, as at point

Q

, or greater environmental protection with the same level of output, as at point

S

Command-and-control environmental laws sometimes involve a choice like

M

, but market-oriented environmental tools offer a mechanism for providing either the same environmental protection at lower cost or providing a greater degree of environmental protection for the same cost.

Summary

Depending on their income levels and political preferences, different countries are likely to make different choices about how to balance economic output and environmental protection.
All countries benefit from making a choice that is productively efficient—that is, a choice somewhere on the production possibility frontier rather than inside it.

Review questions

In the tradeoff between economic output and environmental protection, what do the combinations on the production possibility curve represent?
What does a point inside the production possibility frontier represent?

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Vandita M. Wilson
Posted 4 years ago. Direct link to Vandita M. Wilson's post “what's more important: th...”
what's more important: the ONE Earth resource we have, or economic efficiency? You're failing to see the larger picture, in the name of economics.
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  Posted 7 months ago. Direct link to 🅗🅐🅝🅝🅐🅗 😜's post “Well said. :)”
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