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Economics U$A: 21st Century Edition

Pollution and the Environment (Microeconomics)

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In 1977, the federal court system told the Reserve Mining Company to build a $400 million disposal site for carcinogenic materials. After 1970, Los Angeles was looking for a broad-ranging smog-reduction policy to reflect recently amended Clean Air Act standards. In 2009, the House of Representatives introduced the first piece of comprehensive clean energy legislation, known as the American Clean Energy and Security Act, which both economists and energy providers could support. Pollution is a “negative externality,” which, as these stories show, can have serious consequences for economic efficiency.

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Unit Overview


To define the concept of a “negative externality,” to illustrate the effect of an externality on economic efficiency, to show the ways in which externalities can be internalized, and to demonstrate how to use cost-benefit analysis to determine the “optimum” level of pollution.


  1. Market transactions do not always take all the social benefits and costs of an economic activity into account. If private benefits and/or costs differ from social benefits and/or costs, an economic activity has “externalities.” These externalities tend to disrupt economic efficiency.
  2. Externalities can be internalized by tax and subsidy policies or by mandated control methods. A polluting firm can be taxed. This will force it to increase its selling price and therefore reduce its sales. Or, the firm could be forced to install equipment that reduces the pollution. This also raises the product price, but forces the government rather than the firm to decide how pollution should be reduced.
  3. There are numerous costs caused by pollution and all are difficult to measure (health, discomfort, damage to crops and painted surfaces, aesthetic, etc.).
  4. Marginal social cost should equal marginal social benefit for the efficient allocation of resources of production from society’s point of view, and marginal cost-benefit analysis should be used to determine the optimal quantity of pollution.

Meet the Series Experts

William Ruckelshaus

The U.S. Environmental Protection Agency’s first Administrator when the agency was formed by President Richard M. Nixon in 1970. Subsequently, he was acting Director of the Federal Bureau of Investigation and Deputy Attorney General of the United States, and he served a second term as EPA Administrator, 1983–1985. Previously, he was the Assistant Attorney General in charge of the Civil Division for the U.S. Department of Justice, Deputy Attorney General of Indiana, and Counsel to the Indiana Stream Pollution Control Board, where he obtained court orders prohibiting industries and municipalities from polluting of the state’s water supply. He also helped draft the 1961 Indiana Air Pollution Control Act, the state’s first attempt to reduce that problem. Mr. Ruckelshaus received his B.A. from Princeton University and L.L.B. from Harvard Law School.

Eric Pooley

Award-winning journalist and expert in the area of pollution and the environment. He was a feature writer, political columnist, and Senior Editor for New York magazine, later working at Time as its White House Correspondent, Chief Political Correspondent, and National Editor. In 2008, he studied press coverage of climate change issues at Harvard’s Kennedy School of Government and has written about climate change politics for Time, Slate, Bloomberg News, and other publications. He is the author of The Climate War and Deputy Editor of Bloomberg BusinessWeek. Mr. Pooley received his B.A. from Brown University.

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Take the Economics USA: Pollution and the Environment quiz.

Quiz Addendum

2. Answer explanation: 
This is the only example in which T&G causes damage to resources, thereby harming others in a way for which they are not compensated.


  • benefits vs. costs of pollution abatement
    An organization’s attempt at reconciling the price of removing the negative externality of pollution with the immediate profit seen by that organization when nothing is done about pollution.
  • cost-benefit analysis
    In governmental planning and budgeting, the attempt to measure whether alleged outputs will outweigh the known inputs.
  • externalities
    External economies and diseconomies.
  • marginal private vs. marginal social costs
    Marginal private costs are the incremental costs incurred by a consumer in consuming a good or service. Marginal social costs are the incremental costs of an activity as viewed by the society, and expressed as the sum of marginal external cost and marginal private cost.
  • market inefficiency
    A condition that occurs when current prices don’t reflect the available information regarding securities.
  • pollution tax vs. pollution control
    The comparison on the part of government of whether it is more beneficial to an economy to impose a revenue-based cost on pollution, or to attempt to curb pollution by imposing strict laws against it.

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Economics U$A: 21st Century Edition


Produced by the Educational Film Center. 2012.
  • Closed Captioning
  • ISBN: 1-57680-895-5