How Clean Is Clean?

Economic Concepts	Environmental Context
Marginal analysis	Pollution clean-up
Opportunity Cost
Sunk cost
Marginal Cost and Benefit
Total Cost and Benefit

National Content Standards Addressed:

Standard 2: Effective decision making requires comparing the additional costs of alternatives with the additional benefits. Most choices involve doing a little more or a little less of something; few choices are all-or-nothing decisions.

Standard 4: People respond predictably to positive and negative incentives.

Standard 5: Voluntary exchange occurs only when all participating parties expect to gain.

Key Points

1. Review: There are no costless choices.
   • Because of scarcity, choosing one alternative means giving up the next best alternative.
   • A decision to use the environment in one way means giving up the benefits of the next-best alternative use.
     • Comparing these provides the opportunity to make better choices.
2. Economics teaches us that the relevant costs and benefits in decision-making are marginal costs and benefits.
   • Marginal = additional or the next.
     • Marginal cost is the additional cost or the cost of the next unit of production
     • Marginal benefit is the additional benefit or the benefit of the next unit of production
   • Illustrations from everyday life:
     • Cleaning up a teenager’s room
     • Preparing for visitors in your home – which room do you clean first?
3. Economic reasoning teaches us that the economic perspective, which emphasizes marginal cost/marginal benefit analysis, is preferable to the all-or-nothing approach to pollution clean-up sometimes adopted by environmental activist groups.
   • Pollution issues are marginal (clean enough) problems rather than all-or-nothing (pristine) problems, for they concentrate on the trade-offs involved in continuing clean-up or diverting resources to another environmental effort.
   • Because they include sunk costs, total cost and average total cost offer no guidance in decisions about future actions.
4. Economic reasoning approaches the issue of pollution clean as a marginal analysis problem.
   • The relevant comparison is between expected marginal social benefits and expected marginal social costs of clean up.
   • Graphic representation of a pollution clean-up situation:
     • • Marginal social cost curve – note that cost increases
       • Marginal social benefit curve – note that benefits increase
       • Point of maximum benefit is where MSB = MSC (or where 2 social cost curves intersect).

     Activity: Is 100% Clean Really Worth It? (ppt)

5. Conclusion: In decisions about future actions, the relevant costs and benefits are marginal.
   • Production examples: Light bulb puzzle – average total cost and sunk cost provide misleading information in deciding whether or not to continue a course of action.
   • Example: The Audubon Society and oil drilling on the Paul J. Rainey Sanctuary
     • “PC Oil Drilling in a Wildlife Refuge,” by Pamela Snyder and Jane Shaw, September, 1995 Op-Ed in The Wall Street Journal http://www.perc.org/publications/opeds/pcoil.php