download EWE Lesson 6(.doc file)
- Marginal analysis
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.
Our public discussions about pollution often rest on the unstated assumption that no price is too much to pay to save the environment. We tend to seek all-or-nothing solutions, rather than asking how much pollution we are willing to tolerate or how much clean-up we are willing to pay for.
This lesson asks students to apply marginal analysis by calculating the additional costs and additional benefits of the next level of pollution clean-up. As students decide whether to transform a dirty pond into a swimming hole, they weigh the costs and benefits of each step of the transformation. By engaging in marginal analysis, students also learn that people have a demand for environmental quality and are willing to pay for, or purchase, environmental quality as long as the benefits outweigh the costs. This leads to two insights:
- 100% pollution clean-up is never the only possible choice, and it may not be the best one; people demand different levels of environmental quality, depending on their values and the alternatives available to them; and
- coercion (through government, law, and regulation) is not the only or the best way to achieve environmental protection; people acting as private citizens can and do protect the environment and clean up pollution.
Thinking in terms of all-or-nothing solutions is not only unrealistic; it blocks our thinking about creative ways to achieve environmental goals. In our daily lives, most of the decisions we make are about doing or having a little more or a little less of something. Rarely do we face all-or-nothing alternatives. Marginal analysis, a powerful tool of economic reasoning, directs us to consider the additional costs and additional benefits of having a little more or a little less of something, instead of falling into the all-or-nothing trap. It sounds complicated but marginal analysis is so intuitively obvious that we do it all the time without thinking about it.
For example, how do you decide how much water to drink on a hot day? You decide one glass, or one gulp, at a time, based on how much satisfaction you think you’ll get from the next gulp or next cup. The first cool gulp? You anticipate huge satisfaction, so you eagerly drink it. And then, what about the second? Not as much satisfaction as from the first, but still enough that you drink it. What about the third? The fourth? Decision-making at the margin reveals that the additional satisfaction decreases. Economists call this diminishing marginal utility, which means that at some point you won’t anticipate enough satisfaction to take another drink. Thus, the important question for the thirsty individual is not whether to have four drinks or none, but whether to have the next drink.
In addition to being an everyday decision-making tool, marginal analysis is particularly powerful for analyzing emotion-laden issues like pollution and environmental quality. In this lesson, students discover that the important question for those concerned with environmental quality isn’t whether to clean up pollution or not, but whether paying for the next level of cleanliness is worthwhile. Marginal analysis helps to counteract our collective tendency to approach pollution as an all-or-nothing issue in which we look only at total costs and total benefits, and opens our thinking to creative alternatives for achieving environmental goals.
Lesson Six is more than an intellectual exercise about possibilities; many real-world examples exist. One involves the work of “enviro-capitalist,” Peter S. O’Neill, a developer who prides himself on preserving and enhancing the beauty of natural surroundings and stream habitat. River Run (O’Neill’s development in Boise, Idaho) exemplifies his work.
“O’Neill recognized the growing demand for natural amenities in an urban setting and responded by building communities for fish as well as people. Among his early achievements was a project that revitalized a river and created one of the nation’s first urban spawning streams for trout. O’Neill recognized that visually pleasing and biologically productive surroundings are assets that add to property values. Hence, his housing developments offer free-flowing trout streams, lush streamside vegetation, and biologically diverse lakes and wetlands. . . .
As a partner in the River Run Development Company, O’Neill was not satisfied with these efforts. To him, it was obvious that the development could improve the environment even more, especially where there was an unsightly half-mile flood-relief channel that paralleled the northern border of the development and the Boise River. . . .
At a cost of $30,000 for modifying the flood control channel, the investment was substantial, but O’Neill decided to push ahead with the project. . . .
Because it took several years for vegetation to take hold and spread along the stream banks, the benefits of the project were not immediately visible. But once the natural system began to mature, the amenities became more visible, and the trout began to flourish. . . .
Since completing River Run, O’Neill has developed four other projects and is working on a fifth. . . . Has the expense and trouble been worth it for O’Neill? Undoubtedly, his housing developments command a financial premium because of their amenities. But on a personal level, O’Neill enjoys a tremendous personal satisfaction from the way he improved the environment.” (Anderson & Leal, 1997, pp. 1216 The stories of Peter O’Neill and many other private environmentalists can be found in Enviro-Capitalists—Doing Good While Doing Well, by Terry L. Anderson and Donald R. Leal.)
Foundation for Teaching Economics is proud to announce that Debbie Henney, director of curriculum for the Foundation for Teaching…
Ted Tucker, Executive Director, Foundation for Teaching Economics October 26, 2022 More high schools are offering courses on personal finance…