Holt 7525-9 S15_IT

Example 6: The Endangered Species Act of 1973 has a purpose to “provide a means whereby
the ecosystems upon which endangered species and threatened species depend may be
conserved.” The Act does not provide for a comparison of costs and benefits in the effort to
protect endangered species. According to Lon Peters of the Cascade Policy Institute, the
Northwest Planning Council has spent $150-200 million per year to protect salmon in the
Columbia River Basin. In contrast, the value of the harvested salmon at the dock is around $15
million per year.
3. Regulations impose costs on the economy. These costs include: the costs of the regulatory
agencies, the costs to the regulated firms of complying with the regulations, the inefficiency
costs if the regulations reduce competition, and the costs of unintended consequences of the
regulations. The costs of government regulations are examined in more detail in Chapter 29.
Pollution Control
Production of goods and services often results in undesired byproducts (noise, odors, solid
waste, etc.). We call these undesired byproducts pollution.
Pollution – any undesired byproduct of production.
Pollution is a type of external cost. As such, the private market will tend to produce more pollution
than is optimal. The economically efficient level of pollution is usually not zero. Since pollution is a
byproduct of production, to achieve zero pollution would usually require completely eliminating
valuable production. The cost of reducing pollution to zero is usually greater than the benefit of
achieving zero pollution.
Example 7: Arsenic is a dangerous element which can enter drinking water supplies from natural
deposits or from agricultural and industrial activities. The EPA has set a maximum contaminant
level of 10 parts per billion of arsenic in drinking water. To reduce the arsenic level to zero would
likely require incurring costs greater than the benefits.
The optimal quantity of any activity occurs where marginal social benefit equals marginal social
cost. Pollution control should be pursued up to the point where the MSB of control equals the
MSC of control. The optimal level of pollution control will usually not result in zero pollution.
Typically, the MSB of pollution control will initially be high, and will decline as more pollution
control is pursued. The MSC of pollution control will initially be low, and will increase as more
pollution control is pursued.
Example 8: Assume that the table below and the graph on the next page illustrate the MSB and
the MSC of different quantities of pollution control. The optimal quantity of pollution control occurs
at a quantity of 5 units of pollution control (where the MSB of pollution control equals the MSC).
Units of
Pollution Control MSB MSC
0 X X
1 $90 $10
2 80 20
3 70 30
4 60 40
5 50 50
6 40 60
7 30 70
8 20 80
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
Market Failure 27 - 6