WrightEconomics

//When you buy a car, you assume that the cost you pay for the car will pay for the manufacture of that car, the wages of those who manufactured it, the transportation of the built car to the dealership, and the wages to the salesman who you buy it from. However, there are other costs ("byproducts") associated with owning a car that are not included in this initial cost; the gas to run it, oil changes and engine maintenance, tires, are all things you have to pay over the life of the car but were not included in the first cost. So these are sorts of externalities (to you- they are extra costs to you). But then there are other externalities. Who is paying for your car’s wear and tear on the roads you drive on? Who is paying for the pollution emitted from your engine? Who is paying for the noise walls built along highways to shield the noise your car makes from local neighborhoods? So these are also things that go with owning a car, but are not factored into the original sale price of the car and then you as the owner don’t even have to pay them. You do a little bit, as you pay an annual fee to have your car "registered" in your state (at least $89 + a $9 emissions test for TN). And part of that registration money goes toward government projects, like road repair, to handle the true cost of you driving your car. Other ways these costs are covered are through taxes and also toll roads. But sometimes the externality is just not paid for (like the air pollutant example), and it is just an environmental cost that is left for “someone else to deal with later.” //
 * talked about the balance of __government policy__ with __economic solutions__
 * "economic solutions" can be considered __market-based solutions__
 * __Tragedy Of The Commons__
 * what is a "commons"? what are some examples of environmental commons?
 * what is an incentive to take care of commons? How can we incentivize taking care of them?
 * throughout history, taking care of "commons" have never materialized. They have always been depleted or harmed in any process.
 * People always work towards their "rational self interest". If something is not in the taste of our rational self-interest, we will theoretically not do it.
 * __Externatlities__
 * an Externality is a "byproduct" of creating something or participating in something.
 * Here is an example of externalities at play:

// Every system has externalities, and poorly planned systems have more. It can be about anything- not just the price of cars. Let’s say I believe in buying all my food at the lowest cost possible. The companies that can afford to sell cheap food are most likely in California and even overseas (like all the banana farms are in South America). So I don’t want to spend a lot of money on food; I just buy what’s cheapest. There is a positive externality: I now have more money to spend on something else. But there is also a negative externality: what about the local farmer in my town that can’t sell his produce that cheaply? As shipping costs are considered a business write-off in the US (meaning companies can subtract the cost of shipping from their profit margin, placing them in a lower tax bracket sometimes that those companies who are in-town and don’t need to ship), the California farmer can compete at a lower price than the local farmer (and for many reasons, not just because shipping is virtually free). So if no one buys from the local farmer, he is out of money and out of business. Not such a big deal until you realize that someone in your city is out of business and probably filing for income assistance and not able to pay bills at your local hospital, or maybe something as simple as he is no longer able to afford to go out to eat once a week at your family’s restaurant or get his car fixed at your dad’s auto mechanic shop or whatever, and now you take the hit- maybe to your business, maybe just in taxes. //

// So in this situation I described, my small choice to buy a certain kind of food actually had two externalities I didn’t realize as I was buying it: I now have more money to buy something else (positive externality to my choice) and citizens in my town are potentially going to drain our tax structure if they go out of business (negative externality). //


 * __Marginal Benefit vs. Marginal Cost__
 * Mr. Wright shared with us a simplified version of the graph from the book:




 * The solid line represents the cost to abate pollution (the sacrifice, or cost paid).
 * The dashed line represents the perceived benefit from society (the satisfaction, or benefit felt).
 * When the marginal cost is low, the benefit felt is high. However, not much or all of the pollution will be abated.
 * When the marginal cost is high, the benefit felt is low. However, all of the pollution will be abated.
 * The marginal cost increases slowly, and then rapidly, which illustrates that "opportunity costs" are found early on in the abatement process; after a certain point, costs to abate pollution will exponentially increase. But costs to abate early are slow to increase between abatement amounts.
 * MB > MC means society will be happy with the cost to abate.
 * MB < MC means society will be unhappy with the cost to abate.
 * MB = MC (where the two lines intersect) is the __economically optimal amount of pollution__: this represents the maximum cost society is willing to spend to clean up a polluted area and still feel that it is a benefit, both as a health benefit and as a cost that makes their wallet feel good. :)
 * Amount of pollution to be abated can be measured quantitatively: for example, "tons" of CO2 to be removed prior to leaving a smokestack.
 * Cost to abate can be measured in dollars: for example, $500 to install each scrubber in the smokestack to remove the pollution.


 * __Cap and Trade: A **Market-Based** solution:__
 * Mr. Wright shared with us a simplified version of the cap-and-trade graph:


 * On the above graph, the "units" being sold are pollution permits. For example, a company could purchase a permit that would allow them to emit 1000 tons of CO2 each year. If they purchased 2 permits, they could emit 2000 tons each year, and so on.
 * The government sets the market with a __limited supply__ of permits (denoted by "x" on the above graph).
 * Companies purchase permits __or__ fix their pollution problem (abate) so they do not pollute as much. Or they could always shut down if they cannot afford one of the first two options.
 * Companies who pollute over their purchased/allowed amount will be taxed or fined.
 * As companies pollute throughout the year, they may find a need to purchase more permits. They must buy these from other companies who either over-bought or who cleaned up their pollution enough that they did not end up needing what they purchased.
 * The dashed line represents the demand for the permits. If the supply (solid line, x) is high, the demand will be low. If the supply is low, the demand will be high. Therefore, if the demand is low, the price will also be low. If the demand is high, the price will also be high.
 * Visualize moving the supply bar lower along the x axis (closer to the origin). What would happen to the demand, and also to the market price of each permit? Every year, the supply of permits is decreased by the government. This incentivizes companies to invest in cleaner technologies over the course of a few years, so they will not need to purchase as many permits. Ideally there will come a point when no permits would be available because all companies have cleaned up their pollution.
 * **Here is a video to illustrate cap and trade** (although, it does definitely have a bias. but the cartoons help)