This is “End-of-Chapter Material”, section 13.4 from the book Theory and Applications of Microeconomics (v. 1.0).
This book is licensed under a Creative Commons by-nc-sa 3.0 license. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms.
This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book.
Normally, the author and publisher would be credited here. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Additionally, per the publisher's request, their name has been removed in some passages. More information is available on this project's attribution page.
For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. You may also download a PDF copy of this book (30 MB) or just this chapter (1 MB), suitable for printing or most e-readers, or a .zip file containing this book's HTML files (for use in a web browser offline).
Economists and environmentalists sometimes do not see eye to eye. Economists think environmentalists often focus on the wrong problems, and environmentalists think economists place too much faith in markets. Yet economics is the science that helps us understand why some environmental problems are among the most important and difficult that we face.
When economists look at excludable resources, for which property rights are well defined, they tend to be less concerned. It is certainly possible that we will run out of oil and other nonrenewable resources. But that in itself does not signal a problem. What matters is whether we are using our resources efficiently or inefficiently. Perhaps the best thing for us as a society to do is to use up our resources quickly. More important, as oil becomes scarce, we know that market prices will force users to economize on oil and look for substitutes instead.
We are assuredly not saying that an economy is better off with fewer resources. We would always like to have more of an exhaustible resource. The most important question, though, is how to best use the resources we have. Markets can sometimes provide a good answer to this question. If markets work properly, sending the correct signals to producers and consumers, then market allocation will be efficient.
Economists worry a great deal more about environmental problems where resources are nonexcludable. Pollution of the air, pollution of rivers and oceans, biodiversity loss, overfishing, and climate change are all examples of environmental problems for which we cannot rely on markets. To an economist, it is not surprising that markets fail in these cases. All of these resources are nonexcludable. When resources are nonexcludable, market allocations will not typically be efficient, and there may be a role for government to try to solve these problems.
Consider some situations that might arise in your college or university. Which of the following is an example of an externality?