Wednesday, March 31, 2010

More Externalities -- Toxins and Consumer Products

David Leonhardt argues that the US is not doing enough to regulate the toxins in our consumer products in the NYTImes:

Every society needs to make a choice about how to prioritize consumer safety. If you try too hard to avoid problems, you can end up stifling daily life. Outlawing gasoline, for instance, would doubtless reduce pollution and respiratory disease, but no one is suggesting such a step. Europe, with its hostility to genetically modified foods, arguably errs on the side of being too cautious about chemicals and other such substances.

But the United States clearly seems to be on the other side of the line. We are not taking toxic risks seriously enough.

Several common diseases, like certain cancers and developmental disorders, have been rising in recent decades, and scientists are not sure why. In some cases, evidence suggests chemicals may be the reason.

Nobody can be sure, though. The science is not far enough along, partly because our regulation of toxins is so limp. Companies don’t have to release much of their internal safety data. And regulators face a terribly high burden of proof. They can often take action only after they have demonstrated that a substance is harmful — a task that corporate secrecy can make impossible.

To be clear, much of the article is not directly about the negative externalities associated with chemical use. Rather, Leonhardt is mainly focused on another source of market failure -- lack of information. For the market to work "properly", all the parties to a transaction need to have full information about what they are buying. Leonhardt's main argument is that consumers are frequently ill-informed about the chemicals they are consuming (and the long term effects of that consumption on their health and well-being). As such, he argues that the government should be more involved in obtaining information from manufacturers and informing consumers about the risks of various products (or perhaps more directly involved in the protection of consumers by preventing the manufacture and sale of "dangerous" products).

Tuesday, March 30, 2010

Externalities Example -- Bees and Pesticides

As some of you may know, honey bees (who are play a big role in how we feed ourselves) have been hammered by some mysterious plague dubbed "colony collapse disorder". New research suggests that pesticides may be a major contributor to this problem:
For years the news has been the same: Honey bees are being hammered by some mysterious environmental plague that has a name -- colony collapse disorder – but no established cause. A two-year study now provides evidence indicting one likely group of suspects: pesticides. It found “unprecedented levels” of mite-killing chemicals and crop pesticides in hives across the United States and parts of Canada.
A classic negative externality.

EC 443/553 -- Preparation for class Wed

Based on the first class survey and several questions and comments I received during the break, I think we need to do some basic review. So before class on Wednesday please review the following concepts (google them, look them up in wikipedia, or in old textbooks you may have lying around):

Supply and Demand
Price elasticity
Income elasticity
Market equilibrium
Consumer and Producer Surplus
Deadweight Loss
Marginal Cost
Marginal Benefit
Marginal Utility
Diminishing Marginal Utility
Market Failure
Public Good/free rider problem
Moral Hazard
Adverse Selection

Gross Domestic Product (GDP)
Economic Growth

Check back later, I may add more as I think of them.

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