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AN ECONOMIST'S VIEW OF POLLUTION

As the human population has grown, its appetite for natural resources—plants, animals, water, min­erals, air, land, and so on—has seriously stressed the Earth's environment. Pressures for continued economic and industrial development have proven difficult to resist, and such development has almost always entailed the disruption of natural ecosys­tems.

Economics is the study of how people use their limited resources to try to satisfy their unlimited wants. Using theories, models, and testing of obser­vations and data, economists try to understand the consequences of the ways in which people, busi­nesses, and governments allocate their limited re­sources. In a free market system such as that of the United States, economists study the prices of goods and services and how those prices influence the amount of a given good or service that is produced and consumed. Like any scientists conducting experiments, economists try to predict the consequences of particular economic actions. When the actions involve economic development, their predictions may lead to policy decisions that have significant environmental consequences. If, as citizens, we wish to affect these policy decisions, we need to understand how economists view the world.   

Seen through an economist's eyes, the world is one large marketplace where resources are allocated to a variety of uses and where goods {a car, a pair of shoes, a hog) and services (a haircut, a tour of a museum, an education) are consumed and paid for. In a free market, the price of a good is determined

by its supply and by the demand for it. If something in great demand is in short supply, its price will be high. High prices encourage suppliers to produce more of a good or service (as long as the selling price is higher than the cost of producing the good or service). This interaction of consumer demand, producer's supply, prices, and costs underlies much of what happens in our country's economy, from the price of a hamburger to the salary of a corporate executive to the cycles of economic expansion (in­creasing economic activity) and recession (slow­down in economic activity).

    An important aspect of the operation of a free market system is that the person consuming a prod­uct should be the one to pay for all the costs of producing that product. When consumption or production of a product has a harmful side effect that is borne by people not directly involved in the market exchange for that product, the side effect is called an external cost. Because external costs are usually not reflected in a product's price, the mar­ket system does not operate in the most efficient way. For example, if an industry makes a product and, in so doing, also releases a pollutant info the environment, the product is bought at a price that reflects the cost of making it, but not the cost of the damage to the ecosystem by the pollutant- Because this damage is not included in the product's price and because the consumer may not be aware mat the pollution exists or that it harms the environ­ment, the cost of the pollution has no impact on the consumer's decision to buy the product. As a result, consumers of the product demand more of it than they would if it’s true cost (including the cost of pollution) were known. The failure to add the price of environmental damage to the cost of prod­ucts creates a market force that increases pollution. From the perspective of economics, then, one of the root causes of the world's pollution problem is the failure to consider external costs in the pricing of goods.