Page 765 - Krugmans Economics for AP Text Book_Neat

section 14

Module 74: Introduction to Externalities
Module 75: Externalities and Public Policy
Module 76: Public Goods Market
Module 77: Public Policy to Promote
Competition
Module 78: Income Inequality and Income Failure and
Distribution
Economics by Example:
the Role of
“Why Not Split the Check?”

Government

For many people in the northeastern United States, there is incentive to take the environmental effects of their actions
no better way to relax than to fish in one of the region’s into account.
thousands of lakes. But in the 1960s, avid fishermen no- The Gulf of Mexico oil spill of 2010 is among the re-
ticed something alarming: lakes that had formerly teemed minders that environmental problems persist. Neglected pol-
with fish were now almost empty. What had happened? lution is one of several reasons why markets sometimes fail
The answer was acid rain, caused mainly by coal-burning to deliver efficient quantities of goods and services. We’ve al-
power plants. When coal is burned, it releases sulfur dioxide ready seen that inefficiency can arise from market power,
and nitric oxide into the at- which allows monopolists
mosphere; these gases react and colluding oligopolists to
with water, producing sulfuric charge prices above marginal
acid and nitric acid. The result cost, thereby preventing mu-
in the Northeast, downwind tually beneficial transactions
from the nation’s industrial from occurring. In this section
heartland, was rain sometimes we will consider other reasons
as acidic as lemon juice. Acid for market failure. In Modules
rain didn’t just kill fish; it also 74 and 75, we will see that in-
damaged trees and crops, and efficiency can arise from exter-
in time even began to dissolve nalities, which create a conflict
limestone buildings. between the best interests of
You’ll be glad to hear that an individual or a firm and the
the acid rain problem today best interests of society as a
is much less serious than it whole. In Module 76, we will
was in the 1960s. Power plants focus on how the characteris-
have reduced their emissions tics of goods often determine
by switching to low-sulfur coal whether markets can deliver
and installing scrubbers in them efficiently. In Modules
their smokestacks. But they 77 and 78, we look at the role
didn’t do this out of the of government in addressing
goodness of their hearts; they market failures. The investiga-
did it in response to govern- AP/Wide World Photos tion of sources of inefficiency
ment policy. Without such will deepen our understand-
government intervention, power ing of the types of policy that
companies would have had no For many polluters, acid rain is someone else’s problem. can make society better off.
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