Samuelson's book Summary Chapter 18

Chapter 18 Summary

A. Population and Resource Limitations 1. Malthus's theory of population rests on the law of diminishing returns. He contended that population, if unchecked, would tend to grow at a geometric (or exponential) rate, doubling every generation or so. But each member of the growing population would have less land and natural resources to work with. Because of diminishing returns, income could grow at an arithmetic rate at best; output per person would tend to fall so low as to stabilize population at a subsistence level of near-starvation. 2. Over the last century and a half, Malthus and his followers have been criticized on several grounds. Among the major criticisms are that Malthusians ignored the possibility of technological advance and overlooked the significance of birth control as a force in lowering population growth. 3. Studies of the relationship between pollution, population, and income have determined that the demand for environmental quality rises rapidly with per capita income, so for most indicators environmental quality improves rather than deteriorates as per capita income rises. B. Natural-Resource Economics 4. Natural resources are nonrenewable when they are essentially fixed in supply and cannot regenerate quickly. Renewable resources are ones whose services are replenished regularly and which, if properly managed, can yield useful services indefinitely. 5. From an economic point of view, the crucial distinction is between appropriable and inappropriable resources. Natural resources are appropriable when firms or consumers can capture the full benefits of their services; examples include vineyards or oil fields. Natural resources are inappropriable when their costs or benefits do not accrue to the owners; in other words, they involve externalities. Examples include air quality and climate, which have externalities that are affected by such activities as the burning of fossil fuels. 6. Important examples of appropriable, nonrenewable natural resources are fossil fuels such as oil, gas, and coal. Economists argue that because private markets can efficiently price and allocate their services, such natural resources should be treated the same as any other capital asset. C. Curbing Externalities: Environmental Economics 7. A major market failure that is increasing in importance is externalities. These occur when the costs (or benefits) of an activity spill over to other people, without those other people being paid (or paying) for the costs (or benefits) incurred (or received). 8. The most clear-cut example of an externality is the case of public goods, like defense, where all consumers in a group share equally in the consumption and cannot be excluded. Less obvious examples like public health, inventions, parks, and dams also possess public-good properties. These contrast with private goods, like bread, which can be divided and provided to a single individual. 9. Environmental problems arise because of externalities that stem from production or consumption. An unregulated market economy will produce too much pollution and too little pollution abatement. Unregulated firms decide on abatement (and other public goods) by comparing the marginal private benefits with the marginal private costs. Efficiency requires that marginal social benefits equal marginal social abatement costs. 10. There are numerous steps by which governments can internalize or correct the inefficiencies arising from externalities. Alternatives include decentralized solutions (such as negotiations or legal liability rules) and government-imposed approaches (such as pollution-emission standards or emissions taxes). Experience indicates that no approach is ideal in all circumstances, but many economists believe that greater use of market-oriented approaches would improve the efficiency of regulatory systems. 11. Global public goods, like slowing climate change, present the thorniest problems, which often cannot be solved by either markets or national governments. Nations must devise new tools to forge international agreements when global environmental trends threaten our living standards or ecosystems.