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Unit 8 — Pollution and the Environment

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To define the concept of a “negative externality,” to illustrate the effect of an externality on economic efficiency, to show the ways in which externalities can be internalized, and to demonstrate how to use cost-benefit analysis to determine the “optimum” level of pollution.


  1. Market transactions do not always take all the social benefits and costs of an economic activity into account. If private benefits and/or costs differ from social benefits and/or costs, an economic activity has “externalities.” These externalities tend to disrupt economic efficiency.
  2. Externalities can be internalized by tax and subsidy policies or by mandated control methods. A polluting firm can be taxed. This will force it to increase its selling price and therefore reduce its sales. Or, the firm could be forced to install equipment that reduces the pollution. This also raises the product price, but forces the government rather than the firm to decide how pollution should be reduced.
  3. There are numerous costs caused by pollution and all are difficult to measure (health, discomfort, damage to crops and painted surfaces, aesthetic, etc.).
  4. Marginal social cost should equal marginal social benefit for the efficient allocation of resources of production from society’s point of view, and marginal cost-benefit analysis should be used to determine the optimal quantity of pollution.

Audio and Transcripts

Meet the Series Experts

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Eric Pooley

Eric Pooley

Award-winning journalist and expert in the area of pollution and the environment.

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William Ruckelshaus

William Ruckelshaus

The U.S. Environmental Protection Agency’s first Administrator when the agency was formed by President Richard M. Nixon in 1970.

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Study Tools



Use this web-based calculator to aid in your studies.


  1. Which of the following statements is MOST accurate? The problem of pollution is...

    worldwide, though U.S. consumers contribute more to pollution per capita than consumers elsewhere.

  2. Which of the following is the BEST example of an external diseconomy?

    This is the only example in which T&G causes damage to resources, thereby harming others in a way for which they are not compensated.

  3. Firms that pollute tend to overproduce MAINLY because

    the artificially low price they pay for resources makes production cheaper.

  4. At present, the PRIMARY means by which government intervenes to control the nation’s pollution problem is through...

    direct regulation.

  5. From an economist’s standpoint, probably the most sensible goal for our society is to...

    continue searching for ways to minimize the sum of pollution and pollution control costs.

  6. An economist would MOST LIKELY agree with which of the following statements? Pollution is MAINLY attributable to...

    human choices.



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