3. Concept of externalities

Internal costs – all the direct costs which are paid for by the seller and the buyer of an economic good.

Externalities – social costs or benefits not included in the market price (higher costs for health care and health insurance, higher taxes for pollution control).

External cost – a harmful environmental or social cost that is borne by people not directly involved in buying or selling a product. These harmful effects are passed on to workers, the general public, and in some cases future generations.

Internalizing the external costs – a process of inclusion of the harmful external costs in the market prices of goods and services.

4. Economic strategies for pollution control

Marginal cost – the additional cost associated with one more unit of something.

Marginal cost of pollution – the added cost for all present and future members of society of an additional unit of pollution.

Marginal cost of pollution abatement - the added cost for all present and future members of society of reducing one unit of a given type of pollution.

Cost-benefit diagram – a diagram that helps policymakers make decisions about cost of a particular action and benefits that would occur if that action were implemented.

Optimum amount of pollution – the amount of pollution that is economically most desirable.

Command and control regulation – pollution control laws that work by setting limits on levels of pollution.

Incentive-based regulation - pollution control laws that work by establishing emission targets and providing industries with incentives to reduce emissions.

Table: Economic solutions to pollution and resource waste

Solution	Internalizes external costs	Innovation	International competitiveness	Administrative costs	Increase government revenue
Regulation	Partially	Can encourage	Decreased*	High	No
Subsidies	No	Can encourage	Increased	Low	No
Withdrawing harmful subsidies	Yes	Can encourage	Decreased*	Low	Yes
Tradable rights	Yes	Encourages	Decreased*	Low	Yes
Green taxes	Yes	Encourages	Decreased*	Low	Yes
User fees	Yes	Can encourage	Decreased*	Low	Yes
Pollution prevention bonds	Yes	Encourages	Decreased*	Low	No
* Unless more cost-effective and productive technologies are developed

5. Solutions of reducing poverty

Poverty – the inability to meet one’s basic economic needs.

The World Bank’s definition of poverty is the income of $1 per day (one of every five people on the planet).

Poverty causes premature deaths and preventable health problems. It also tends to increase birth rates and often pushes people to use potentially renewable resources unsustainably in order to survive.

The wealth gap

The richest fifth (20%) of the world’s population receive 80% of global income, and the poorest fifth (80%) has only 20% of income.

Poverty reducing solutions:

- to forgive at least 60% of the almost $2 trillion that developing countries owe to developed countries and international lending agencies;

- to increase the nonmilitary aid to developing countries from developed countries;

- international lending agencies should be required to use a standard environmental and social impact analysis to evaluate any proposed development project;

- to establish policies that encourage both developed and developing countries to slow population growth and stabilize their populations