Greetings everybody, and welcome to today's slightly different economics class, “Economics for Environmentalists: Diminishing Marginal Return (DMR)”. For those of you who have been following the “Economics for Politicians” series (which will be concluding soon – final chapter is in the works), this post will differ from the ones in that series. First, this will not be a series – this is a one time lesson. This will also differ from the “…Politicians” series in those posts are written for people who have no understanding of the concepts being presented. In today's case I believe that to some degree every person, whether from the left or right already has some understanding of today's topic, whether they realize it or not. However, I think that while almost everybody has experienced DMR many have probably not seen it defined and illustrated as we will be doing today. Where today's lesson comes in is how we can use the concept as a tool to find a common ground for environmental policy.
DMR states that however much utility is gained from consuming or using a good, while each additional unit consumed offers utility, it is less than the initial, and continues to decrease until the product can actually give negative utility.
A classic example used to illustrate DMR is hiring a worker to paint a room. That person will accomplish a great deal, and adding a second worker allows even more work to be done. While having a second person to help mix paint, move drop cloths, and open cans will add to the productivity of the first worker, the additional work completed is slightly less than what you gain from going from zero workers to one. Each additional person adds slightly less than the last, until we get to the point where you have so many workers in the room that they get in each other's way and result in negative utility.
I prefer to use a more fun illustration – beer! For my illustration we'll use a college student named Bob, who after a tough week of exams has just departed his last Friday class of the week and is heading to his favorite watering hole to enjoy happy hour with some friends. Here is a chart illustrating how much utility (happiness) is gained from each unit consumed (beers drank), with beer by beer explanations immediately following:
1 – Nirvana! After a tough week nothing tastes better than that first sip of an ice cold beer to start off that weekend. That first beer takes the edge off and helps to celebrate the start of the weekend!
2 – Still delicious. The second beer tastes great, but the additional pleasure gained from drinking it is not quite as great as the first.
3 – Still good, but not quite as good as beer #2 was.
4- Slightly less good than #3.
Now we skip a head a few beers to show where the extra utility of additional beers are offset by negative externalities, or as we will refer to them in this example, “drunkenness”.
8 – Bob (along with most of the bar) starts singing along to Biz Markie on the jukebox.
9 – Singing along to Dave Matthews – The fact that Bob is even willing to listen to DMB at this point is a good warning that things are going downhill.
10 – Bob thinks its a good idea to step onto the dance floor and try to show off his moves with that cute girl from his Economics class.
11 – Bob's girlfriend arrives and witnesses said dancing attempt.
12 – This is the beer that causes Bob to lose memory of the fight with his girlfriend that ensued after beer #11.
13 – Bob is praying to the porcelain gods.
As these examples show, even an economic good as great as beer diminishes in utility as more is consumed, even to the point where it becomes a bad thing. The same can be applied to pollution, or more specifically, how we regulate it. Pollution is obviously a bad thing, but there are limits to how much it should be regulated. Right now the left's “None of the above” energy policy is mainly dictated by this zero tolerance for any kind of pollutants:
Offshore Oil Drilling – We'll get another BP oil spill
Onshore Oil Drilling – Slow down and stop wherever possible any new drilling permits on federal land
Coal – Too dirty. Coal companies need to be bankrupted and their executives crucified
Natural Gas – No new pipelines, please. And no fracking
Nuclear – Because it's nuclear
Hydroelectric – Dams are bad for the environment
Solar or Wind – Supported by the left in theory, until the planned site contains a newly discovered endangered species
I know that abolishing the EPA is sometimes a rallying cry among conservatives, but I'm not among them. I think that we should have a regulatory agency over what levels of pollution we are willing to accept in out ground, water, and air. I'm not discounting that the EPA has been known for its abuses – it's not hard to find a site documenting them.
What we need to determine is what the scope of the EPA should be and ensure that it's not trying to work beyond that scope in the name of justifying a higher budget. Even the most pro-business die hard conservative doesn't not want to see Lake Erie catching on fire or Pittsburgh engulfed in factory smoke. While there will be disagreement about what the tolerable levels of various forms of pollutants should be, understanding the concept of Diminishing Marginal Return can help bring both sides to the table.
Cross posted from Brother Bob's Blog
@Bob – You know what is frequently overlooked? The consumer and technology.
Given two products and given one has less of an environmental impact, many if not most of us are going to choose the environmental friendly product – as long as it is not prohibitively more expensive. Market forces will move Company B to produce increasingly evironmentally friendly products.
The EPA is a relative new entity and can’t be given the credit for the leaps and bounds our industrial base has improved eco friendliness over the last two hundred years. Not to mention how scientific advances improve the environment, think New York City 1800 – how coal and wood soot dirtied the air and how horse manure polluted the streets with the run-off contaminating fresh water supplies. Thank you technology.
Good post btw. Like what you did. Right on point. The better we can articulate the arguments, the easier it will be to present and push reasonable solutions.
@ Mossomo. Great points about how capitalism has improved the environment. You’d probably enjoy my favorite econ blog, Cafe Hayek.. One of the items they like to run from time to time is “Cleaned by Capitalism”, talking about the little advancements that make society so much cleaner. Here is the latest entry on how far we’ve come since George Washington’s dentures.
Solar or Wind – Supported by the left
in theory, until the planned site contains a newly discovered endangered speciesdespite the proven mass destruction of EAGLES, HAWKS, FALCONS, BATS, Tortoises, Desert hares, Sacred Ground of Native Americans, and more!Many solar and wind sites are getting waivers to destroy such raptors and endangered species in the name of ”green.”
This is perhaps the biggest irony of the so-called “green” movement.
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On a slightly different note, going back to pollution.
Greenies, including Obama, are demanding businesses use technologies not yet invented or pay a penalty.
There is No Existing technology that gets 100% of all arsenic or cyanide out of water.
Getting 100% of all trace poison out of our water is not possible, but Republicans are falsely accused of PUTTING POISON IN WATER!
Dirty little secret: Democrats couldn’t do a whit better!
There is no technology that produces commercially viable cellulousic methane for gasoline blends.
Businesses paid over $6 million to Obama for that methane not being in their gasoline last year, more every year!
@Nan G: Your methane example is a perfect example of the abuses to which I’m referring. Fighting pollution is one thing, mission creep to justify funding is another.
Another is the managing of Federal Forests by environmentalists instead of professional forest management personnel. Colorado will likely be just scorched earth by the end of the summer. It didn’t have to be that way. The fire is not about 12 miles from home. I may need to decide what I am going to let burn. The smoke is quite thick here. I should save my collection of leather bound books written by our founding fathers and my guns. I also have a 1st edition of Lone Star Ranger signed by Zane Grey. Decisions, decisions!
Sorry to hear, Randy – be safe.
@Randy:
God bless
…managing of Federal Forests by environmentalists instead of professional forest management personnel. Colorado will likely be just scorched earth by the end of the summer. … The fire is not about 12 miles from home.
I missed it. You are on point. A quick search found prescience in this Forbes article from 2009.
http://www.forbes.com/2009/04/07/public-land-mismanagement-opinions-contributors-perc.html
Sounds a lot like Grandma’s rule on hiring boys. You hire one boy you get one boy’s worth of work done. You hire two boys you get a half a boy’s worth of work done. You hire three boys you don’t get any work done at all.
This is kind of an interesting article—not m0mentous, but interesting. It points out this simple fact: The Left and the Right have different views on the same subject. To live in this world together, we must give and take a little—also known as compromise. Now wouldn’t it be beneficial if all who engaged in argument about the issues of the day did so on the basis of facts, instead of ideology?
The EPA paid for my degrees in the late 1970’s. I find it interesting that US manufacturing peaked just a few years after these laws were enacted. Last refineries and nuclear plants built were 1979 and 1982 respectively.
In retrospect, these laws killed our economy. Yes, things are cleaner ( but just marginally since 1985), and I believe that the overall cost was not worth it.
Since the early 90’s it’s gone over the top for every form of “environmentalism”, it is no longer based on science or cost. I would drastically modify the CWA and the Clean Air Act, and move our standards back to the 1985 levels.
@Liberal1 (objectivity):
So says the one knee deep in ideology… Ever look into a Mirror and go, “Gee… I’m a hypocrite” … No? Well, shouldn’t surprise Flopping Aces regulars.