WEBVTT 00:00:00.000 --> 00:00:01.961 align:middle line:90% [SQUEAKING] 00:00:01.961 --> 00:00:03.909 align:middle line:90% [RUSTLING] 00:00:03.909 --> 00:00:10.148 align:middle line:90% [CLICKING] 00:00:10.148 --> 00:00:12.440 align:middle line:84% JON GRUBER: OK, today, we're going to finish chapter 5. 00:00:12.440 --> 00:00:16.900 align:middle line:84% Let me just say, last lecture was, in my 33 years at MIT, 00:00:16.900 --> 00:00:18.440 align:middle line:84% one of the most active interactive 00:00:18.440 --> 00:00:19.648 align:middle line:90% lectures I've ever delivered. 00:00:19.648 --> 00:00:20.660 align:middle line:90% So you guys are great. 00:00:20.660 --> 00:00:21.860 align:middle line:90% I really hope you'll keep it up. 00:00:21.860 --> 00:00:24.152 align:middle line:84% This course is going to be so much fun if you guys keep 00:00:24.152 --> 00:00:26.440 align:middle line:90% asking questions, interacting. 00:00:26.440 --> 00:00:29.860 align:middle line:84% Just the broad spread of people, the questions I got were great, 00:00:29.860 --> 00:00:30.860 align:middle line:90% so please do keep it up. 00:00:30.860 --> 00:00:32.600 align:middle line:84% We're going to have an awesome semester if you guys continue 00:00:32.600 --> 00:00:33.100 align:middle line:90% to do that. 00:00:33.100 --> 00:00:35.240 align:middle line:90% I really appreciate it. 00:00:35.240 --> 00:00:38.320 align:middle line:90% OK, so we're back to chapter 5. 00:00:38.320 --> 00:00:39.720 align:middle line:84% And you remember, we were talking 00:00:39.720 --> 00:00:43.880 align:middle line:84% about government interventions to address externalities. 00:00:43.880 --> 00:00:46.280 align:middle line:84% And I said, look, at the end of the day, 00:00:46.280 --> 00:00:49.360 align:middle line:84% price and quantity restrictions are pretty much the same. 00:00:49.360 --> 00:00:52.020 align:middle line:84% I said there were two big differences. 00:00:52.020 --> 00:00:54.717 align:middle line:84% One was quantity restrictions involve more information 00:00:54.717 --> 00:00:57.300 align:middle line:84% because you don't only need to know how big the externalities. 00:00:57.300 --> 00:01:00.540 align:middle line:84% You also need to know the shape of the demand and supply curves. 00:01:00.540 --> 00:01:03.100 align:middle line:84% And I said quality interventions also 00:01:03.100 --> 00:01:06.220 align:middle line:84% can lead to allocative inefficiency 00:01:06.220 --> 00:01:07.940 align:middle line:90% if firms are heterogeneous. 00:01:07.940 --> 00:01:10.280 align:middle line:84% But we solve that problem with the cap and trade system. 00:01:10.280 --> 00:01:11.738 align:middle line:84% We talked about how a cap and trade 00:01:11.738 --> 00:01:15.700 align:middle line:84% system can solve that particular problem with quantity solutions. 00:01:15.700 --> 00:01:18.900 align:middle line:84% There is a third difference between quantity and price 00:01:18.900 --> 00:01:20.420 align:middle line:90% solutions, which is actually-- 00:01:20.420 --> 00:01:21.962 align:middle line:84% not that one's better than the other, 00:01:21.962 --> 00:01:23.580 align:middle line:84% but the third critical difference. 00:01:23.580 --> 00:01:25.705 align:middle line:84% And this is due to a very important article written 00:01:25.705 --> 00:01:28.440 align:middle line:84% by Marty Weitzman, a former economist at MIT and Harvard. 00:01:28.440 --> 00:01:32.420 align:middle line:84% He made a very important point about how once you 00:01:32.420 --> 00:01:36.460 align:middle line:84% have uncertainty in your model, then 00:01:36.460 --> 00:01:41.100 align:middle line:84% there are different advantages of costs and price approaches 00:01:41.100 --> 00:01:43.900 align:middle line:84% to dealing with negative externalities. 00:01:43.900 --> 00:01:47.920 align:middle line:84% So to see that, we're going to look at figure 5-10. 00:01:47.920 --> 00:01:49.860 align:middle line:84% It's the last figure from chapter 5-- 00:01:49.860 --> 00:01:51.780 align:middle line:90% figure 5-10. 00:01:51.780 --> 00:01:56.180 align:middle line:84% Figure 5-10 is the same pollution reduction framework we 00:01:56.180 --> 00:01:58.640 align:middle line:90% used last time. 00:01:58.640 --> 00:02:00.622 align:middle line:90% The difference here is twofold. 00:02:00.622 --> 00:02:02.080 align:middle line:84% First of all, we're no longer going 00:02:02.080 --> 00:02:04.020 align:middle line:84% to have a flat marginal damage curve. 00:02:04.020 --> 00:02:06.080 align:middle line:84% Many of you asked, does the marginal damage curve 00:02:06.080 --> 00:02:06.780 align:middle line:90% have to be flat? 00:02:06.780 --> 00:02:07.800 align:middle line:90% No, it doesn't. 00:02:07.800 --> 00:02:12.240 align:middle line:84% And here, we're going to have a declining marginal damage 00:02:12.240 --> 00:02:13.540 align:middle line:90% curve, which makes sense. 00:02:13.540 --> 00:02:15.340 align:middle line:84% The first unit of pollution is the worst, 00:02:15.340 --> 00:02:18.680 align:middle line:84% and it gets slightly less bad after that. 00:02:18.680 --> 00:02:21.440 align:middle line:84% Not necessarily, but it's a sensible starting point, 00:02:21.440 --> 00:02:24.648 align:middle line:90% at least over relevant range. 00:02:24.648 --> 00:02:25.940 align:middle line:90% So that's the first difference. 00:02:25.940 --> 00:02:28.065 align:middle line:84% You'll see it's a declining marginal benefit curve. 00:02:28.065 --> 00:02:31.040 align:middle line:84% The second difference is we're going to add uncertainty. 00:02:31.040 --> 00:02:34.600 align:middle line:84% And in particular, we're going to have the very realistic case 00:02:34.600 --> 00:02:38.840 align:middle line:84% of uncertainty over firm cost curves for pollution reduction. 00:02:38.840 --> 00:02:41.760 align:middle line:84% After all, let's say you're a regulator 00:02:41.760 --> 00:02:44.920 align:middle line:84% and you want to know about firm cost curves 00:02:44.920 --> 00:02:46.560 align:middle line:90% for reducing pollution. 00:02:46.560 --> 00:02:48.487 align:middle line:84% You could do some engineering model, 00:02:48.487 --> 00:02:50.820 align:middle line:84% which will be uncertain because every firm is different. 00:02:50.820 --> 00:02:52.187 align:middle line:90% You could ask the firm. 00:02:52.187 --> 00:02:54.020 align:middle line:84% But the firm of course, is going to say, oh, 00:02:54.020 --> 00:02:56.247 align:middle line:84% it's incredibly expensive to reduce pollution. 00:02:56.247 --> 00:02:58.080 align:middle line:84% It's going to cost me bazillians of dollars. 00:02:58.080 --> 00:02:59.247 align:middle line:90% You shouldn't make me do it. 00:02:59.247 --> 00:03:01.180 align:middle line:84% You can't get reliable information from them. 00:03:01.180 --> 00:03:03.540 align:middle line:84% So you're going to face an uncertain environment 00:03:03.540 --> 00:03:07.700 align:middle line:84% in which you're measuring the cost of pollution reduction. 00:03:07.700 --> 00:03:09.480 align:middle line:84% That is what we're capturing here, 00:03:09.480 --> 00:03:12.300 align:middle line:84% and we're going to do it in two examples. 00:03:12.300 --> 00:03:14.080 align:middle line:84% The first example is climate change, 00:03:14.080 --> 00:03:17.100 align:middle line:84% which we'll talk about a little bit more later in this lecture. 00:03:17.100 --> 00:03:19.700 align:middle line:90% And the second is forest fires. 00:03:19.700 --> 00:03:22.140 align:middle line:84% The big difference between the two 00:03:22.140 --> 00:03:25.240 align:middle line:84% is the steepness of the marginal demand curve, 00:03:25.240 --> 00:03:28.140 align:middle line:84% or the marginal damage curve, or the social marginal benefit 00:03:28.140 --> 00:03:29.460 align:middle line:90% curve. 00:03:29.460 --> 00:03:34.000 align:middle line:84% With global warming, every unit of carbon does damage. 00:03:34.000 --> 00:03:37.620 align:middle line:84% But it's not like a particular unit tips us over. 00:03:37.620 --> 00:03:39.980 align:middle line:84% Now, we're getting closer to tipping points 00:03:39.980 --> 00:03:41.600 align:middle line:90% with things like Arctic melting. 00:03:41.600 --> 00:03:45.260 align:middle line:84% But in general, we don't really care 00:03:45.260 --> 00:03:47.520 align:middle line:84% if you drive 100 miles or a million miles this year. 00:03:47.520 --> 00:03:50.860 align:middle line:84% That's not going to really affect the future of the Earth. 00:03:50.860 --> 00:03:54.080 align:middle line:84% With forest fires, that's another negative externality. 00:03:54.080 --> 00:03:56.880 align:middle line:84% You set a forest fire, that affects other people. 00:03:56.880 --> 00:04:00.200 align:middle line:84% And there, certainly there can be very steep marginal damage 00:04:00.200 --> 00:04:01.760 align:middle line:84% as forest fires get bigger, that can 00:04:01.760 --> 00:04:05.360 align:middle line:90% do exponentially more damage. 00:04:05.360 --> 00:04:07.060 align:middle line:84% So that's a steep marginal damage curve. 00:04:07.060 --> 00:04:08.660 align:middle line:84% Now, I'm just picking these examples. 00:04:08.660 --> 00:04:09.538 align:middle line:90% I'm making them up. 00:04:09.538 --> 00:04:11.080 align:middle line:84% The main point is you want an example 00:04:11.080 --> 00:04:12.455 align:middle line:84% with a flat marginal damage curve 00:04:12.455 --> 00:04:15.800 align:middle line:84% and a steep marginal damage curve. 00:04:15.800 --> 00:04:17.220 align:middle line:90% So those are two examples. 00:04:17.220 --> 00:04:20.600 align:middle line:84% In each example, we're going to have an MC1 curve. 00:04:20.600 --> 00:04:28.000 align:middle line:84% MC1 is the government's estimate of what the marginal cost looks 00:04:28.000 --> 00:04:33.480 align:middle line:84% like MC1 is the government's estimate of how 00:04:33.480 --> 00:04:36.840 align:middle line:84% much a marginal cost of reduction actually is. 00:04:36.840 --> 00:04:41.640 align:middle line:90% MC2 is the truth. 00:04:41.640 --> 00:04:44.560 align:middle line:84% So MC1 is what the government thinks 00:04:44.560 --> 00:04:46.720 align:middle line:84% the marginal cost of reduction curve is. 00:04:46.720 --> 00:04:51.800 align:middle line:84% MC2 is the true marginal cost of reduction curve. 00:04:51.800 --> 00:04:54.620 align:middle line:90% Questions about the setup? 00:04:54.620 --> 00:04:58.700 align:middle line:84% OK, let's now look at what happens 00:04:58.700 --> 00:05:02.020 align:middle line:84% when the government either puts in a tax or quantity 00:05:02.020 --> 00:05:04.860 align:middle line:84% regulation based on what it thinks 00:05:04.860 --> 00:05:08.060 align:middle line:84% is the true marginal cost of reduction. 00:05:08.060 --> 00:05:10.900 align:middle line:84% So in the case of climate change, 00:05:10.900 --> 00:05:13.300 align:middle line:84% let's take the quantity regulation. 00:05:13.300 --> 00:05:16.120 align:middle line:84% The government rolls in and says, look, 00:05:16.120 --> 00:05:19.100 align:middle line:84% we think the right cost curve is MC1. 00:05:19.100 --> 00:05:20.307 align:middle line:90% The benefit curve is SMB. 00:05:20.307 --> 00:05:22.140 align:middle line:84% We're going to assume no uncertainty in that 00:05:22.140 --> 00:05:24.180 align:middle line:90% to make life a little easier. 00:05:24.180 --> 00:05:27.420 align:middle line:84% Those two intersect at point C. And that 00:05:27.420 --> 00:05:33.140 align:middle line:84% says that the optimal reduction is R1. 00:05:33.140 --> 00:05:35.900 align:middle line:84% That's just applying the framework we did last time. 00:05:35.900 --> 00:05:40.980 align:middle line:84% Now in truth, the marginal cost curve is MC2. 00:05:40.980 --> 00:05:43.980 align:middle line:84% So the true optimal reduction is where 00:05:43.980 --> 00:05:49.080 align:middle line:84% MC2 hits the social marginal benefit curve, which is that R2. 00:05:49.080 --> 00:05:51.880 align:middle line:90% 00:05:51.880 --> 00:05:53.160 align:middle line:90% It's that R2? 00:05:53.160 --> 00:05:59.535 align:middle line:84% So the government, by getting it wrong, is reducing too much. 00:05:59.535 --> 00:06:00.660 align:middle line:90% There's too much reduction. 00:06:00.660 --> 00:06:02.035 align:middle line:84% Remember the key point last time. 00:06:02.035 --> 00:06:05.600 align:middle line:84% You can have too much pollution reduction. 00:06:05.600 --> 00:06:08.160 align:middle line:84% Fully getting rid of pollution is never optimal. 00:06:08.160 --> 00:06:10.500 align:middle line:84% Because why would you have too much pollution reduction? 00:06:10.500 --> 00:06:12.400 align:middle line:84% Because the costs you're imposing on firms 00:06:12.400 --> 00:06:14.640 align:middle line:84% to reduce pollution are greater than the benefits 00:06:14.640 --> 00:06:17.140 align:middle line:84% to society of having them reduced. 00:06:17.140 --> 00:06:19.640 align:middle line:84% So what you see here is the government, through its quantity 00:06:19.640 --> 00:06:24.440 align:middle line:84% regulation, is creating a deadweight loss DWL1. 00:06:24.440 --> 00:06:30.480 align:middle line:84% DWL1 is units where the true marginal cost, the red line, 00:06:30.480 --> 00:06:33.840 align:middle line:90% is above the marginal benefit. 00:06:33.840 --> 00:06:37.480 align:middle line:84% So those are all units where the marginal cost of reduction 00:06:37.480 --> 00:06:39.180 align:middle line:90% is above the marginal benefit. 00:06:39.180 --> 00:06:41.480 align:middle line:84% And yet, you're still mandating reduction. 00:06:41.480 --> 00:06:43.480 align:middle line:84% So you're creating a deadweight loss 00:06:43.480 --> 00:06:46.400 align:middle line:90% by mandating too much reduction. 00:06:46.400 --> 00:06:49.080 align:middle line:90% Questions about that? 00:06:49.080 --> 00:06:53.970 align:middle line:84% OK, now let's think about an alternative policy 00:06:53.970 --> 00:06:56.650 align:middle line:90% tool, which is a tax. 00:06:56.650 --> 00:07:00.510 align:middle line:84% Imagine I know the marginal damage curve, 00:07:00.510 --> 00:07:02.450 align:middle line:84% the social marginal benefit curve. 00:07:02.450 --> 00:07:05.290 align:middle line:84% But I still don't quite know what the right cost curve is. 00:07:05.290 --> 00:07:10.210 align:middle line:84% So I set my tax thinking that marginal costs are MC1. 00:07:10.210 --> 00:07:11.990 align:middle line:90% Well, where do I set my tax? 00:07:11.990 --> 00:07:15.330 align:middle line:90% I set my tax at the level C2. 00:07:15.330 --> 00:07:18.290 align:middle line:84% That little t equals C2 on the y-axis. 00:07:18.290 --> 00:07:21.290 align:middle line:90% I set my tax there. 00:07:21.290 --> 00:07:26.410 align:middle line:84% When I set my tax there, I am saying 00:07:26.410 --> 00:07:28.690 align:middle line:84% to firms that's the tax they're going to have to pay. 00:07:28.690 --> 00:07:34.830 align:middle line:84% In fact, the tax they should pay is where-- 00:07:34.830 --> 00:07:36.630 align:middle line:90% let me be very precise on this. 00:07:36.630 --> 00:07:40.530 align:middle line:84% So I set the tax where marginal cost equals marginal, 00:07:40.530 --> 00:07:42.530 align:middle line:90% MC1 equals marginal benefits. 00:07:42.530 --> 00:07:46.090 align:middle line:90% So I set it at point C. 00:07:46.090 --> 00:07:49.710 align:middle line:84% Where it should be is where marginal cost 00:07:49.710 --> 00:07:53.270 align:middle line:84% equals marginal benefits, MC2 equals marginal benefits. 00:07:53.270 --> 00:07:56.990 align:middle line:84% The government is going to set a tax at that little t. 00:07:56.990 --> 00:07:58.750 align:middle line:84% And that's what they're going to tax. 00:07:58.750 --> 00:08:03.250 align:middle line:84% The firm, the optimal tax would be different than that. 00:08:03.250 --> 00:08:05.790 align:middle line:84% The optimal tax would be at B where 00:08:05.790 --> 00:08:07.410 align:middle line:90% MC2 equals marginal benefits. 00:08:07.410 --> 00:08:09.370 align:middle line:90% That would be the optimal tax. 00:08:09.370 --> 00:08:12.950 align:middle line:84% So the optimal tax would be slightly higher, where 00:08:12.950 --> 00:08:14.670 align:middle line:90% the optimal is slightly higher. 00:08:14.670 --> 00:08:16.170 align:middle line:90% So what happens here? 00:08:16.170 --> 00:08:20.530 align:middle line:84% Well, the firm should choose point B. Instead, 00:08:20.530 --> 00:08:23.850 align:middle line:84% it chooses point E. Why does it choose point E? 00:08:23.850 --> 00:08:25.390 align:middle line:84% Someone tell me, why does the firm 00:08:25.390 --> 00:08:28.530 align:middle line:84% choose point E when we set this tax equal to little t. 00:08:28.530 --> 00:08:29.030 align:middle line:90% Yeah. 00:08:29.030 --> 00:08:31.862 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:08:31.862 --> 00:08:32.570 align:middle line:90% JON GRUBER: Yeah. 00:08:32.570 --> 00:08:36.950 align:middle line:84% So basically, there's no reason to reduce less than 00:08:36.950 --> 00:08:39.270 align:middle line:84% that because that's the marginal cost of reduction. 00:08:39.270 --> 00:08:41.653 align:middle line:84% That were reduced to the point where the marginal cost 00:08:41.653 --> 00:08:43.570 align:middle line:84% reduction equals the penalty they have to pay. 00:08:43.570 --> 00:08:45.830 align:middle line:90% That penalty is little t. 00:08:45.830 --> 00:08:50.290 align:middle line:84% So they're going to choose to reduce to point E. 00:08:50.290 --> 00:08:55.970 align:middle line:84% The optimum is B So they are doing too little reduction. 00:08:55.970 --> 00:08:57.690 align:middle line:90% The optimal reduction is R2. 00:08:57.690 --> 00:09:02.570 align:middle line:84% They're doing R3, creating a deadweight loss of the triangle 00:09:02.570 --> 00:09:04.370 align:middle line:90% to the left DBE. 00:09:04.370 --> 00:09:07.770 align:middle line:90% 00:09:07.770 --> 00:09:13.210 align:middle line:84% Now let's contrast that to what happens to forest fires. 00:09:13.210 --> 00:09:16.690 align:middle line:84% Let's walk through the same steps a little faster now. 00:09:16.690 --> 00:09:21.490 align:middle line:84% The government thinks that the optimal quantity to regulate 00:09:21.490 --> 00:09:23.050 align:middle line:90% is R1. 00:09:23.050 --> 00:09:26.290 align:middle line:90% The true optimal quantity is R2. 00:09:26.290 --> 00:09:30.290 align:middle line:84% So the government causes too much reduction, 00:09:30.290 --> 00:09:32.890 align:middle line:84% creating a deadweight loss to the right 00:09:32.890 --> 00:09:37.810 align:middle line:90% of point B, the triangle ABC. 00:09:37.810 --> 00:09:40.210 align:middle line:84% The tax case-- the government thinks the optimal tax 00:09:40.210 --> 00:09:42.010 align:middle line:90% is little t. 00:09:42.010 --> 00:09:44.950 align:middle line:90% But little t hits MC. 00:09:44.950 --> 00:09:52.430 align:middle line:84% But in fact, the optimal tax should be higher. 00:09:52.430 --> 00:09:55.570 align:middle line:84% So that means they do too little reduction. 00:09:55.570 --> 00:09:59.510 align:middle line:84% In other words, the area BDE is the area 00:09:59.510 --> 00:10:02.790 align:middle line:84% where the social marginal benefits of reduction 00:10:02.790 --> 00:10:04.930 align:middle line:90% are above the cost of reduction. 00:10:04.930 --> 00:10:07.150 align:middle line:84% So that's why they're doing too little. 00:10:07.150 --> 00:10:09.050 align:middle line:84% In both the top and bottom panel, 00:10:09.050 --> 00:10:12.550 align:middle line:84% the tax caused them to do too little reduction 00:10:12.550 --> 00:10:14.670 align:middle line:84% because the social marginal benefits are 00:10:14.670 --> 00:10:17.790 align:middle line:84% above the true social marginal costs. 00:10:17.790 --> 00:10:19.910 align:middle line:84% So it's a deadweight loss, which arises from doing 00:10:19.910 --> 00:10:21.110 align:middle line:90% too little reduction. 00:10:21.110 --> 00:10:21.915 align:middle line:90% Let me stop there. 00:10:21.915 --> 00:10:22.790 align:middle line:90% Do people understand? 00:10:22.790 --> 00:10:24.630 align:middle line:84% Questions about this complicated graph? 00:10:24.630 --> 00:10:27.790 align:middle line:90% Questions about this? 00:10:27.790 --> 00:10:30.470 align:middle line:90% OK, here's the money question. 00:10:30.470 --> 00:10:33.442 align:middle line:84% Notice the key contrast between the two-- yeah, question. 00:10:33.442 --> 00:10:35.650 align:middle line:84% AUDIENCE: The marginal cost curves that we have here, 00:10:35.650 --> 00:10:37.270 align:middle line:90% [INAUDIBLE] are [INAUDIBLE] firm 00:10:37.270 --> 00:10:38.570 align:middle line:90% JON GRUBER: To the firm. 00:10:38.570 --> 00:10:42.330 align:middle line:84% Well, basically, these are private marginal cost curves. 00:10:42.330 --> 00:10:44.310 align:middle line:84% These are private marginal cost curves. 00:10:44.310 --> 00:10:47.090 align:middle line:84% Now remember, when we're doing-- in this framework, 00:10:47.090 --> 00:10:48.930 align:middle line:90% we're not doing social. 00:10:48.930 --> 00:10:52.810 align:middle line:84% The marginal cost is the marginal cost of reduction. 00:10:52.810 --> 00:10:54.490 align:middle line:84% So the private and social marginal costs 00:10:54.490 --> 00:10:57.570 align:middle line:84% are the same because we're assuming no externalities 00:10:57.570 --> 00:10:59.177 align:middle line:90% in the reduction of pollution. 00:10:59.177 --> 00:11:01.010 align:middle line:84% So marginal cost curve is just marginal cost 00:11:01.010 --> 00:11:01.790 align:middle line:90% of reducing pollution. 00:11:01.790 --> 00:11:03.873 align:middle line:84% We're assuming that costs are the same in the firm 00:11:03.873 --> 00:11:05.210 align:middle line:90% as it pertains to society. 00:11:05.210 --> 00:11:05.770 align:middle line:90% Yeah. 00:11:05.770 --> 00:11:08.145 align:middle line:84% AUDIENCE: Can you explain one more time [INAUDIBLE] firms 00:11:08.145 --> 00:11:10.310 align:middle line:84% where the [? reduced ?] tax [INAUDIBLE]. 00:11:10.310 --> 00:11:13.010 align:middle line:84% JON GRUBER: Would we switch to point E? 00:11:13.010 --> 00:11:15.710 align:middle line:90% Because the firm's decision is-- 00:11:15.710 --> 00:11:18.770 align:middle line:84% remember, the true MC is MC2, the red line. 00:11:18.770 --> 00:11:22.630 align:middle line:90% They see a tax of little t. 00:11:22.630 --> 00:11:24.770 align:middle line:84% So you said point E instead of point-- 00:11:24.770 --> 00:11:25.290 align:middle line:90% OK. 00:11:25.290 --> 00:11:32.390 align:middle line:84% Well, why would a firm facing a tax of t not go past E? 00:11:32.390 --> 00:11:33.930 align:middle line:90% Why would it go to B? 00:11:33.930 --> 00:11:38.210 align:middle line:84% If it goes to B, it's spending more than paying the tax. 00:11:38.210 --> 00:11:41.050 align:middle line:84% Because look, if it goes to B, its marginal cost 00:11:41.050 --> 00:11:42.790 align:middle line:90% is above the tax. 00:11:42.790 --> 00:11:44.150 align:middle line:90% So why would it do that? 00:11:44.150 --> 00:11:46.350 align:middle line:84% It would rather just pay the tax. 00:11:46.350 --> 00:11:48.270 align:middle line:84% So it will only reduce until the intersection 00:11:48.270 --> 00:11:50.630 align:middle line:84% of that line, which is point E. Does that make sense? 00:11:50.630 --> 00:11:51.465 align:middle line:90% AUDIENCE: Yes. 00:11:51.465 --> 00:11:52.090 align:middle line:90% JON GRUBER: OK. 00:11:52.090 --> 00:11:52.930 align:middle line:90% Yeah. 00:11:52.930 --> 00:11:56.510 align:middle line:84% AUDIENCE: So the deadweight loss one would only occur if and only 00:11:56.510 --> 00:11:58.510 align:middle line:84% if the mandate and deadweight loss two 00:11:58.510 --> 00:12:00.390 align:middle line:84% would only occur if and only if [INAUDIBLE]. 00:12:00.390 --> 00:12:01.830 align:middle line:90% JON GRUBER: Exactly. 00:12:01.830 --> 00:12:03.890 align:middle line:90% Yes, that's a great point. 00:12:03.890 --> 00:12:05.390 align:middle line:90% Excellent clarification. 00:12:05.390 --> 00:12:07.630 align:middle line:90% OK, here's the money question. 00:12:07.630 --> 00:12:11.090 align:middle line:84% Notice that the deadweight loss on the left 00:12:11.090 --> 00:12:13.750 align:middle line:84% is smaller than deadweight loss on the right on top, 00:12:13.750 --> 00:12:17.190 align:middle line:90% but bigger on bottom. 00:12:17.190 --> 00:12:18.230 align:middle line:90% Any intuition for why? 00:12:18.230 --> 00:12:19.310 align:middle line:90% This is hard. 00:12:19.310 --> 00:12:22.710 align:middle line:84% Any intuition for why the bottom case? 00:12:22.710 --> 00:12:25.830 align:middle line:84% In other words, in the top case, quantity regulation 00:12:25.830 --> 00:12:29.550 align:middle line:84% causes more inefficiency than price regulation. 00:12:29.550 --> 00:12:32.030 align:middle line:84% In the bottom case, price regulation 00:12:32.030 --> 00:12:34.870 align:middle line:84% causes more inefficiency than quantity regulation. 00:12:34.870 --> 00:12:35.870 align:middle line:90% Why? 00:12:35.870 --> 00:12:36.410 align:middle line:90% Yeah. 00:12:36.410 --> 00:12:38.785 align:middle line:84% AUDIENCE: It's due to the elasticity of [INAUDIBLE] curve 00:12:38.785 --> 00:12:39.490 align:middle line:90% [INAUDIBLE]. 00:12:39.490 --> 00:12:41.532 align:middle line:84% JON GRUBER: That's what's causing it graphically. 00:12:41.532 --> 00:12:43.053 align:middle line:90% But what's the intuition? 00:12:43.053 --> 00:12:44.970 align:middle line:84% And that's causing graphically the elasticity. 00:12:44.970 --> 00:12:46.430 align:middle line:84% But what's the intuition for why? 00:12:46.430 --> 00:12:46.690 align:middle line:90% Yeah. 00:12:46.690 --> 00:12:47.190 align:middle line:90% [INAUDIBLE] 00:12:47.190 --> 00:12:49.290 align:middle line:84% AUDIENCE: Better [? to ?] prevent forest fires 00:12:49.290 --> 00:12:50.187 align:middle line:90% than under prevent. 00:12:50.187 --> 00:12:51.270 align:middle line:90% JON GRUBER: Yeah, exactly. 00:12:51.270 --> 00:12:52.650 align:middle line:90% Think of it this way. 00:12:52.650 --> 00:12:55.970 align:middle line:84% Think of quantity regulations as erring 00:12:55.970 --> 00:13:00.810 align:middle line:84% on the side of the regulator and price regulation 00:13:00.810 --> 00:13:03.303 align:middle line:84% as erring on the side of the regulated. 00:13:03.303 --> 00:13:05.470 align:middle line:84% So the quantity regulation, the regulator is saying, 00:13:05.470 --> 00:13:07.012 align:middle line:84% look, I don't care what it costs you. 00:13:07.012 --> 00:13:08.730 align:middle line:90% You're doing x. 00:13:08.730 --> 00:13:10.462 align:middle line:84% With a price regulation, they're saying, 00:13:10.462 --> 00:13:11.670 align:middle line:90% I don't care how much you do. 00:13:11.670 --> 00:13:14.210 align:middle line:90% Just do it till it costs y. 00:13:14.210 --> 00:13:16.410 align:middle line:84% So quantity regulation is about getting the quantity 00:13:16.410 --> 00:13:19.540 align:middle line:84% exactly right no matter what the cost is. 00:13:19.540 --> 00:13:21.390 align:middle line:84% A price regulation is about saying, 00:13:21.390 --> 00:13:25.730 align:middle line:84% look deal with the externality and we get what we get. 00:13:25.730 --> 00:13:28.170 align:middle line:84% In the first case, we don't really 00:13:28.170 --> 00:13:29.867 align:middle line:84% care about getting exactly right. 00:13:29.867 --> 00:13:31.950 align:middle line:84% It's a very flat curve if you're a little bit off. 00:13:31.950 --> 00:13:34.470 align:middle line:84% If you drive 500,000 miles, instead of a million miles, 00:13:34.470 --> 00:13:36.930 align:middle line:84% it's not going to affect the future of the Earth. 00:13:36.930 --> 00:13:40.030 align:middle line:84% In the second case, if you light a big fire versus a small fire, 00:13:40.030 --> 00:13:43.390 align:middle line:84% that will affect the future of California. 00:13:43.390 --> 00:13:44.630 align:middle line:90% So we care. 00:13:44.630 --> 00:13:47.390 align:middle line:84% The other example I often use here is nuclear waste. 00:13:47.390 --> 00:13:49.310 align:middle line:84% There, it's just a vertical line. 00:13:49.310 --> 00:13:51.510 align:middle line:84% But that's the most extreme example. 00:13:51.510 --> 00:13:57.030 align:middle line:84% We care in this second case much more 00:13:57.030 --> 00:13:59.630 align:middle line:90% by getting the quantity right. 00:13:59.630 --> 00:14:03.030 align:middle line:84% So even if we impose extra costs on you, 00:14:03.030 --> 00:14:05.487 align:middle line:84% the bottom line is quantity regulation 00:14:05.487 --> 00:14:07.570 align:middle line:84% is making sure that the quantity right and saying, 00:14:07.570 --> 00:14:09.250 align:middle line:84% I don't care what it costs you, firm. 00:14:09.250 --> 00:14:10.490 align:middle line:90% We've got to get this right. 00:14:10.490 --> 00:14:13.710 align:middle line:84% Once again, nuclear waste would be the ultimate example. 00:14:13.710 --> 00:14:14.977 align:middle line:90% That's a vertical line. 00:14:14.977 --> 00:14:16.310 align:middle line:90% The marginal damage is vertical. 00:14:16.310 --> 00:14:17.490 align:middle line:90% A little bit kills us all. 00:14:17.490 --> 00:14:17.990 align:middle line:90% Yeah. 00:14:17.990 --> 00:14:19.670 align:middle line:84% AUDIENCE: Is the result [INAUDIBLE] 00:14:19.670 --> 00:14:21.750 align:middle line:90% was above MC2 [INAUDIBLE]? 00:14:21.750 --> 00:14:25.070 align:middle line:84% JON GRUBER: If MC2 was above C2, you'd reverse everything. 00:14:25.070 --> 00:14:26.710 align:middle line:90% Yeah, exactly. 00:14:26.710 --> 00:14:32.190 align:middle line:84% So basically this is an example of a more subtle distinction 00:14:32.190 --> 00:14:34.110 align:middle line:84% between price and quantity regulations 00:14:34.110 --> 00:14:37.370 align:middle line:84% and another reason why they might be different. 00:14:37.370 --> 00:14:39.250 align:middle line:84% It's a very subtle point, but it's 00:14:39.250 --> 00:14:43.170 align:middle line:84% a good example of how we can use this kind of graphical analysis. 00:14:43.170 --> 00:14:46.290 align:middle line:84% And in section we'll do it mathematically graphical 00:14:46.290 --> 00:14:50.530 align:middle line:84% analysis to really understand why 00:14:50.530 --> 00:14:52.510 align:middle line:84% you might prefer one versus the other 00:14:52.510 --> 00:14:54.670 align:middle line:90% and to deal with a real world. 00:14:54.670 --> 00:14:59.790 align:middle line:84% Look, as I say in 14.01, all models are wrong, 00:14:59.790 --> 00:15:01.090 align:middle line:90% but some are useful. 00:15:01.090 --> 00:15:02.790 align:middle line:90% What is a model? 00:15:02.790 --> 00:15:05.450 align:middle line:84% A model is an abstraction from reality. 00:15:05.450 --> 00:15:08.010 align:middle line:84% The goal of any modeling exercise 00:15:08.010 --> 00:15:14.490 align:middle line:84% is to trade off the power of a more complicated model 00:15:14.490 --> 00:15:18.650 align:middle line:84% against the benefit of a model that's easier to work with. 00:15:18.650 --> 00:15:21.210 align:middle line:84% Until this point, we've abstracted away 00:15:21.210 --> 00:15:23.410 align:middle line:90% from uncertainty. 00:15:23.410 --> 00:15:25.503 align:middle line:84% That gave us a lot of interesting lessons. 00:15:25.503 --> 00:15:27.670 align:middle line:84% Now I add uncertainty and you'll learn a new lesson, 00:15:27.670 --> 00:15:30.930 align:middle line:90% but at the cost of 25 minutes. 00:15:30.930 --> 00:15:33.490 align:middle line:84% So basically, the challenge we face 00:15:33.490 --> 00:15:34.950 align:middle line:84% is how to think about these things. 00:15:34.950 --> 00:15:37.037 align:middle line:84% And this is an example of a deeper dive 00:15:37.037 --> 00:15:39.370 align:middle line:84% that one might do if one wanted to really get into this. 00:15:39.370 --> 00:15:43.110 align:middle line:90% More questions about that? 00:15:43.110 --> 00:15:45.590 align:middle line:84% All right, now we move on to chapter 6. 00:15:45.590 --> 00:15:49.790 align:middle line:84% And what we'll do in chapter 6 today and next time 00:15:49.790 --> 00:15:53.990 align:middle line:84% is talk about externalities in reality. 00:15:53.990 --> 00:15:57.310 align:middle line:84% And we'll focus on the two key areas 00:15:57.310 --> 00:16:00.870 align:middle line:84% where externalities are a focus of government policy, 00:16:00.870 --> 00:16:04.390 align:middle line:84% the first being environmental externalities 00:16:04.390 --> 00:16:07.470 align:middle line:84% and the second being health externalities. 00:16:07.470 --> 00:16:09.750 align:middle line:84% So we'll start with environmental externalities. 00:16:09.750 --> 00:16:11.510 align:middle line:84% And we're going to focus in particular on two kinds 00:16:11.510 --> 00:16:12.802 align:middle line:90% of environmental externalities. 00:16:12.802 --> 00:16:14.567 align:middle line:84% The first is particulates emission. 00:16:14.567 --> 00:16:17.150 align:middle line:84% Now, I'm sure there are people who understand the science here 00:16:17.150 --> 00:16:17.942 align:middle line:90% way better than me. 00:16:17.942 --> 00:16:20.590 align:middle line:84% So excuse my rudimentary chemistry. 00:16:20.590 --> 00:16:24.830 align:middle line:84% But roughly speaking, when we burn coal to make power, 00:16:24.830 --> 00:16:28.870 align:middle line:84% we release sulfur oxide and nitrous oxide 00:16:28.870 --> 00:16:30.670 align:middle line:90% into the atmosphere. 00:16:30.670 --> 00:16:33.310 align:middle line:84% They then combine with oxygen to make 00:16:33.310 --> 00:16:37.017 align:middle line:84% bad stuff, in particular to make acid rain, which 00:16:37.017 --> 00:16:39.350 align:middle line:84% is rain that comes down, that's bad for the environment. 00:16:39.350 --> 00:16:40.850 align:middle line:90% It's not that bad for humans. 00:16:40.850 --> 00:16:43.650 align:middle line:84% More importantly, they create particulates, 00:16:43.650 --> 00:16:45.962 align:middle line:84% which are soot, which is in the air 00:16:45.962 --> 00:16:47.670 align:middle line:84% and which can harm us when we breathe it. 00:16:47.670 --> 00:16:49.850 align:middle line:84% In particular, very fine particulates, 00:16:49.850 --> 00:16:54.210 align:middle line:84% which can get into our lungs, are very damaging to people. 00:16:54.210 --> 00:16:57.570 align:middle line:84% As a result, there are enormous health consequences 00:16:57.570 --> 00:16:58.525 align:middle line:90% of burning coal. 00:16:58.525 --> 00:17:00.650 align:middle line:84% We know burning coal is bad for the long-run health 00:17:00.650 --> 00:17:01.530 align:middle line:90% of the Earth. 00:17:01.530 --> 00:17:04.690 align:middle line:84% But it's actually bad for the short-run health of us. 00:17:04.690 --> 00:17:07.670 align:middle line:84% When you burn coal, it can cause asthma. 00:17:07.670 --> 00:17:09.349 align:middle line:84% It can cause other health problems. 00:17:09.349 --> 00:17:12.250 align:middle line:84% And I'll come to those in a few minutes. 00:17:12.250 --> 00:17:17.849 align:middle line:84% Now, the problem is they burn the coal in the Midwest. 00:17:17.849 --> 00:17:21.329 align:middle line:84% And the soot then floats in the air and falls on the East Coast. 00:17:21.329 --> 00:17:24.250 align:middle line:84% So it's a classic steel plant and fisherman 00:17:24.250 --> 00:17:27.349 align:middle line:84% problem, which is the folks burning the coal-- 00:17:27.349 --> 00:17:28.970 align:middle line:84% not only is it many folks burning 00:17:28.970 --> 00:17:30.595 align:middle line:84% the coal and many folks being affected, 00:17:30.595 --> 00:17:32.455 align:middle line:90% not even the same folks. 00:17:32.455 --> 00:17:33.830 align:middle line:84% So it's a classic case where it's 00:17:33.830 --> 00:17:35.710 align:middle line:84% going to be very hard to envision a Coasean 00:17:35.710 --> 00:17:38.340 align:middle line:84% solution to this problem, because they're not 00:17:38.340 --> 00:17:40.090 align:middle line:84% only disparate in terms of who's doing it. 00:17:40.090 --> 00:17:41.750 align:middle line:90% They're separate geographically. 00:17:41.750 --> 00:17:43.870 align:middle line:84% And that's why we think we need a government 00:17:43.870 --> 00:17:46.070 align:middle line:90% role in dealing with this. 00:17:46.070 --> 00:17:48.430 align:middle line:84% So I want to talk about how has the government regulated 00:17:48.430 --> 00:17:51.630 align:middle line:84% particulates, because it's an excellent example of how 00:17:51.630 --> 00:17:53.550 align:middle line:84% our thinking on this has evolved. 00:17:53.550 --> 00:17:57.770 align:middle line:84% The first effort to do this was in the 1970 Clean Air Act, way, 00:17:57.770 --> 00:17:59.210 align:middle line:84% way back, cast your mind way back. 00:17:59.210 --> 00:18:03.270 align:middle line:84% And with the 1970 Clean Air Act, it 00:18:03.270 --> 00:18:06.990 align:middle line:84% set up what was called New Source Performance Standards. 00:18:06.990 --> 00:18:09.948 align:middle line:84% They said, look, we got a bunch of bad coal plants. 00:18:09.948 --> 00:18:11.990 align:middle line:84% What we're going to do is make sure that we never 00:18:11.990 --> 00:18:13.710 align:middle line:90% make this mistake again. 00:18:13.710 --> 00:18:15.950 align:middle line:84% And any new coal plant that's built 00:18:15.950 --> 00:18:19.210 align:middle line:84% has got to be much more environmentally protective. 00:18:19.210 --> 00:18:20.565 align:middle line:90% You've got to install scrubbers. 00:18:20.565 --> 00:18:22.190 align:middle line:84% You've got to do all this stuff to make 00:18:22.190 --> 00:18:23.670 align:middle line:84% sure you're not emitting all this bad stuff 00:18:23.670 --> 00:18:24.650 align:middle line:90% into the atmosphere. 00:18:24.650 --> 00:18:26.970 align:middle line:84% It's not that you can't build a coal plant. 00:18:26.970 --> 00:18:29.150 align:middle line:84% We're just going to make it much more protective 00:18:29.150 --> 00:18:30.720 align:middle line:90% of the environment. 00:18:30.720 --> 00:18:37.300 align:middle line:84% And that was a major bill that passed the passed in the 1970s. 00:18:37.300 --> 00:18:41.640 align:middle line:84% And we did see some declines, in particular in sulfur dioxide 00:18:41.640 --> 00:18:43.200 align:middle line:90% that caused particulates. 00:18:43.200 --> 00:18:44.680 align:middle line:90% We saw declines. 00:18:44.680 --> 00:18:48.340 align:middle line:90% But it wasn't a huge effect. 00:18:48.340 --> 00:18:49.880 align:middle line:90% And why is that? 00:18:49.880 --> 00:18:52.080 align:middle line:84% What's the fundamental challenge if you 00:18:52.080 --> 00:18:53.620 align:middle line:90% try a regulation like this? 00:18:53.620 --> 00:18:56.600 align:middle line:90% 00:18:56.600 --> 00:19:00.880 align:middle line:84% Let's say you're a power producer in Ohio. 00:19:00.880 --> 00:19:03.240 align:middle line:84% You've got your coal-fired plant. 00:19:03.240 --> 00:19:06.018 align:middle line:84% I pass this new source performance standard. 00:19:06.018 --> 00:19:07.060 align:middle line:90% What are you going to do? 00:19:07.060 --> 00:19:07.810 align:middle line:90% Yeah, in the back. 00:19:07.810 --> 00:19:10.760 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:19:10.760 --> 00:19:13.680 align:middle line:84% JON GRUBER: Yeah, so basically, think about an optimizing coal 00:19:13.680 --> 00:19:14.823 align:middle line:90% power plant owner. 00:19:14.823 --> 00:19:16.240 align:middle line:84% He's constantly thinking, should I 00:19:16.240 --> 00:19:18.520 align:middle line:84% upgrade or should I build a new plant or not? 00:19:18.520 --> 00:19:21.600 align:middle line:84% What we've done is just taxed building a new plant. 00:19:21.600 --> 00:19:24.430 align:middle line:84% We've just said, look, if before you were indifferent, 00:19:24.430 --> 00:19:26.680 align:middle line:84% you're about to build a new plant, now don't build it. 00:19:26.680 --> 00:19:28.700 align:middle line:84% That's what it costs just keep running your old ones. 00:19:28.700 --> 00:19:29.200 align:middle line:90% Guess what? 00:19:29.200 --> 00:19:31.940 align:middle line:84% The old ones are really bad for pollution. 00:19:31.940 --> 00:19:34.380 align:middle line:84% So essentially, this offsetting effect, which is we 00:19:34.380 --> 00:19:38.580 align:middle line:84% incentivize keeping old plants running. 00:19:38.580 --> 00:19:43.180 align:middle line:84% Essentially, it offset the pollution gains 00:19:43.180 --> 00:19:45.120 align:middle line:84% from these New Source Performance Standards. 00:19:45.120 --> 00:19:47.060 align:middle line:84% While new source performance standards helped, 00:19:47.060 --> 00:19:51.420 align:middle line:84% they didn't help that much these offsetting effects. 00:19:51.420 --> 00:19:54.920 align:middle line:84% So this is not just an example from my childhood. 00:19:54.920 --> 00:19:56.780 align:middle line:90% This is relevant today. 00:19:56.780 --> 00:20:01.220 align:middle line:84% We want to replace our fossil fuel-using vehicles 00:20:01.220 --> 00:20:04.060 align:middle line:90% to electric vehicles. 00:20:04.060 --> 00:20:06.920 align:middle line:84% What happens to all the old fossil fuel-using vehicles? 00:20:06.920 --> 00:20:08.300 align:middle line:90% They don't just disappear. 00:20:08.300 --> 00:20:09.900 align:middle line:90% What happens to them? 00:20:09.900 --> 00:20:12.300 align:middle line:84% They get shipped to developing countries. 00:20:12.300 --> 00:20:17.340 align:middle line:84% So all these used old fossil fuel-burning vehicles 00:20:17.340 --> 00:20:20.160 align:middle line:84% that we're now replacing with EVs get shipped 00:20:20.160 --> 00:20:21.160 align:middle line:90% to developing countries. 00:20:21.160 --> 00:20:23.080 align:middle line:84% And a bunch of people who weren't going to drive now 00:20:23.080 --> 00:20:24.560 align:middle line:84% drive fossil fuel-burning vehicles, 00:20:24.560 --> 00:20:27.500 align:middle line:84% offsetting the benefits of switching to EVs. 00:20:27.500 --> 00:20:29.080 align:middle line:90% This is a classic problem. 00:20:29.080 --> 00:20:32.120 align:middle line:84% We call it a problem of partial regulation, which 00:20:32.120 --> 00:20:34.400 align:middle line:84% is when you try to sorta, this is always 00:20:34.400 --> 00:20:35.437 align:middle line:90% a game of whack-a-mole. 00:20:35.437 --> 00:20:37.020 align:middle line:84% And when you try to solve one problem, 00:20:37.020 --> 00:20:40.640 align:middle line:84% you might create others you don't anticipate. 00:20:40.640 --> 00:20:44.160 align:middle line:84% And that's probably one of the greatest victories 00:20:44.160 --> 00:20:46.560 align:middle line:90% of all time for economics. 00:20:46.560 --> 00:20:49.240 align:middle line:84% In 1990, under the first President Bush, 00:20:49.240 --> 00:20:51.560 align:middle line:84% a series of economists, including our own Richard 00:20:51.560 --> 00:20:54.760 align:middle line:84% Schmalensee, former dean of the Sloan School, 00:20:54.760 --> 00:20:56.880 align:middle line:84% convinced the Bush administration 00:20:56.880 --> 00:21:02.040 align:middle line:84% to pass a set of amendments to the Clean Air Act in 1990. 00:21:02.040 --> 00:21:06.040 align:middle line:84% And these amendments did two things. 00:21:06.040 --> 00:21:08.840 align:middle line:84% First of all, they dramatically tightened the standards 00:21:08.840 --> 00:21:10.920 align:middle line:90% of what could be emitted. 00:21:10.920 --> 00:21:14.640 align:middle line:84% But second of all, they set up the nation's first cap and trade 00:21:14.640 --> 00:21:16.680 align:middle line:90% system. 00:21:16.680 --> 00:21:19.740 align:middle line:84% They said, look, we are now going to say every-- 00:21:19.740 --> 00:21:20.740 align:middle line:90% I'm sorry, three things. 00:21:20.740 --> 00:21:22.300 align:middle line:84% First of all, they tightened the standards. 00:21:22.300 --> 00:21:24.717 align:middle line:84% Secondly, they applied them to every power plant, not just 00:21:24.717 --> 00:21:25.980 align:middle line:90% new ones. 00:21:25.980 --> 00:21:28.140 align:middle line:90% And third, they allowed trading. 00:21:28.140 --> 00:21:33.760 align:middle line:84% They said, we're going to have a new cap for U utility. 00:21:33.760 --> 00:21:36.820 align:middle line:84% Jon's Coal Plants of Ohio, we're going 00:21:36.820 --> 00:21:39.660 align:middle line:84% to have a new cap on how much you can produce overall 00:21:39.660 --> 00:21:41.860 align:middle line:90% from all your plants. 00:21:41.860 --> 00:21:45.980 align:middle line:84% But we're going to allow tradable permits. 00:21:45.980 --> 00:21:49.140 align:middle line:84% This was the first example of tradeable permits. 00:21:49.140 --> 00:21:51.620 align:middle line:84% As I said it was super-controversial. 00:21:51.620 --> 00:21:54.260 align:middle line:84% There was this concern over pollution absolution, 00:21:54.260 --> 00:21:57.360 align:middle line:84% that essentially we're permitting bad behavior. 00:21:57.360 --> 00:21:59.580 align:middle line:84% We should just tell them all to stop, not do this. 00:21:59.580 --> 00:22:02.700 align:middle line:84% But in fact, it's much more efficient. 00:22:02.700 --> 00:22:04.683 align:middle line:84% It's a much more efficient way to do it. 00:22:04.683 --> 00:22:07.100 align:middle line:84% Plants could then basically-- if we go back to our example 00:22:07.100 --> 00:22:08.160 align:middle line:90% from last lecture. 00:22:08.160 --> 00:22:09.760 align:middle line:84% Indeed, if you flip over this page-- 00:22:09.760 --> 00:22:10.880 align:middle line:90% I think we still have the graph. 00:22:10.880 --> 00:22:13.172 align:middle line:84% Yeah, it was of the graph from last lecture on the back 00:22:13.172 --> 00:22:14.460 align:middle line:90% of the chapter 5 page. 00:22:14.460 --> 00:22:16.460 align:middle line:84% If you go back to the chapter 5, handout there's 00:22:16.460 --> 00:22:17.820 align:middle line:90% a graph from last lecture. 00:22:17.820 --> 00:22:19.160 align:middle line:90% So Paul, you were smart. 00:22:19.160 --> 00:22:21.700 align:middle line:84% You thought ahead in printing this out. 00:22:21.700 --> 00:22:25.000 align:middle line:84% Basically, when we have heterogeneity 00:22:25.000 --> 00:22:31.220 align:middle line:84% in the cost of reduction, then it's going to be beneficial. 00:22:31.220 --> 00:22:34.640 align:middle line:84% Rather than forcing plant B to spend a ton and plant 00:22:34.640 --> 00:22:36.860 align:middle line:84% A to get away cheaply, by letting them trade, 00:22:36.860 --> 00:22:38.360 align:middle line:84% we move to the efficient allocation 00:22:38.360 --> 00:22:40.520 align:middle line:90% as we discussed last time. 00:22:40.520 --> 00:22:43.280 align:middle line:84% So this was, in some sense, the economist's argument 00:22:43.280 --> 00:22:45.560 align:middle line:84% for having your cake and eating it too. 00:22:45.560 --> 00:22:49.440 align:middle line:84% We could regulate more and reduce economic activity 00:22:49.440 --> 00:22:52.680 align:middle line:84% less by having this trading system, 00:22:52.680 --> 00:22:55.200 align:middle line:84% and get rid of partial problem of people 00:22:55.200 --> 00:22:57.880 align:middle line:90% just keeping old plants running. 00:22:57.880 --> 00:23:03.230 align:middle line:84% Now, this predictably raised a lot of opposition. 00:23:03.230 --> 00:23:05.480 align:middle line:84% One form of opposition said was from environmentalists 00:23:05.480 --> 00:23:08.580 align:middle line:90% who felt it wasn't pure enough. 00:23:08.580 --> 00:23:10.080 align:middle line:84% The other opposition, of course, was 00:23:10.080 --> 00:23:12.740 align:middle line:84% from the industry who said, look, you're going to crush us. 00:23:12.740 --> 00:23:14.148 align:middle line:90% You're going to destroy coal. 00:23:14.148 --> 00:23:14.940 align:middle line:90% It sounds familiar. 00:23:14.940 --> 00:23:16.960 align:middle line:84% It's current modern debates as well. 00:23:16.960 --> 00:23:19.220 align:middle line:84% You destroy the coal industry with these regulations. 00:23:19.220 --> 00:23:20.600 align:middle line:90% No one will use coal anymore. 00:23:20.600 --> 00:23:22.440 align:middle line:90% It's horrible. 00:23:22.440 --> 00:23:23.940 align:middle line:84% We'll lose-- I think the estimates 00:23:23.940 --> 00:23:25.760 align:middle line:84% the coal industry point out-- by the way, 00:23:25.760 --> 00:23:28.053 align:middle line:84% never trust an estimate from a regulated industry 00:23:28.053 --> 00:23:30.220 align:middle line:84% about what something's going to do to that industry. 00:23:30.220 --> 00:23:31.740 align:middle line:84% I don't think you need to be a genius 00:23:31.740 --> 00:23:33.782 align:middle line:84% to figure out why their incentives aren't aligned 00:23:33.782 --> 00:23:35.260 align:middle line:90% to give you a correct estimate. 00:23:35.260 --> 00:23:40.180 align:middle line:84% They estimated that there would be a $7.4 billion annual loss 00:23:40.180 --> 00:23:41.680 align:middle line:84% and four million jobs would be lost, 00:23:41.680 --> 00:23:43.680 align:middle line:84% which is probably more than what was in the coal 00:23:43.680 --> 00:23:44.780 align:middle line:90% sector at that time. 00:23:44.780 --> 00:23:51.160 align:middle line:84% And so they said that it would be bad. 00:23:51.160 --> 00:23:55.300 align:middle line:84% But in fact, this has been an enormous success. 00:23:55.300 --> 00:23:58.470 align:middle line:84% In fact, what we found is two things. 00:23:58.470 --> 00:24:00.220 align:middle line:84% First of all, studies of the Clean Air Act 00:24:00.220 --> 00:24:04.140 align:middle line:84% have found enormous benefits for human health, benefits 00:24:04.140 --> 00:24:06.500 align:middle line:90% for studies of everything. 00:24:06.500 --> 00:24:09.700 align:middle line:84% There's really cool studies of the Clean Air Act. 00:24:09.700 --> 00:24:13.940 align:middle line:84% The simplest studies were of the form-- something 00:24:13.940 --> 00:24:17.260 align:middle line:90% like figure 6.1. 00:24:17.260 --> 00:24:19.260 align:middle line:84% Let's look at the original Clean Air Act. 00:24:19.260 --> 00:24:21.667 align:middle line:84% So you covered chapter 3 in sections 00:24:21.667 --> 00:24:23.500 align:middle line:84% there's an application of chapter 3 methods. 00:24:23.500 --> 00:24:26.730 align:middle line:84% This is by the nation's leading environmental economist, 00:24:26.730 --> 00:24:28.480 align:middle line:84% Michael Greenstone, who used to teach here 00:24:28.480 --> 00:24:31.760 align:middle line:90% and now teaches at Chicago. 00:24:31.760 --> 00:24:34.640 align:middle line:84% Here we have a situation where there 00:24:34.640 --> 00:24:38.800 align:middle line:90% were areas that were similar. 00:24:38.800 --> 00:24:42.320 align:middle line:84% Some were regulated, some were not. 00:24:42.320 --> 00:24:44.622 align:middle line:84% Errors are similar, some are regulated, some were not. 00:24:44.622 --> 00:24:46.080 align:middle line:84% So basically what he said is, there 00:24:46.080 --> 00:24:47.780 align:middle line:90% are some areas that are similar. 00:24:47.780 --> 00:24:50.442 align:middle line:84% Some were just over a threshold when they were regulated. 00:24:50.442 --> 00:24:52.900 align:middle line:84% Some were below that threshold when they weren't regulated. 00:24:52.900 --> 00:24:55.680 align:middle line:84% And he looked at what happened over time 00:24:55.680 --> 00:24:59.928 align:middle line:84% to basically pollution in areas that 00:24:59.928 --> 00:25:01.220 align:middle line:90% are regulated or not regulated. 00:25:01.220 --> 00:25:03.728 align:middle line:84% What he finds is the regulatory pollution dropped a lot. 00:25:03.728 --> 00:25:06.020 align:middle line:84% So in non-regulated areas, things didn't really change. 00:25:06.020 --> 00:25:07.200 align:middle line:90% That's the green. 00:25:07.200 --> 00:25:09.440 align:middle line:84% And the regulatory pollution dropped a lot. 00:25:09.440 --> 00:25:10.380 align:middle line:90% And guess what else? 00:25:10.380 --> 00:25:12.200 align:middle line:90% So did deaths. 00:25:12.200 --> 00:25:14.835 align:middle line:84% Those are dramatic reduction in deaths. 00:25:14.835 --> 00:25:16.460 align:middle line:84% So there's a number of studies of that. 00:25:16.460 --> 00:25:18.940 align:middle line:84% But there's also really cool studies that go beyond that. 00:25:18.940 --> 00:25:22.340 align:middle line:84% So for example, one of the coolest studies I know 00:25:22.340 --> 00:25:25.180 align:middle line:84% is, they looked at what happened to kids 00:25:25.180 --> 00:25:29.172 align:middle line:84% who lived near toll booths before and after E-ZPass. 00:25:29.172 --> 00:25:31.380 align:middle line:84% You guys know E-ZPass lets you whip through the toll. 00:25:31.380 --> 00:25:33.500 align:middle line:84% When I was a kid, you used to have to pay. 00:25:33.500 --> 00:25:35.740 align:middle line:84% There were long lines of cars at toll booths, which 00:25:35.740 --> 00:25:37.700 align:middle line:90% meant more emissions. 00:25:37.700 --> 00:25:39.340 align:middle line:84% So basically, E-ZPass meant suddenly, 00:25:39.340 --> 00:25:41.180 align:middle line:84% these kids were exposed to less emissions 00:25:41.180 --> 00:25:43.980 align:middle line:84% because there weren't long lines of cars idling, waiting to pay. 00:25:43.980 --> 00:25:47.408 align:middle line:84% And they found measurable improvements in child health. 00:25:47.408 --> 00:25:49.200 align:middle line:84% There's all sorts of cool papers like this. 00:25:49.200 --> 00:25:51.117 align:middle line:84% It's one of the most active and exciting areas 00:25:51.117 --> 00:25:52.200 align:middle line:90% in empirical economics. 00:25:52.200 --> 00:25:54.460 align:middle line:84% There's all sorts of interesting, exciting papers 00:25:54.460 --> 00:25:57.340 align:middle line:84% showing the enormous health impacts of reducing 00:25:57.340 --> 00:25:59.660 align:middle line:84% particulates, either through this regulatory mechanism 00:25:59.660 --> 00:26:01.780 align:middle line:90% or other mechanisms. 00:26:01.780 --> 00:26:05.420 align:middle line:84% Now, on the other hand, it did cost something. 00:26:05.420 --> 00:26:07.940 align:middle line:84% There was a loss in economic activity 00:26:07.940 --> 00:26:11.500 align:middle line:84% because we did lose some coal jobs and some production. 00:26:11.500 --> 00:26:15.740 align:middle line:84% And also it raised the price of fuels. 00:26:15.740 --> 00:26:19.440 align:middle line:90% Basically, what we're doing is-- 00:26:19.440 --> 00:26:21.120 align:middle line:90% [INAUDIBLE] 00:26:21.120 --> 00:26:23.080 align:middle line:84% So what we're doing is essentially 00:26:23.080 --> 00:26:27.000 align:middle line:84% making it more expensive to use fuel products that is going 00:26:27.000 --> 00:26:29.080 align:middle line:90% to lower economic activity. 00:26:29.080 --> 00:26:34.280 align:middle line:84% The best estimates are that if you take the health benefits, 00:26:34.280 --> 00:26:37.640 align:middle line:84% and you value them in a way we'll discuss in chapter 8, 00:26:37.640 --> 00:26:41.920 align:middle line:84% the benefits of this law was about seven times its cost. 00:26:41.920 --> 00:26:46.120 align:middle line:84% And that seven times was largely because of the trading. 00:26:46.120 --> 00:26:49.080 align:middle line:84% Basically, trading lowered the cost of implementing this law 00:26:49.080 --> 00:26:51.400 align:middle line:90% by about 2/3. 00:26:51.400 --> 00:26:54.680 align:middle line:84% Basically, absent trading, the Clean Air Act, 00:26:54.680 --> 00:26:59.000 align:middle line:84% to achieve the same goals, would have cost three times as much. 00:26:59.000 --> 00:27:01.643 align:middle line:84% And so the benefit-cost ratio would have been closer. 00:27:01.643 --> 00:27:03.560 align:middle line:84% But because of trading, the benefit-cost ratio 00:27:03.560 --> 00:27:05.580 align:middle line:84% was-- the benefits exceeded the costs. 00:27:05.580 --> 00:27:06.473 align:middle line:90% Question. 00:27:06.473 --> 00:27:08.140 align:middle line:84% AUDIENCE: For the purpose of this class, 00:27:08.140 --> 00:27:09.920 align:middle line:84% do we care about who bear the costs 00:27:09.920 --> 00:27:11.100 align:middle line:90% and who gains the benefits? 00:27:11.100 --> 00:27:12.225 align:middle line:90% JON GRUBER: Great question. 00:27:12.225 --> 00:27:15.080 align:middle line:84% Now we don't because we're not about distribution. 00:27:15.080 --> 00:27:16.900 align:middle line:84% For the purpose of the class, we do. 00:27:16.900 --> 00:27:19.340 align:middle line:84% But it's always very important to separate distribution 00:27:19.340 --> 00:27:21.400 align:middle line:90% and efficiency. 00:27:21.400 --> 00:27:23.780 align:middle line:84% Now we're just talking about efficiency. 00:27:23.780 --> 00:27:25.540 align:middle line:90% Later, we'll talk about that. 00:27:25.540 --> 00:27:28.460 align:middle line:84% I mean, we can come to it here in a second, which 00:27:28.460 --> 00:27:32.500 align:middle line:84% is in some sense, if you think about that, 00:27:32.500 --> 00:27:34.660 align:middle line:90% you can take a model like this-- 00:27:34.660 --> 00:27:37.700 align:middle line:84% we talked about social welfare if you reviewed your chapter 2. 00:27:37.700 --> 00:27:40.700 align:middle line:84% You could take a model like this and add social welfare weights. 00:27:40.700 --> 00:27:42.460 align:middle line:84% Social welfare weights are essentially-- 00:27:42.460 --> 00:27:44.973 align:middle line:84% if you think about a utilitarian social welfare function, 00:27:44.973 --> 00:27:47.140 align:middle line:84% a poor person has a higher weight than a rich person 00:27:47.140 --> 00:27:48.925 align:middle line:84% because each dollar means more to them, 00:27:48.925 --> 00:27:50.800 align:middle line:84% has a higher marginal utility of consumption. 00:27:50.800 --> 00:27:51.967 align:middle line:90% You can add welfare weights. 00:27:51.967 --> 00:27:54.640 align:middle line:84% If you add welfare weights, that only strengthens this argument 00:27:54.640 --> 00:27:57.140 align:middle line:84% because generally the pollution was the worst in the poorest 00:27:57.140 --> 00:27:58.780 align:middle line:90% neighborhoods. 00:27:58.780 --> 00:28:02.060 align:middle line:84% And the costs were generally borne 00:28:02.060 --> 00:28:04.740 align:middle line:84% in by higher-income owners of coal plants 00:28:04.740 --> 00:28:07.187 align:middle line:84% and fairly wealthy workers in those coal plants. 00:28:07.187 --> 00:28:09.020 align:middle line:84% So that would only strengthen the conclusion 00:28:09.020 --> 00:28:10.920 align:middle line:84% if you add distributional concerns. 00:28:10.920 --> 00:28:11.420 align:middle line:90% Yeah. 00:28:11.420 --> 00:28:13.920 align:middle line:84% AUDIENCE: How is it that permits [INAUDIBLE] for legislation 00:28:13.920 --> 00:28:16.212 align:middle line:84% [? like ?] that, how does that [INAUDIBLE] actually get 00:28:16.212 --> 00:28:17.720 align:middle line:90% distributed among [INAUDIBLE]? 00:28:17.720 --> 00:28:19.387 align:middle line:84% JON GRUBER: That is an awesome question. 00:28:19.387 --> 00:28:23.040 align:middle line:84% I'm going to come to that in a few minutes. 00:28:23.040 --> 00:28:24.100 align:middle line:90% Other questions? 00:28:24.100 --> 00:28:24.600 align:middle line:90% Yeah. 00:28:24.600 --> 00:28:27.720 align:middle line:84% AUDIENCE: [INAUDIBLE] also we spoke last lecture 00:28:27.720 --> 00:28:31.280 align:middle line:84% about there is [? some ?] benefits to using direct taxing 00:28:31.280 --> 00:28:33.920 align:middle line:84% or pricing of the negative thing, 00:28:33.920 --> 00:28:35.480 align:middle line:90% rather than capping and trading. 00:28:35.480 --> 00:28:36.360 align:middle line:90% Why is [INAUDIBLE]? 00:28:36.360 --> 00:28:40.360 align:middle line:84% JON GRUBER: Same question, I'm going to come to that. 00:28:40.360 --> 00:28:42.880 align:middle line:84% I have about a five-minute spiel on this that you're 00:28:42.880 --> 00:28:45.080 align:middle line:90% absolutely previewing. 00:28:45.080 --> 00:28:47.560 align:middle line:90% But to get to that spiel-- 00:28:47.560 --> 00:28:49.920 align:middle line:90% other questions about this? 00:28:49.920 --> 00:28:53.240 align:middle line:84% Let's turn to the next topic, which is really 00:28:53.240 --> 00:28:56.000 align:middle line:84% the most important environmental externality in the world, which 00:28:56.000 --> 00:28:57.880 align:middle line:90% is global climate change. 00:28:57.880 --> 00:29:02.763 align:middle line:84% Basically, I have this saying because I'm a health economist. 00:29:02.763 --> 00:29:05.180 align:middle line:84% I say there's only two things that matter in the long run, 00:29:05.180 --> 00:29:06.805 align:middle line:84% which is climate change and health care 00:29:06.805 --> 00:29:08.880 align:middle line:84% costs, because in both cases, we're underwater. 00:29:08.880 --> 00:29:12.880 align:middle line:84% Basically, global climate change is real. 00:29:12.880 --> 00:29:15.340 align:middle line:84% It's caused-- even Trump didn't deny that last night, 00:29:15.340 --> 00:29:17.500 align:middle line:90% that it's real and man-made. 00:29:17.500 --> 00:29:21.380 align:middle line:84% And it has enormous consequences. 00:29:21.380 --> 00:29:24.940 align:middle line:90% The world is getting hotter. 00:29:24.940 --> 00:29:33.820 align:middle line:84% Last year, 2023-- if you look at degrees Celsius above the 20th 00:29:33.820 --> 00:29:39.340 align:middle line:84% century average, in 2022, we were about 0.91 degrees Celsius 00:29:39.340 --> 00:29:42.040 align:middle line:90% above the 20th century average. 00:29:42.040 --> 00:29:46.380 align:middle line:84% In 2023, it jumped to 1.2 degrees Celsius above. 00:29:46.380 --> 00:29:48.193 align:middle line:90% That is an enormous jump. 00:29:48.193 --> 00:29:49.860 align:middle line:84% I mean, that's incredibly consequential, 00:29:49.860 --> 00:29:52.260 align:middle line:84% and there's no sense of it slowing down. 00:29:52.260 --> 00:29:57.660 align:middle line:84% We are facing an enormous and rapidly growing 00:29:57.660 --> 00:29:59.740 align:middle line:90% problem of global warming. 00:29:59.740 --> 00:30:03.440 align:middle line:84% Now, if you live in North Dakota or northern Minnesota, 00:30:03.440 --> 00:30:05.380 align:middle line:90% it's not necessarily so bad. 00:30:05.380 --> 00:30:08.340 align:middle line:84% Indeed, it's not even clear that we 00:30:08.340 --> 00:30:09.823 align:middle line:84% were before that 100 years ago was 00:30:09.823 --> 00:30:11.240 align:middle line:84% at the optimal global temperature. 00:30:11.240 --> 00:30:14.100 align:middle line:84% It's not entirely what the optimal global temperature is. 00:30:14.100 --> 00:30:15.880 align:middle line:84% If you look at total world production, 00:30:15.880 --> 00:30:17.700 align:middle line:84% we may actually be closer to it now. 00:30:17.700 --> 00:30:21.560 align:middle line:84% But what's clear is we're going to go past it very rapidly. 00:30:21.560 --> 00:30:23.980 align:middle line:84% And things like Bangladesh will be underwater, 00:30:23.980 --> 00:30:25.920 align:middle line:84% Cape Cod will be gone, Florida will be gone, 00:30:25.920 --> 00:30:29.200 align:middle line:90% things which might make us sad. 00:30:29.200 --> 00:30:31.260 align:middle line:90% These are enormous consequences. 00:30:31.260 --> 00:30:34.620 align:middle line:84% World GDP by 2100 will be 10% lower. 00:30:34.620 --> 00:30:38.040 align:middle line:84% Literally, we're burning 10% of all our resources 00:30:38.040 --> 00:30:39.108 align:middle line:90% through climate change. 00:30:39.108 --> 00:30:40.900 align:middle line:84% And it's obviously not distributed equally. 00:30:40.900 --> 00:30:42.400 align:middle line:84% Once again, it's some of the poorest 00:30:42.400 --> 00:30:48.040 align:middle line:84% countries that are bearing the brunt of this climate change. 00:30:48.040 --> 00:30:50.920 align:middle line:84% But the key thing we've really started to focus on lately 00:30:50.920 --> 00:30:53.600 align:middle line:84% is it's not just the long-run global warming, because people 00:30:53.600 --> 00:30:54.850 align:middle line:90% don't care about the long run. 00:30:54.850 --> 00:30:57.140 align:middle line:84% It's the short-run, salient climate related disasters. 00:30:57.140 --> 00:30:58.720 align:middle line:84% And that's why we've gone from calling it global warming 00:30:58.720 --> 00:31:00.120 align:middle line:90% to climate change. 00:31:00.120 --> 00:31:03.160 align:middle line:84% Or the term I like, someone called it, "global weirding," 00:31:03.160 --> 00:31:06.960 align:middle line:84% which is weather has just gotten really weird. 00:31:06.960 --> 00:31:09.520 align:middle line:84% There is both more rain and more droughts. 00:31:09.520 --> 00:31:10.180 align:middle line:90% Why is that? 00:31:10.180 --> 00:31:12.263 align:middle line:84% Because the rain falls harder and faster than it's 00:31:12.263 --> 00:31:13.290 align:middle line:90% absorbed in the dirt. 00:31:13.290 --> 00:31:15.028 align:middle line:84% There's more rain and more droughts. 00:31:15.028 --> 00:31:16.070 align:middle line:90% There is more hurricanes. 00:31:16.070 --> 00:31:17.510 align:middle line:90% There's more wildfires. 00:31:17.510 --> 00:31:19.050 align:middle line:84% One of the most dramatic examples 00:31:19.050 --> 00:31:24.055 align:middle line:84% was, in 2023, an area of Canada burned the size of North Dakota. 00:31:24.055 --> 00:31:25.930 align:middle line:84% Some of you in America may have seen the smog 00:31:25.930 --> 00:31:27.430 align:middle line:90% from Canadian wildfires. 00:31:27.430 --> 00:31:29.930 align:middle line:84% This was an enormous wildfire, one of the biggest on record. 00:31:29.930 --> 00:31:31.770 align:middle line:90% Here's what's amazing. 00:31:31.770 --> 00:31:36.050 align:middle line:84% That wildfire also released a ton of carbon stored in trees. 00:31:36.050 --> 00:31:38.510 align:middle line:84% So that wildfire, by burning the trees, released carbon. 00:31:38.510 --> 00:31:41.490 align:middle line:84% Indeed, the carbon released by that wildfire 00:31:41.490 --> 00:31:45.670 align:middle line:84% was more than any other country in the world emitted that year, 00:31:45.670 --> 00:31:47.090 align:middle line:90% except for three. 00:31:47.090 --> 00:31:49.770 align:middle line:84% So that one wildfire emitted more carbon 00:31:49.770 --> 00:31:54.090 align:middle line:84% than any other country, except for three in the world. 00:31:54.090 --> 00:31:58.050 align:middle line:84% So we are in this real cycle of damage. 00:31:58.050 --> 00:32:04.010 align:middle line:84% And once again, it's not just about the environment. 00:32:04.010 --> 00:32:04.510 align:middle line:90% It's not. 00:32:04.510 --> 00:32:06.810 align:middle line:84% It's about human lives and human health. 00:32:06.810 --> 00:32:10.270 align:middle line:84% So for example, there's a huge rise in chronic kidney disease, 00:32:10.270 --> 00:32:12.230 align:middle line:90% the cause of kidney failure. 00:32:12.230 --> 00:32:14.350 align:middle line:84% Every five degree temperature increase 00:32:14.350 --> 00:32:17.550 align:middle line:84% increased the odds of kidney failure by 47% 00:32:17.550 --> 00:32:19.508 align:middle line:84% And we are seeing more kidney failure. 00:32:19.508 --> 00:32:22.050 align:middle line:84% There is more chronic disease because of this global warming. 00:32:22.050 --> 00:32:22.970 align:middle line:90% The problems are bad. 00:32:22.970 --> 00:32:23.850 align:middle line:90% I can go on and on. 00:32:23.850 --> 00:32:25.142 align:middle line:90% You guys have heard about this. 00:32:25.142 --> 00:32:25.890 align:middle line:90% It's a problem. 00:32:25.890 --> 00:32:30.430 align:middle line:84% It's perhaps the classic non-privately solvable negative 00:32:30.430 --> 00:32:32.390 align:middle line:84% externality, because as I said, emissions 00:32:32.390 --> 00:32:35.430 align:middle line:84% from anywhere in the world affect everywhere in the world. 00:32:35.430 --> 00:32:38.670 align:middle line:84% Literally, you could not design a better fail of Coase 00:32:38.670 --> 00:32:40.270 align:middle line:90% than global warming. 00:32:40.270 --> 00:32:42.990 align:middle line:84% You need the government to get involved. 00:32:42.990 --> 00:32:45.710 align:middle line:84% Now, the problem is which government? 00:32:45.710 --> 00:32:49.030 align:middle line:84% If you look at figure 6-2, this shows the distribution 00:32:49.030 --> 00:32:51.870 align:middle line:90% of emissions around the world. 00:32:51.870 --> 00:32:53.510 align:middle line:84% This is millions of tons of carbon 00:32:53.510 --> 00:32:55.430 align:middle line:90% that are emitted by country. 00:32:55.430 --> 00:32:57.810 align:middle line:84% You see that China, the United States, and India-- 00:32:57.810 --> 00:32:59.990 align:middle line:84% China and the United States are well 00:32:59.990 --> 00:33:01.390 align:middle line:90% above the rest of the world. 00:33:01.390 --> 00:33:02.830 align:middle line:84% And they account for a huge share 00:33:02.830 --> 00:33:04.410 align:middle line:84% of the total worldwide emissions. 00:33:04.410 --> 00:33:07.170 align:middle line:84% 40% of worldwide emissions are from China and the US. 00:33:07.170 --> 00:33:11.530 align:middle line:84% By the way, when I started teaching this class in 1992, 00:33:11.530 --> 00:33:12.970 align:middle line:90% China was negligible. 00:33:12.970 --> 00:33:15.430 align:middle line:84% The US dominated every other country. 00:33:15.430 --> 00:33:17.250 align:middle line:84% So China, we see-- we'll come back 00:33:17.250 --> 00:33:20.890 align:middle line:84% to this, how rapid growth can impact the environment. 00:33:20.890 --> 00:33:24.970 align:middle line:84% So basically, you have a situation 00:33:24.970 --> 00:33:30.117 align:middle line:84% where you have an unequal distribution of the emissions, 00:33:30.117 --> 00:33:32.450 align:middle line:84% an unequal dynamic distribution and unequal distribution 00:33:32.450 --> 00:33:34.290 align:middle line:90% of the damages. 00:33:34.290 --> 00:33:37.650 align:middle line:84% So it's not like one country's government can solve this. 00:33:37.650 --> 00:33:39.930 align:middle line:90% You need a global solution. 00:33:39.930 --> 00:33:42.810 align:middle line:90% Now, that is very hard. 00:33:42.810 --> 00:33:46.050 align:middle line:84% The good news is we have one positive example, 00:33:46.050 --> 00:33:48.072 align:middle line:84% and that's the Montreal Protocol. 00:33:48.072 --> 00:33:49.530 align:middle line:84% So when I was a kid, there was lots 00:33:49.530 --> 00:33:52.330 align:middle line:84% of things that feature what's called chlorofluorocarbons, 00:33:52.330 --> 00:33:54.833 align:middle line:84% which are basically things that were in aerosols. 00:33:54.833 --> 00:33:56.250 align:middle line:84% So when you had hairspray as a kid 00:33:56.250 --> 00:34:00.010 align:middle line:84% that had these aerosols in it, refrigerators, et cetera. 00:34:00.010 --> 00:34:02.730 align:middle line:84% Turned out those aerosols were just creating a giant fucking 00:34:02.730 --> 00:34:04.370 align:middle line:90% hole in the ozone layer. 00:34:04.370 --> 00:34:07.270 align:middle line:84% And suddenly, this hole just started-- 00:34:07.270 --> 00:34:08.909 align:middle line:90% scientists knew about this. 00:34:08.909 --> 00:34:10.550 align:middle line:84% But then suddenly, the hole actually 00:34:10.550 --> 00:34:12.227 align:middle line:90% emerged, or started to emerge. 00:34:12.227 --> 00:34:13.810 align:middle line:84% And people were like, wow, that's bad. 00:34:13.810 --> 00:34:14.650 align:middle line:90% There's a hole. 00:34:14.650 --> 00:34:16.670 align:middle line:84% We ought to do something about that. 00:34:16.670 --> 00:34:21.909 align:middle line:84% And 160 nations got together and negotiated a global ban 00:34:21.909 --> 00:34:24.030 align:middle line:90% on chlorofluorocarbons. 00:34:24.030 --> 00:34:28.310 align:middle line:84% Indeed, the Montreal Protocol was ratified by 184 countries, 00:34:28.310 --> 00:34:32.310 align:middle line:84% and worldwide consumption of CFCs over 15 years dropped from 00:34:32.310 --> 00:34:36.070 align:middle line:90% 1.1 million tons to 64,000 tons. 00:34:36.070 --> 00:34:40.110 align:middle line:84% It worked, and that hole is now on its way to healing. 00:34:40.110 --> 00:34:44.792 align:middle line:84% Recently, the Kigali Agreement, ratified and further expanded it 00:34:44.792 --> 00:34:46.750 align:middle line:84% because there's some other CFC-like things that 00:34:46.750 --> 00:34:47.409 align:middle line:90% are also bad. 00:34:47.409 --> 00:34:48.784 align:middle line:84% And so there's a new round called 00:34:48.784 --> 00:34:52.030 align:middle line:84% the Kigali Agreement where they further ban those things. 00:34:52.030 --> 00:34:55.210 align:middle line:90% So basically, this is great. 00:34:55.210 --> 00:34:56.909 align:middle line:90% This is a good example. 00:34:56.909 --> 00:35:00.030 align:middle line:84% The problem is-- it's the best example for cooperation 00:35:00.030 --> 00:35:01.550 align:middle line:90% because there was a hole. 00:35:01.550 --> 00:35:03.347 align:middle line:84% Global warming doesn't work that way. 00:35:03.347 --> 00:35:05.430 align:middle line:84% Global warming is like a ship that's going slowly. 00:35:05.430 --> 00:35:08.490 align:middle line:84% It's going to take 100 years to turn around. 00:35:08.490 --> 00:35:11.150 align:middle line:84% So we don't have quite the salience of the hole, 00:35:11.150 --> 00:35:13.370 align:middle line:84% but at least we have one example we can point to 00:35:13.370 --> 00:35:15.610 align:middle line:90% of international cooperation. 00:35:15.610 --> 00:35:20.050 align:middle line:84% So the question is, how can we get international cooperation? 00:35:20.050 --> 00:35:25.190 align:middle line:84% And this led to a series of international conferences, 00:35:25.190 --> 00:35:28.450 align:middle line:84% the first one in Rio in 1992, to take 00:35:28.450 --> 00:35:31.490 align:middle line:84% on the problem of global climate change. 00:35:31.490 --> 00:35:33.250 align:middle line:84% Now, the most significant early conference 00:35:33.250 --> 00:35:37.070 align:middle line:84% was the Kyoto meeting in December 1997. 00:35:37.070 --> 00:35:38.410 align:middle line:90% I actually was at that. 00:35:38.410 --> 00:35:40.850 align:middle line:84% I was in the Clinton administration at this time. 00:35:40.850 --> 00:35:43.210 align:middle line:84% And it's actually an interesting story-- 00:35:43.210 --> 00:35:44.570 align:middle line:90% interesting to me at least. 00:35:44.570 --> 00:35:47.250 align:middle line:84% And I guess now you have to hear it. 00:35:47.250 --> 00:35:48.890 align:middle line:84% What happened was, there was actually 00:35:48.890 --> 00:35:51.090 align:middle line:84% a big fight between the environmentalists 00:35:51.090 --> 00:35:51.960 align:middle line:90% and the economists. 00:35:51.960 --> 00:35:53.710 align:middle line:84% The environmentalists were led by Al Gore. 00:35:53.710 --> 00:35:56.252 align:middle line:84% The economists were led by my former mentor, former President 00:35:56.252 --> 00:35:57.890 align:middle line:90% of Harvard Larry Summers. 00:35:57.890 --> 00:36:00.030 align:middle line:84% The economists said-- look, remember, 00:36:00.030 --> 00:36:02.090 align:middle line:84% we knew way less about global warming in 1997 00:36:02.090 --> 00:36:02.798 align:middle line:90% than we know now. 00:36:02.798 --> 00:36:04.882 align:middle line:84% The economist said, look, the global warming thing 00:36:04.882 --> 00:36:05.430 align:middle line:90% might be bad. 00:36:05.430 --> 00:36:07.490 align:middle line:84% We're still unsure, so let's start slowly. 00:36:07.490 --> 00:36:09.690 align:middle line:84% Let's slowly start to regulate and ramp in. 00:36:09.690 --> 00:36:12.065 align:middle line:84% The environmentalists are like, no, the Earth is burning. 00:36:12.065 --> 00:36:13.230 align:middle line:90% We got to go hard now. 00:36:13.230 --> 00:36:15.630 align:middle line:90% And the environmentalists won. 00:36:15.630 --> 00:36:19.170 align:middle line:84% And the US went into a negotiation, 00:36:19.170 --> 00:36:21.630 align:middle line:84% which was going to be an aggressive reduction 00:36:21.630 --> 00:36:24.070 align:middle line:90% in worldwide carbon emissions. 00:36:24.070 --> 00:36:27.070 align:middle line:84% Now, I wasn't intended to go because I was on the losing 00:36:27.070 --> 00:36:28.667 align:middle line:90% side as an economist. 00:36:28.667 --> 00:36:31.250 align:middle line:84% But they decided the day before, they needed economists there. 00:36:31.250 --> 00:36:33.690 align:middle line:84% So the only plane left the day before was Air Force Two. 00:36:33.690 --> 00:36:35.190 align:middle line:84% So they got to fly over in Air Force 00:36:35.190 --> 00:36:37.830 align:middle line:84% Two, got to hang out with Al Gore in his sweatpants. 00:36:37.830 --> 00:36:39.930 align:middle line:84% The coolest part was I get an Air Force Two, 00:36:39.930 --> 00:36:40.930 align:middle line:90% and there's nice chairs. 00:36:40.930 --> 00:36:42.870 align:middle line:84% And I'm sitting, the phone next to me, rings. 00:36:42.870 --> 00:36:44.130 align:middle line:90% I pick it up, I'm like, hello? 00:36:44.130 --> 00:36:45.250 align:middle line:90% They're like, Hi, Jon. 00:36:45.250 --> 00:36:46.670 align:middle line:84% It's like oh my god, they're calling from Japan 00:36:46.670 --> 00:36:47.878 align:middle line:90% to make sure I was on my way. 00:36:47.878 --> 00:36:48.870 align:middle line:90% That was freaky. 00:36:48.870 --> 00:36:50.270 align:middle line:90% So we went. 00:36:50.270 --> 00:36:52.230 align:middle line:84% It was an incredibly intense experience 00:36:52.230 --> 00:36:54.670 align:middle line:90% negotiating this treaty. 00:36:54.670 --> 00:36:56.550 align:middle line:84% What I learned is basically, the way treaties 00:36:56.550 --> 00:36:59.133 align:middle line:84% get negotiated is everyone just gets so tired that you finally 00:36:59.133 --> 00:37:00.110 align:middle line:90% sign it to go to bed. 00:37:00.110 --> 00:37:02.270 align:middle line:90% So I was there for four days. 00:37:02.270 --> 00:37:03.850 align:middle line:90% I slept five hours. 00:37:03.850 --> 00:37:06.330 align:middle line:84% In Japan, they have vending machines, coffee in cans. 00:37:06.330 --> 00:37:08.830 align:middle line:84% So we just drank the coffee in cans all the time to stay up. 00:37:08.830 --> 00:37:12.370 align:middle line:84% And eventually, we just signed it because people were tired. 00:37:12.370 --> 00:37:14.410 align:middle line:84% But we signed the Kyoto Agreement, which 00:37:14.410 --> 00:37:16.310 align:middle line:90% was a dramatic step forward. 00:37:16.310 --> 00:37:20.810 align:middle line:84% It was an agreement to reduce emissions 00:37:20.810 --> 00:37:26.910 align:middle line:84% by 2010 to where they're left to below where they'd been in 1990. 00:37:26.910 --> 00:37:29.730 align:middle line:84% So those emissions are growing naturally as economies grow. 00:37:29.730 --> 00:37:34.210 align:middle line:84% It was a commitment to reduce that growth in emissions. 00:37:34.210 --> 00:37:36.850 align:middle line:84% 37 of the 38 countries that agreed to that bill 00:37:36.850 --> 00:37:39.130 align:middle line:84% then brought it back to their nations and signed it. 00:37:39.130 --> 00:37:42.330 align:middle line:84% We were the one that didn't The US 00:37:42.330 --> 00:37:46.210 align:middle line:84% never signed the Kyoto Agreement and never was bound by it. 00:37:46.210 --> 00:37:50.130 align:middle line:84% So once again, while chlorofluorocarbon 00:37:50.130 --> 00:37:52.590 align:middle line:84% is a great example, it's not uniform. 00:37:52.590 --> 00:37:55.250 align:middle line:90% It's hard. 00:37:55.250 --> 00:37:59.130 align:middle line:84% I'll come back to, in a few minutes, why the US didn't sign. 00:37:59.130 --> 00:38:01.350 align:middle line:84% But let's talk about a key feature 00:38:01.350 --> 00:38:06.870 align:middle line:84% of the Kyoto Agreement, which was that it included emissions 00:38:06.870 --> 00:38:07.710 align:middle line:90% trading. 00:38:07.710 --> 00:38:10.270 align:middle line:84% And let's talk about how the Kyoto Treaty actually 00:38:10.270 --> 00:38:14.430 align:middle line:84% is an excellent example of the benefits of emissions trading. 00:38:14.430 --> 00:38:16.870 align:middle line:84% Basically, all the signatories were 00:38:16.870 --> 00:38:20.030 align:middle line:84% allowed to trade emission rates across themselves. 00:38:20.030 --> 00:38:24.030 align:middle line:84% So once again, our classic plant A, plant B example, now it's 00:38:24.030 --> 00:38:28.750 align:middle line:84% country A, country B. why this matters is countries-- 00:38:28.750 --> 00:38:31.990 align:middle line:84% like plan A and plan B had very different marginal costs 00:38:31.990 --> 00:38:33.070 align:middle line:90% of production. 00:38:33.070 --> 00:38:35.710 align:middle line:84% Countries had very different marginal costs 00:38:35.710 --> 00:38:39.125 align:middle line:84% of meeting their global warming targets 00:38:39.125 --> 00:38:40.250 align:middle line:90% for very different reasons. 00:38:40.250 --> 00:38:43.030 align:middle line:84% One reason was, take for example Russia. 00:38:43.030 --> 00:38:46.870 align:middle line:84% Russia had just collapsed after 1989. 00:38:46.870 --> 00:38:48.530 align:middle line:90% Their economy had gone. 00:38:48.530 --> 00:38:50.550 align:middle line:84% Growth had been massively negative. 00:38:50.550 --> 00:38:53.122 align:middle line:84% As a result, it wasn't that hard for them 00:38:53.122 --> 00:38:54.330 align:middle line:90% to limit emission reductions. 00:38:54.330 --> 00:38:56.230 align:middle line:84% They weren't producing anything anymore. 00:38:56.230 --> 00:38:57.970 align:middle line:90% It was cheap. 00:38:57.970 --> 00:39:00.410 align:middle line:90% On the other hand, take Japan. 00:39:00.410 --> 00:39:02.650 align:middle line:84% Japan had been taking global warming very seriously 00:39:02.650 --> 00:39:03.570 align:middle line:90% well before we had. 00:39:03.570 --> 00:39:05.750 align:middle line:84% They'd already converted a lot to nuclear and other things, 00:39:05.750 --> 00:39:06.870 align:middle line:90% which are very efficient. 00:39:06.870 --> 00:39:08.970 align:middle line:84% It's very expensive for them to do more. 00:39:08.970 --> 00:39:10.770 align:middle line:84% They'd already gotten pretty far. 00:39:10.770 --> 00:39:13.970 align:middle line:84% So there's huge heterogeneity across countries 00:39:13.970 --> 00:39:16.050 align:middle line:90% in the cost of this. 00:39:16.050 --> 00:39:22.172 align:middle line:84% So to make this a simple example, let's go to figure 6-3. 00:39:22.172 --> 00:39:24.130 align:middle line:84% And let's think about the world as being the US 00:39:24.130 --> 00:39:25.030 align:middle line:90% and the rest of the world. 00:39:25.030 --> 00:39:26.822 align:middle line:84% That's how US people think about it anyway, 00:39:26.822 --> 00:39:28.470 align:middle line:90% so we might as well do it. 00:39:28.470 --> 00:39:30.450 align:middle line:84% We've got the US and the rest of the world. 00:39:30.450 --> 00:39:33.090 align:middle line:84% And let's say there's two marginal cost 00:39:33.090 --> 00:39:34.190 align:middle line:90% curves, supply curves. 00:39:34.190 --> 00:39:37.143 align:middle line:84% This is the graph for pollution reduction. 00:39:37.143 --> 00:39:38.810 align:middle line:84% So the supply curve is the marginal cost 00:39:38.810 --> 00:39:39.980 align:middle line:90% of pollution reduction. 00:39:39.980 --> 00:39:42.230 align:middle line:84% You've got a US curve and the rest of the world curve. 00:39:42.230 --> 00:39:44.130 align:middle line:90% The US curve is much higher. 00:39:44.130 --> 00:39:50.490 align:middle line:84% That is, the marginal costs are much higher because basically, 00:39:50.490 --> 00:39:52.750 align:middle line:84% essentially, it's much more expensive. 00:39:52.750 --> 00:39:57.590 align:middle line:84% A, we're growing rapidly in the 1990s, into the 2000s. 00:39:57.590 --> 00:40:01.830 align:middle line:84% And B, it's much more expensive to retrofit and tear down 00:40:01.830 --> 00:40:03.350 align:middle line:84% plants and build new ones than it is 00:40:03.350 --> 00:40:05.510 align:middle line:90% to just grow into it naturally. 00:40:05.510 --> 00:40:07.990 align:middle line:84% So we are pretty expensive, in particular 00:40:07.990 --> 00:40:10.150 align:middle line:90% compared to places like Russia. 00:40:10.150 --> 00:40:13.630 align:middle line:84% The goal that was set meant a reduction 00:40:13.630 --> 00:40:18.290 align:middle line:84% of 440 million metric tons of carbon. 00:40:18.290 --> 00:40:22.430 align:middle line:90% That was the goal set in Kyoto. 00:40:22.430 --> 00:40:23.890 align:middle line:90% I'm sorry, it was 630. 00:40:23.890 --> 00:40:27.750 align:middle line:84% I'm sorry, the target was 630 million metric tons 00:40:27.750 --> 00:40:30.470 align:middle line:90% of carbon to be reduced. 00:40:30.470 --> 00:40:35.630 align:middle line:84% So one way to do that was to say every country 00:40:35.630 --> 00:40:40.150 align:middle line:84% had to achieve the Kyoto goal on their own. 00:40:40.150 --> 00:40:46.810 align:middle line:84% Well, given the distribution of carbon emissions at that point, 00:40:46.810 --> 00:40:48.630 align:middle line:84% that would have meant the US would 00:40:48.630 --> 00:40:52.250 align:middle line:84% have had to do 440 million metric tons of reduction, 00:40:52.250 --> 00:40:55.930 align:middle line:84% and the entire rest of the world would do 190 million. 00:40:55.930 --> 00:40:57.615 align:middle line:84% That's just because basically, we're 00:40:57.615 --> 00:40:58.990 align:middle line:84% the super bad guys at that point. 00:40:58.990 --> 00:41:01.073 align:middle line:84% China, India hadn't really started doing this yet. 00:41:01.073 --> 00:41:03.330 align:middle line:84% We're the bad guys, so we had a lot more to reduce. 00:41:03.330 --> 00:41:07.610 align:middle line:84% We just said, in an autarkic world with no trading, 00:41:07.610 --> 00:41:10.610 align:middle line:84% the US has to get to the Kyoto target, which 00:41:10.610 --> 00:41:13.337 align:middle line:84% was 7% below its 1990 levels, by 2010. 00:41:13.337 --> 00:41:15.170 align:middle line:84% It would have had to reduce carbon emissions 00:41:15.170 --> 00:41:17.690 align:middle line:90% by 440 million metric tons. 00:41:17.690 --> 00:41:21.730 align:middle line:84% The rest of the world, only by 190 million. 00:41:21.730 --> 00:41:23.710 align:middle line:84% What does that mean in terms of cost? 00:41:23.710 --> 00:41:28.170 align:middle line:84% That means the US would have had to spend $210-- 00:41:28.170 --> 00:41:32.770 align:middle line:84% would have had to charge $210 per metric ton of carbon. 00:41:32.770 --> 00:41:34.830 align:middle line:84% In other words, if you just put a price, 00:41:34.830 --> 00:41:37.370 align:middle line:84% the price it would cost the marginal cost, the rest of the 00:41:37.370 --> 00:41:39.370 align:middle line:90% would have been $20. 00:41:39.370 --> 00:41:41.290 align:middle line:90% Now let me fix ideas for you. 00:41:41.290 --> 00:41:46.850 align:middle line:84% $1 per metric ton of carbon is like a cent on a gallon of gas. 00:41:46.850 --> 00:41:52.050 align:middle line:84% So this would be equivalent to a $2 increase in the price of gas. 00:41:52.050 --> 00:41:52.647 align:middle line:90% That's big. 00:41:52.647 --> 00:41:54.230 align:middle line:84% You heard last night, the price of gas 00:41:54.230 --> 00:41:59.910 align:middle line:84% is a big part of how we think about public policy. 00:41:59.910 --> 00:42:06.470 align:middle line:84% But due to trading, we could fix this problem. 00:42:06.470 --> 00:42:09.310 align:middle line:90% So go to the second panel. 00:42:09.310 --> 00:42:10.892 align:middle line:84% Now imagine, instead of each country 00:42:10.892 --> 00:42:12.350 align:middle line:84% having to do it on its own, we just 00:42:12.350 --> 00:42:16.590 align:middle line:84% have a worldwide supply of carbon reduction. 00:42:16.590 --> 00:42:21.510 align:middle line:84% And that's S sub T. That is the sum of the US supply curve 00:42:21.510 --> 00:42:23.950 align:middle line:84% and the rest of the world supply curve-- 00:42:23.950 --> 00:42:30.430 align:middle line:84% S sub T. What you see is now, to reduce by 630 million units, 00:42:30.430 --> 00:42:34.270 align:middle line:84% from a worldwide perspective of only $50. 00:42:34.270 --> 00:42:38.130 align:middle line:84% So if we had perfect trading and permits over $50, 00:42:38.130 --> 00:42:42.930 align:middle line:84% the US would reduce only by 40 million metric tons, 00:42:42.930 --> 00:42:44.090 align:middle line:90% 1/10 as much. 00:42:44.090 --> 00:42:46.790 align:middle line:84% And the rest of the world would pick up the slack. 00:42:46.790 --> 00:42:47.350 align:middle line:90% Why? 00:42:47.350 --> 00:42:49.830 align:middle line:84% Because it was efficient for them to do so. 00:42:49.830 --> 00:42:52.230 align:middle line:84% Reductions were cheap in the rest of the world. 00:42:52.230 --> 00:42:54.570 align:middle line:84% They would be happy to pick up the slack 00:42:54.570 --> 00:42:56.370 align:middle line:90% if we paid them for it. 00:42:56.370 --> 00:42:58.990 align:middle line:84% So with a functioning and efficient permanent market, 00:42:58.990 --> 00:43:05.730 align:middle line:84% we cut the cost by a quarter to the US of meeting this target. 00:43:05.730 --> 00:43:09.595 align:middle line:84% So this is an example of the power of trading. 00:43:09.595 --> 00:43:10.470 align:middle line:90% Questions about that? 00:43:10.470 --> 00:43:11.780 align:middle line:90% Yeah. 00:43:11.780 --> 00:43:13.290 align:middle line:84% AUDIENCE: So presumably, that would 00:43:13.290 --> 00:43:16.490 align:middle line:84% lead to a smaller increase in, for example, the price of gas 00:43:16.490 --> 00:43:17.330 align:middle line:90% in the US. 00:43:17.330 --> 00:43:19.953 align:middle line:84% Would the difference between that level 00:43:19.953 --> 00:43:21.370 align:middle line:84% and the level that would have been 00:43:21.370 --> 00:43:27.930 align:middle line:84% paid in panel A be, somehow or another, still passed 00:43:27.930 --> 00:43:28.710 align:middle line:90% on to taxpayers? 00:43:28.710 --> 00:43:30.210 align:middle line:84% JON GRUBER: That's a great question. 00:43:30.210 --> 00:43:31.610 align:middle line:90% Once again, I'll come to that. 00:43:31.610 --> 00:43:32.810 align:middle line:90% Great question. 00:43:32.810 --> 00:43:35.722 align:middle line:90% So that is one example. 00:43:35.722 --> 00:43:37.430 align:middle line:84% Other questions about the mechanics here? 00:43:37.430 --> 00:43:37.930 align:middle line:90% Yeah. 00:43:37.930 --> 00:43:41.470 align:middle line:84% AUDIENCE: Walk through again the orange curve. 00:43:41.470 --> 00:43:46.210 align:middle line:84% JON GRUBER: Yeah, ST is just the sum of SUS and SR. 00:43:46.210 --> 00:43:48.210 align:middle line:84% Imagine, instead of each country doing it alone, 00:43:48.210 --> 00:43:50.675 align:middle line:90% there's a worldwide supply. 00:43:50.675 --> 00:43:51.940 align:middle line:90% AUDIENCE: Why would it be? 00:43:51.940 --> 00:43:53.660 align:middle line:90% JON GRUBER: Flatter? 00:43:53.660 --> 00:43:56.300 align:middle line:84% Flatter than either of them, because basically, you always 00:43:56.300 --> 00:43:56.800 align:middle line:90% do. 00:43:56.800 --> 00:43:57.857 align:middle line:90% What's cheaper? 00:43:57.857 --> 00:43:59.440 align:middle line:84% If you have an aggregate supply curve, 00:43:59.440 --> 00:44:01.523 align:middle line:84% it's always flatter than each firm's supply curve, 00:44:01.523 --> 00:44:02.960 align:middle line:84% you could always choose whichever. 00:44:02.960 --> 00:44:04.720 align:middle line:84% So basically, you do what other firms do. 00:44:04.720 --> 00:44:07.510 align:middle line:84% But eventually, the US gets cheaper than other countries. 00:44:07.510 --> 00:44:09.260 align:middle line:84% At that point, you use the US, and so it's 00:44:09.260 --> 00:44:10.400 align:middle line:90% below the other country curve. 00:44:10.400 --> 00:44:11.240 align:middle line:90% Does that make sense? 00:44:11.240 --> 00:44:11.700 align:middle line:90% AUDIENCE: [INAUDIBLE]. 00:44:11.700 --> 00:44:13.320 align:middle line:90% JON GRUBER: OK, other questions? 00:44:13.320 --> 00:44:14.180 align:middle line:90% Good question. 00:44:14.180 --> 00:44:15.500 align:middle line:90% Other questions? 00:44:15.500 --> 00:44:20.520 align:middle line:84% OK, well, as I said, the US wouldn't sign this, Kyoto. 00:44:20.520 --> 00:44:22.740 align:middle line:84% Part of it was $50 was still a lot. 00:44:22.740 --> 00:44:25.620 align:middle line:84% But part of it was the fact that you 00:44:25.620 --> 00:44:28.580 align:middle line:84% may know there are more than 38 countries in the world. 00:44:28.580 --> 00:44:30.760 align:middle line:84% I mentioned 38 countries signing this. 00:44:30.760 --> 00:44:34.012 align:middle line:84% The entire developing world was left out of this agreement. 00:44:34.012 --> 00:44:35.720 align:middle line:84% Why were they left out of this agreement? 00:44:35.720 --> 00:44:39.388 align:middle line:84% Well, we knew this was a problem that's going to come. 00:44:39.388 --> 00:44:41.180 align:middle line:84% We knew eventually China, India would start 00:44:41.180 --> 00:44:42.840 align:middle line:90% to use a lot of emissions. 00:44:42.840 --> 00:44:44.560 align:middle line:90% The problem is, they hadn't. 00:44:44.560 --> 00:44:46.260 align:middle line:90% And they're like, screw you. 00:44:46.260 --> 00:44:49.303 align:middle line:84% Like, you guys got to party and have air conditioning. 00:44:49.303 --> 00:44:51.220 align:middle line:84% We're about to grow and have air conditioning. 00:44:51.220 --> 00:44:52.548 align:middle line:90% You don't want us to have it? 00:44:52.548 --> 00:44:54.340 align:middle line:84% You don't want to let us have what you had? 00:44:54.340 --> 00:44:56.080 align:middle line:90% Tough luck, buddy. 00:44:56.080 --> 00:44:58.520 align:middle line:90% We're going to have it. 00:44:58.520 --> 00:45:00.520 align:middle line:84% So the problem with developing countries-- and I 00:45:00.520 --> 00:45:01.940 align:middle line:84% was in the room negotiating with them, 00:45:01.940 --> 00:45:04.240 align:middle line:84% and they were very dismissive of this whole enterprise. 00:45:04.240 --> 00:45:07.507 align:middle line:84% We're like, look, why should we play? 00:45:07.507 --> 00:45:09.840 align:middle line:84% The problem is that getting developing countries to play 00:45:09.840 --> 00:45:10.590 align:middle line:90% would be enormous. 00:45:10.590 --> 00:45:13.640 align:middle line:84% Indeed, if the whole world was involved, 00:45:13.640 --> 00:45:17.600 align:middle line:84% the cost would fall by another factor of 4. 00:45:17.600 --> 00:45:19.600 align:middle line:84% So you get developing countries in, 00:45:19.600 --> 00:45:21.100 align:middle line:84% that ST curve would be even flatter. 00:45:21.100 --> 00:45:23.720 align:middle line:84% And the cost [? would ?] cost by another factor of 4. 00:45:23.720 --> 00:45:24.460 align:middle line:90% Why is that? 00:45:24.460 --> 00:45:26.040 align:middle line:84% Because that's where the cheapest opportunities 00:45:26.040 --> 00:45:28.623 align:middle line:84% are, because they haven't built the plants in the first place. 00:45:28.623 --> 00:45:30.620 align:middle line:84% If the US wants to improve our fuel efficiency, 00:45:30.620 --> 00:45:32.120 align:middle line:84% we've got to tear down a coal plant, 00:45:32.120 --> 00:45:34.660 align:middle line:84% and build a nuclear plant or a natural gas plant. 00:45:34.660 --> 00:45:35.980 align:middle line:84% These countries were going to build it anyway. 00:45:35.980 --> 00:45:37.647 align:middle line:84% Just build this way instead of that way. 00:45:37.647 --> 00:45:39.015 align:middle line:90% That's way cheaper. 00:45:39.015 --> 00:45:41.140 align:middle line:84% So the tremendous opportunity is you bring them in. 00:45:41.140 --> 00:45:43.800 align:middle line:84% But they were like, we don't want to play. 00:45:43.800 --> 00:45:48.460 align:middle line:84% So how could we solve this problem? 00:45:48.460 --> 00:45:51.373 align:middle line:84% Basically, there's tremendous opportunity of bringing them in. 00:45:51.373 --> 00:45:53.540 align:middle line:84% They don't want to come in because they want the air 00:45:53.540 --> 00:45:54.860 align:middle line:90% conditioning. 00:45:54.860 --> 00:45:55.640 align:middle line:90% What do you do? 00:45:55.640 --> 00:45:58.840 align:middle line:90% 00:45:58.840 --> 00:45:59.740 align:middle line:90% AUDIENCE: Pay them. 00:45:59.740 --> 00:46:00.660 align:middle line:90% JON GRUBER: Pay them. 00:46:00.660 --> 00:46:02.860 align:middle line:84% And what's a great way to pay them? 00:46:02.860 --> 00:46:05.820 align:middle line:84% Say, we are going to set a looser target for you. 00:46:05.820 --> 00:46:09.220 align:middle line:84% So instead of you having to get to 7% below 1990, 00:46:09.220 --> 00:46:12.860 align:middle line:84% you have to get to 20% above 1990. 00:46:12.860 --> 00:46:16.400 align:middle line:84% Why is a looser target equivalent to paying them? 00:46:16.400 --> 00:46:18.280 align:middle line:84% AUDIENCE: It's like giving them more permits. 00:46:18.280 --> 00:46:20.500 align:middle line:84% JON GRUBER: It's like giving them more permits. 00:46:20.500 --> 00:46:23.340 align:middle line:84% The looser their target, the cheaper 00:46:23.340 --> 00:46:24.440 align:middle line:90% it is for them to reduce. 00:46:24.440 --> 00:46:26.065 align:middle line:84% It effectively gives them more permits, 00:46:26.065 --> 00:46:27.740 align:middle line:84% gives them more reduction opportunities. 00:46:27.740 --> 00:46:31.757 align:middle line:84% So people buy even more of their reduction opportunities. 00:46:31.757 --> 00:46:33.840 align:middle line:84% It's a way to pay them without politically saying, 00:46:33.840 --> 00:46:35.930 align:middle line:90% I'm giving China $1 billion. 00:46:35.930 --> 00:46:38.180 align:middle line:84% You say, well, I'm just setting up this permit market, 00:46:38.180 --> 00:46:40.138 align:middle line:84% and China is going to end up with more permits, 00:46:40.138 --> 00:46:42.860 align:middle line:84% and we're giving China $1 billion. 00:46:42.860 --> 00:46:45.700 align:middle line:84% So that was how you ultimately try to get them involved. 00:46:45.700 --> 00:46:46.720 align:middle line:90% Now, that didn't work. 00:46:46.720 --> 00:46:49.920 align:middle line:84% It wasn't part of Kyoto, and really hasn't 00:46:49.920 --> 00:46:55.360 align:middle line:90% been part of any situation yet. 00:46:55.360 --> 00:46:57.240 align:middle line:84% Now, we come to this excellent set 00:46:57.240 --> 00:46:59.640 align:middle line:84% of questions that were asked, which is what was actually 00:46:59.640 --> 00:47:01.100 align:middle line:90% done in the US? 00:47:01.100 --> 00:47:03.100 align:middle line:84% And how do we think about the policy trade-offs, 00:47:03.100 --> 00:47:05.520 align:middle line:84% which is really fascinating in this context. 00:47:05.520 --> 00:47:09.000 align:middle line:84% So the first thing, if you ask economists, 00:47:09.000 --> 00:47:11.640 align:middle line:84% or look at the figure from the last chapter, 00:47:11.640 --> 00:47:14.960 align:middle line:84% global warming is a classic case where tax makes more sense 00:47:14.960 --> 00:47:16.260 align:middle line:90% than a quantity restriction. 00:47:16.260 --> 00:47:17.720 align:middle line:84% We showed you the deadweight loss for something 00:47:17.720 --> 00:47:19.600 align:middle line:84% with a very flat marginal damage curve 00:47:19.600 --> 00:47:22.340 align:middle line:84% is much lower in the case of uncertainty, 00:47:22.340 --> 00:47:24.800 align:middle line:84% which is a lot of uncertainty with the tax quantity 00:47:24.800 --> 00:47:25.680 align:middle line:90% regulation. 00:47:25.680 --> 00:47:27.540 align:middle line:84% So the obvious thing to do is to have a tax. 00:47:27.540 --> 00:47:30.600 align:middle line:84% And since it's been an issue, economists 00:47:30.600 --> 00:47:35.200 align:middle line:84% have always called for a corrective tax on carbon. 00:47:35.200 --> 00:47:37.240 align:middle line:84% Indeed, as I said, probably the nation's 00:47:37.240 --> 00:47:39.720 align:middle line:84% leading environmental economist guy is Michael Greenstone. 00:47:39.720 --> 00:47:42.880 align:middle line:84% Well, Michael Greenstone has actually done 00:47:42.880 --> 00:47:46.660 align:middle line:84% an incredibly elaborate exercise with a series of collaborators 00:47:46.660 --> 00:47:49.513 align:middle line:84% where they've actually measured the social cost of carbon. 00:47:49.513 --> 00:47:51.680 align:middle line:84% They've actually measured the marginal damage curve. 00:47:51.680 --> 00:47:54.600 align:middle line:84% They measured the cost in terms of damage to human health, 00:47:54.600 --> 00:47:56.050 align:middle line:84% in terms of damage to agriculture. 00:47:56.050 --> 00:47:58.300 align:middle line:84% They've literally gone and taken engineering estimates 00:47:58.300 --> 00:47:59.200 align:middle line:90% and measured it. 00:47:59.200 --> 00:48:02.140 align:middle line:84% And their current estimate is that the social cost 00:48:02.140 --> 00:48:05.860 align:middle line:84% of a ton of carbon is more than $200 per ton today. 00:48:05.860 --> 00:48:08.420 align:middle line:84% That is, every ton of carbon that's used 00:48:08.420 --> 00:48:13.060 align:middle line:84% has an extra marginal damage of more than $200 per ton. 00:48:13.060 --> 00:48:15.700 align:middle line:84% So what Greenstone would say if he were here 00:48:15.700 --> 00:48:18.960 align:middle line:84% is-- politics aside, we should have a carbon tax, 00:48:18.960 --> 00:48:21.100 align:middle line:90% which is $200 a ton. 00:48:21.100 --> 00:48:24.900 align:middle line:84% The problem, as I said, that's $2 a gallon on gas. 00:48:24.900 --> 00:48:27.340 align:middle line:84% To fix ideas, the first attempt to go after this was 00:48:27.340 --> 00:48:29.060 align:middle line:90% in the Clinton administration. 00:48:29.060 --> 00:48:33.260 align:middle line:84% Bill Clinton proposed a gas tax to get ahead of this. 00:48:33.260 --> 00:48:37.620 align:middle line:84% It was an ambitious $0.034 gas tax, 00:48:37.620 --> 00:48:40.380 align:middle line:90% and he lost Congress over it. 00:48:40.380 --> 00:48:44.280 align:middle line:84% The price of gas is super salient in people's minds. 00:48:44.280 --> 00:48:48.520 align:middle line:84% So carbon taxes are just not happening. 00:48:48.520 --> 00:48:51.000 align:middle line:84% Simply, there is a set of things we'll 00:48:51.000 --> 00:48:54.280 align:middle line:84% learn about this semester where they have an incredibly 00:48:54.280 --> 00:48:55.500 align:middle line:90% dedicated voting block. 00:48:55.500 --> 00:48:58.920 align:middle line:84% Unfortunately, that voting block consists only of economists. 00:48:58.920 --> 00:49:01.600 align:middle line:90% This is one of them. 00:49:01.600 --> 00:49:03.900 align:middle line:84% This one, some environmentalists are on board, too. 00:49:03.900 --> 00:49:07.680 align:middle line:84% But the bottom line is it's just too difficult politically. 00:49:07.680 --> 00:49:10.160 align:middle line:84% So that led-- that's your first question 00:49:10.160 --> 00:49:11.720 align:middle line:90% of why didn't they do taxes. 00:49:11.720 --> 00:49:14.720 align:middle line:84% That led to the Kyoto framework and the general framework 00:49:14.720 --> 00:49:15.520 align:middle line:90% of fine. 00:49:15.520 --> 00:49:18.803 align:middle line:84% In general, cap and trade is as efficient as taxes. 00:49:18.803 --> 00:49:20.220 align:middle line:84% So let's just go to cap and trade. 00:49:20.220 --> 00:49:21.740 align:middle line:90% The Weitzman point, we miss. 00:49:21.740 --> 00:49:22.860 align:middle line:90% But leave that aside. 00:49:22.860 --> 00:49:24.000 align:middle line:90% That's too complicated. 00:49:24.000 --> 00:49:26.800 align:middle line:84% In general, cap and trade gets you to where taxes are. 00:49:26.800 --> 00:49:30.120 align:middle line:84% So let's do a cap and trade system. 00:49:30.120 --> 00:49:32.580 align:middle line:90% And so the US turned that down. 00:49:32.580 --> 00:49:34.960 align:middle line:84% But when President Obama was elected, 00:49:34.960 --> 00:49:37.800 align:middle line:84% he campaigned on global warming as being one of his main issues 00:49:37.800 --> 00:49:39.320 align:middle line:90% he wanted to deal with. 00:49:39.320 --> 00:49:42.340 align:middle line:84% And under his leadership, they actually 00:49:42.340 --> 00:49:46.580 align:middle line:84% set up legislation called the Waxman-Markey Bill, which 00:49:46.580 --> 00:49:51.980 align:middle line:84% would have set up a cap and trade system for global warming 00:49:51.980 --> 00:49:53.407 align:middle line:90% in the US. 00:49:53.407 --> 00:49:55.740 align:middle line:84% So the way this worked, it was called the American Clean 00:49:55.740 --> 00:49:57.060 align:middle line:90% Energy and Security Act-- 00:49:57.060 --> 00:49:58.940 align:middle line:90% ACES. 00:49:58.940 --> 00:50:00.540 align:middle line:90% And how did this work? 00:50:00.540 --> 00:50:05.620 align:middle line:84% Basically, firms would face limits on their emissions. 00:50:05.620 --> 00:50:10.580 align:middle line:84% They could do this by reducing their emissions. 00:50:10.580 --> 00:50:12.700 align:middle line:84% Or they could purchase pollution credits 00:50:12.700 --> 00:50:14.940 align:middle line:90% to offset their emissions. 00:50:14.940 --> 00:50:18.860 align:middle line:84% Now, these emission permits would then 00:50:18.860 --> 00:50:22.020 align:middle line:84% be sold in a fluid market and firms could buy them. 00:50:22.020 --> 00:50:26.180 align:middle line:84% Ultimately, the idea is the emission 00:50:26.180 --> 00:50:29.780 align:middle line:84% permits would essentially be what the cost needed to be 00:50:29.780 --> 00:50:32.420 align:middle line:90% to meet our emission targets. 00:50:32.420 --> 00:50:35.540 align:middle line:84% They wouldn't necessarily be the $200 a ton, which is optimal. 00:50:35.540 --> 00:50:38.460 align:middle line:84% But we have some target to meet, we'll set a price such 00:50:38.460 --> 00:50:41.160 align:middle line:90% that we meet that target. 00:50:41.160 --> 00:50:44.520 align:middle line:84% Now there's a couple of issues this raised. 00:50:44.520 --> 00:50:51.980 align:middle line:84% The first was, who is going to pay for these emissions, 00:50:51.980 --> 00:50:53.560 align:middle line:90% for the cost of pollution. 00:50:53.560 --> 00:50:56.840 align:middle line:84% Emission permits is less than what we're polluting today. 00:50:56.840 --> 00:50:58.840 align:middle line:84% That means there's costs on people 00:50:58.840 --> 00:51:01.240 align:middle line:84% who are going to have to reduce their pollution. 00:51:01.240 --> 00:51:04.760 align:middle line:84% And those costs, typically borne by utilities, 00:51:04.760 --> 00:51:06.387 align:middle line:90% would be passed on to consumers. 00:51:06.387 --> 00:51:08.720 align:middle line:84% It's the general consensus of economists and politicians 00:51:08.720 --> 00:51:10.160 align:middle line:90% alike. 00:51:10.160 --> 00:51:15.320 align:middle line:84% And the view was that you would end up with large costs passed 00:51:15.320 --> 00:51:16.180 align:middle line:90% on to consumers. 00:51:16.180 --> 00:51:20.100 align:middle line:84% So let's take my utility in Ohio that's super dirty. 00:51:20.100 --> 00:51:22.360 align:middle line:84% I'm going to buy a ton of emission permits. 00:51:22.360 --> 00:51:23.820 align:middle line:90% Well, I have to pay for them. 00:51:23.820 --> 00:51:24.740 align:middle line:90% How do I pay for them? 00:51:24.740 --> 00:51:27.480 align:middle line:84% I raise the price of what I'm charging 00:51:27.480 --> 00:51:32.640 align:middle line:84% for my coal, for my fuel, for my power that I'm generating. 00:51:32.640 --> 00:51:34.920 align:middle line:84% So basically, you have a situation 00:51:34.920 --> 00:51:39.260 align:middle line:84% where there is going to be significant increase 00:51:39.260 --> 00:51:40.180 align:middle line:90% in the price. 00:51:40.180 --> 00:51:42.860 align:middle line:90% In fact, that's the idea. 00:51:42.860 --> 00:51:44.920 align:middle line:84% If you think about a cap and trade system, 00:51:44.920 --> 00:51:49.140 align:middle line:84% it's a backdoor way of getting at the same level of taxation. 00:51:49.140 --> 00:51:51.620 align:middle line:90% Remember that. 00:51:51.620 --> 00:51:55.980 align:middle line:84% Go back to figure 5-9 on the back of that handout today, 00:51:55.980 --> 00:52:01.140 align:middle line:84% remember, the cap and trade gets us to the same level as the tax. 00:52:01.140 --> 00:52:04.180 align:middle line:84% So really, a cap and trade is a backdoor way to get a tax, 00:52:04.180 --> 00:52:06.820 align:middle line:90% but without calling it that. 00:52:06.820 --> 00:52:08.160 align:middle line:90% Well, people don't like taxes. 00:52:08.160 --> 00:52:09.780 align:middle line:84% And they saw through this and said 00:52:09.780 --> 00:52:13.460 align:middle line:84% it's going to massively raise the price of energy in the US. 00:52:13.460 --> 00:52:18.260 align:middle line:84% Now, the developers of this bill had an answer to that. 00:52:18.260 --> 00:52:21.020 align:middle line:84% They said, well, what we're going 00:52:21.020 --> 00:52:25.980 align:middle line:84% to do is actually give these permits-- the initial allocation 00:52:25.980 --> 00:52:29.420 align:middle line:84% of permits, we're going to give to firms today 00:52:29.420 --> 00:52:32.215 align:middle line:84% in proportion to how much they pollute. 00:52:32.215 --> 00:52:34.840 align:middle line:84% So a firm that pollutes a lot is going to get a lot of permits. 00:52:34.840 --> 00:52:36.120 align:middle line:84% A firm produces little is going to get. 00:52:36.120 --> 00:52:38.680 align:middle line:84% And it's based on past, so it won't distort what it says, 00:52:38.680 --> 00:52:39.580 align:middle line:90% it's based on past. 00:52:39.580 --> 00:52:41.307 align:middle line:84% And then that way Jon's dirty coal fire 00:52:41.307 --> 00:52:43.640 align:middle line:84% plant doesn't have to raise its price as much because it 00:52:43.640 --> 00:52:47.040 align:middle line:90% gets a lot of permits. 00:52:47.040 --> 00:52:50.280 align:middle line:84% Well, that was criticized for two reasons. 00:52:50.280 --> 00:52:52.240 align:middle line:84% And the CBO said that would lower 00:52:52.240 --> 00:52:54.440 align:middle line:90% the cost to consumers a lot. 00:52:54.440 --> 00:52:55.980 align:middle line:90% There's two problems with that. 00:52:55.980 --> 00:52:58.875 align:middle line:84% We don't want the cost to consumers to be lower. 00:52:58.875 --> 00:53:00.500 align:middle line:84% We want the cost of goods to be higher. 00:53:00.500 --> 00:53:02.297 align:middle line:84% That's how you end up using less fuel. 00:53:02.297 --> 00:53:04.380 align:middle line:84% That's how you end up using less carbon intensive. 00:53:04.380 --> 00:53:08.680 align:middle line:84% It offsets the very goal of the policy. 00:53:08.680 --> 00:53:12.000 align:middle line:84% The second problem is, that's an incredibly inefficient way 00:53:12.000 --> 00:53:14.440 align:middle line:84% to use an incredibly valuable resource. 00:53:14.440 --> 00:53:18.713 align:middle line:84% What should the government do to allocate these permits? 00:53:18.713 --> 00:53:20.380 align:middle line:84% The government's got a bunch of permits. 00:53:20.380 --> 00:53:21.220 align:middle line:90% What should it do? 00:53:21.220 --> 00:53:22.480 align:middle line:84% AUDIENCE: Sell to the highest bidder. 00:53:22.480 --> 00:53:23.700 align:middle line:84% JON GRUBER: It should auction them. 00:53:23.700 --> 00:53:25.742 align:middle line:84% Think about the money the government could raise. 00:53:25.742 --> 00:53:27.560 align:middle line:84% So for example, another thing like this 00:53:27.560 --> 00:53:30.720 align:middle line:84% is the government owns the spectrum that all our cell 00:53:30.720 --> 00:53:32.280 align:middle line:90% phones and things go over. 00:53:32.280 --> 00:53:35.340 align:middle line:84% The government used to just give away that spectrum to cell phone 00:53:35.340 --> 00:53:35.880 align:middle line:90% companies. 00:53:35.880 --> 00:53:37.463 align:middle line:84% Now it auctions it, and the auction 00:53:37.463 --> 00:53:39.380 align:middle line:84% is designed by economists, another big victory 00:53:39.380 --> 00:53:42.340 align:middle line:84% for economists, and makes a lot of money every year 00:53:42.340 --> 00:53:43.320 align:middle line:90% from these auctions. 00:53:43.320 --> 00:53:44.640 align:middle line:84% We should do the same thing with these permits. 00:53:44.640 --> 00:53:46.680 align:middle line:84% This is a valuable resource the government owns. 00:53:46.680 --> 00:53:48.000 align:middle line:84% The government is saying, we're regulating. 00:53:48.000 --> 00:53:49.020 align:middle line:84% You say it's a resource, government 00:53:49.020 --> 00:53:51.885 align:middle line:84% should auction it and take that money and use it to help people. 00:53:51.885 --> 00:53:53.760 align:middle line:84% So the efficiency, some economists would say, 00:53:53.760 --> 00:53:55.400 align:middle line:90% is auction the permits. 00:53:55.400 --> 00:53:56.360 align:middle line:90% Take the money. 00:53:56.360 --> 00:53:59.460 align:middle line:84% Give it to poor people who face higher fuel prices. 00:53:59.460 --> 00:54:03.140 align:middle line:84% Remember the argument for free trade I talked about in 14.01. 00:54:03.140 --> 00:54:06.040 align:middle line:84% The idea is, one party loses, one party wins. 00:54:06.040 --> 00:54:07.940 align:middle line:84% But the party that wins, wins by more. 00:54:07.940 --> 00:54:10.523 align:middle line:84% You take that extra and reduce reduce to the party that loses. 00:54:10.523 --> 00:54:11.420 align:middle line:90% Everybody can win. 00:54:11.420 --> 00:54:13.540 align:middle line:90% There's a similar argument here. 00:54:13.540 --> 00:54:16.300 align:middle line:84% The problem is politically, the utility 00:54:16.300 --> 00:54:20.020 align:middle line:84% said, no, if you're going to do this, we want the permits. 00:54:20.020 --> 00:54:23.620 align:middle line:84% So the problem with how they were going to do that 00:54:23.620 --> 00:54:27.040 align:middle line:84% was how they were going to distribute them. 00:54:27.040 --> 00:54:29.860 align:middle line:90% 00:54:29.860 --> 00:54:32.080 align:middle line:84% This legislation, despite these problems, 00:54:32.080 --> 00:54:34.720 align:middle line:84% actually passed the House of Representatives, 00:54:34.720 --> 00:54:36.320 align:middle line:90% but was killed in the Senate. 00:54:36.320 --> 00:54:38.120 align:middle line:84% It was just viewed as too difficult, 00:54:38.120 --> 00:54:40.360 align:middle line:84% raising the price of energy, too easy to kill this 00:54:40.360 --> 00:54:42.320 align:middle line:90% with talking points. 00:54:42.320 --> 00:54:47.040 align:middle line:90% So we tried taxing, didn't work. 00:54:47.040 --> 00:54:51.520 align:middle line:84% We tried regulating, didn't work. 00:54:51.520 --> 00:54:56.080 align:middle line:84% So President Biden turned to a third approach. 00:54:56.080 --> 00:54:59.180 align:middle line:84% The third approach is, if you can't tax a bad thing, 00:54:59.180 --> 00:55:02.055 align:middle line:84% you sure can subsidize the good thing. 00:55:02.055 --> 00:55:04.680 align:middle line:84% And so the third approach, which was in the Inflation Reduction 00:55:04.680 --> 00:55:08.840 align:middle line:84% Act, was a massive set of subsidies 00:55:08.840 --> 00:55:12.445 align:middle line:84% for moving away from fossil fuels towards clean energy. 00:55:12.445 --> 00:55:13.820 align:middle line:84% Subsidies came in multiple forms. 00:55:13.820 --> 00:55:16.720 align:middle line:84% First of all, there were subsidies for production 00:55:16.720 --> 00:55:23.200 align:middle line:84% and R&D on new types of new types of energy. 00:55:23.200 --> 00:55:26.680 align:middle line:90% There were subsidies for-- 00:55:26.680 --> 00:55:29.720 align:middle line:84% so one big spend was basically, like, billions of dollars 00:55:29.720 --> 00:55:31.310 align:middle line:84% to develop hydrogen alternatives, 00:55:31.310 --> 00:55:33.490 align:middle line:84% electric alternatives, billions of dollars for R&D 00:55:33.490 --> 00:55:36.850 align:middle line:90% into new energy alternatives. 00:55:36.850 --> 00:55:40.112 align:middle line:84% The second big expenditure was money to consumers to get them 00:55:40.112 --> 00:55:42.070 align:middle line:84% to switch to more energy-efficient alternatives 00:55:42.070 --> 00:55:44.810 align:middle line:84% so a $7,500 tax credit for buying an EV, 00:55:44.810 --> 00:55:47.870 align:middle line:84% money if you fitted your house to make it more fuel effective, 00:55:47.870 --> 00:55:49.010 align:middle line:90% et cetera. 00:55:49.010 --> 00:55:53.050 align:middle line:84% So it's basically a massive subsidy towards fuel efficiency. 00:55:53.050 --> 00:55:55.830 align:middle line:84% Now, in a standard economic world, 00:55:55.830 --> 00:55:57.587 align:middle line:84% the subsidy is the opposite of a tax. 00:55:57.587 --> 00:55:59.170 align:middle line:84% Taxing the bad thing is the same thing 00:55:59.170 --> 00:56:01.690 align:middle line:90% as subsidizing the good thing. 00:56:01.690 --> 00:56:05.810 align:middle line:84% But it is not as good for two critical reasons. 00:56:05.810 --> 00:56:09.250 align:middle line:84% The first critical reason is the car example 00:56:09.250 --> 00:56:10.792 align:middle line:90% I gave you a few minutes ago. 00:56:10.792 --> 00:56:12.250 align:middle line:84% We're giving people EVs, so they're 00:56:12.250 --> 00:56:15.050 align:middle line:84% going to ship their gas-guzzling cars to other countries. 00:56:15.050 --> 00:56:17.430 align:middle line:84% If there was a global tax on carbon, 00:56:17.430 --> 00:56:20.210 align:middle line:84% those other countries wouldn't use the cars either. 00:56:20.210 --> 00:56:21.730 align:middle line:90% That's the first problem. 00:56:21.730 --> 00:56:23.570 align:middle line:84% The second problem is it costs money. 00:56:23.570 --> 00:56:25.450 align:middle line:90% With one, you raise money. 00:56:25.450 --> 00:56:27.890 align:middle line:84% With the other one, you spend money. 00:56:27.890 --> 00:56:30.550 align:middle line:84% Now, you'll talk about chapter 4, 00:56:30.550 --> 00:56:32.610 align:middle line:84% not this week, but next week in section-- 00:56:32.610 --> 00:56:34.930 align:middle line:84% or I guess two weeks because next week is a holiday. 00:56:34.930 --> 00:56:37.630 align:middle line:90% 00:56:37.630 --> 00:56:39.890 align:middle line:84% And we used to care about deficits. 00:56:39.890 --> 00:56:41.870 align:middle line:90% We don't really anymore. 00:56:41.870 --> 00:56:46.350 align:middle line:84% So the insight of Biden was, look, 00:56:46.350 --> 00:56:48.430 align:middle line:90% this is the right thing to do. 00:56:48.430 --> 00:56:50.430 align:middle line:90% There's no other way to do it. 00:56:50.430 --> 00:56:52.430 align:middle line:84% Nobody seems to care about deficits anymore. 00:56:52.430 --> 00:56:54.930 align:middle line:84% I'm going to spend $500 million-- 00:56:54.930 --> 00:57:00.070 align:middle line:84% it was actually $389 billion, moving us 00:57:00.070 --> 00:57:01.330 align:middle line:90% towards a clean economy. 00:57:01.330 --> 00:57:04.190 align:middle line:84% It was the most significant piece of legislation 00:57:04.190 --> 00:57:07.510 align:middle line:84% in fighting global warming in our nation's history. 00:57:07.510 --> 00:57:10.270 align:middle line:84% And the question is, is this the sad lesson 00:57:10.270 --> 00:57:12.950 align:middle line:84% we've learned that, in fact, we have to do the wrong thing if we 00:57:12.950 --> 00:57:14.230 align:middle line:90% want to do the right thing? 00:57:14.230 --> 00:57:16.870 align:middle line:84% And that's something we'll just have to see over time. 00:57:16.870 --> 00:57:21.965 align:middle line:84% Now, the last point is, where are we now in the world? 00:57:21.965 --> 00:57:23.590 align:middle line:84% Well, the most significant recent round 00:57:23.590 --> 00:57:31.490 align:middle line:84% was the Paris round of negotiations back in 2015. 00:57:31.490 --> 00:57:36.170 align:middle line:84% The Paris Agreement was an agreement, 00:57:36.170 --> 00:57:38.970 align:middle line:84% under President Obama, to significantly reduce 00:57:38.970 --> 00:57:40.450 align:middle line:90% emissions around the world. 00:57:40.450 --> 00:57:43.930 align:middle line:84% The US signed it, but it's all voluntary. 00:57:43.930 --> 00:57:46.070 align:middle line:84% Nobody comes in and pounds me if you don't do it. 00:57:46.070 --> 00:57:48.530 align:middle line:90% It was a voluntary agreement. 00:57:48.530 --> 00:57:52.570 align:middle line:84% It was a very significant agreement 00:57:52.570 --> 00:57:57.810 align:middle line:84% signed by 186 countries, so it brought in developing countries. 00:57:57.810 --> 00:58:00.570 align:middle line:84% It set up a very significant set of goals. 00:58:00.570 --> 00:58:05.450 align:middle line:84% So the US in particular, we pledged 00:58:05.450 --> 00:58:08.930 align:middle line:84% to reduce greenhouse gas emissions by about 26% 00:58:08.930 --> 00:58:17.450 align:middle line:84% below 2005 levels by the year 2020, or starting year 2020. 00:58:17.450 --> 00:58:22.743 align:middle line:84% It basically agreed to a very aggressive reduction 00:58:22.743 --> 00:58:23.910 align:middle line:90% without a plan for doing it. 00:58:23.910 --> 00:58:25.250 align:middle line:90% Just, we're going to do it. 00:58:25.250 --> 00:58:27.550 align:middle line:90% And other countries did too. 00:58:27.550 --> 00:58:29.210 align:middle line:84% As soon as President Trump was elected, 00:58:29.210 --> 00:58:31.020 align:middle line:84% we withdrew from the Paris Agreement. 00:58:31.020 --> 00:58:32.770 align:middle line:84% And then when President Biden was elected, 00:58:32.770 --> 00:58:34.590 align:middle line:84% we got back into the Paris Agreement. 00:58:34.590 --> 00:58:36.830 align:middle line:84% And we'll see which-- you can predict what's going 00:58:36.830 --> 00:58:38.470 align:middle line:90% to happen with this election. 00:58:38.470 --> 00:58:42.055 align:middle line:84% And as a result, we haven't done a whole lot. 00:58:42.055 --> 00:58:44.430 align:middle line:84% I mean, the Inflation Reduction Act that I just described 00:58:44.430 --> 00:58:47.030 align:middle line:84% is the one most significant investment we've made. 00:58:47.030 --> 00:58:48.890 align:middle line:84% You can contrast that actually with China. 00:58:48.890 --> 00:58:51.990 align:middle line:84% Now once again, China did not get special treatment 00:58:51.990 --> 00:58:53.130 align:middle line:90% under the Paris Agreement. 00:58:53.130 --> 00:58:54.970 align:middle line:84% I talked about trying to buy China a special agreement. 00:58:54.970 --> 00:58:56.230 align:middle line:90% They didn't actually get it. 00:58:56.230 --> 00:59:05.187 align:middle line:84% And yet, China has aggressively moved to regulate emissions. 00:59:05.187 --> 00:59:07.270 align:middle line:84% They're going to have the largest emission trading 00:59:07.270 --> 00:59:08.103 align:middle line:90% scheme in the world. 00:59:08.103 --> 00:59:11.770 align:middle line:84% They've already started one that involves about three 00:59:11.770 --> 00:59:14.950 align:middle line:90% billion tons of CO2 annually. 00:59:14.950 --> 00:59:18.910 align:middle line:84% They're doing a set up an entire new climate monitoring system 00:59:18.910 --> 00:59:22.670 align:middle line:84% to make people aware of air quality and to fight it. 00:59:22.670 --> 00:59:25.970 align:middle line:90% And basically, it is working. 00:59:25.970 --> 00:59:29.210 align:middle line:84% They're actually reducing their emissions relative 00:59:29.210 --> 00:59:30.690 align:middle line:90% to the rest of the world. 00:59:30.690 --> 00:59:32.122 align:middle line:90% So this can be done. 00:59:32.122 --> 00:59:34.330 align:middle line:84% The answer is, maybe it's harder to do in a democracy 00:59:34.330 --> 00:59:36.890 align:middle line:84% than in some place that's not a democracy. 00:59:36.890 --> 00:59:37.830 align:middle line:90% But it can be done. 00:59:37.830 --> 00:59:40.105 align:middle line:84% And the good news is coming out of China, 00:59:40.105 --> 00:59:42.730 align:middle line:84% And once again, I don't want to poo-poo the Inflation Reduction 00:59:42.730 --> 00:59:43.272 align:middle line:90% Act too much. 00:59:43.272 --> 00:59:45.050 align:middle line:90% This was an important step. 00:59:45.050 --> 00:59:48.190 align:middle line:84% It was a major step towards fighting global warming. 00:59:48.190 --> 00:59:49.650 align:middle line:84% It's one that needed to be taken. 00:59:49.650 --> 00:59:51.650 align:middle line:84% It's just nice economist who could have done it the right way 00:59:51.650 --> 00:59:53.050 align:middle line:90% rather than the wrong way. 00:59:53.050 --> 00:59:53.590 align:middle line:90% Yeah. 00:59:53.590 --> 00:59:56.460 align:middle line:84% AUDIENCE: [INAUDIBLE] the Europeans [INAUDIBLE]. 00:59:56.460 --> 00:59:58.710 align:middle line:84% JON GRUBER: I'm not sure what the Europeans are doing. 00:59:58.710 --> 01:00:00.810 align:middle line:84% I mean, the Europeans are in a tough spot 01:00:00.810 --> 01:00:03.710 align:middle line:84% because they've already gone pretty far. 01:00:03.710 --> 01:00:06.470 align:middle line:84% I mean, how many people have been to Europe 01:00:06.470 --> 01:00:08.330 align:middle line:90% and seen gas prices over there? 01:00:08.330 --> 01:00:10.810 align:middle line:84% I mean, it's, like, twice what we are. 01:00:10.810 --> 01:00:14.730 align:middle line:84% They've already gone pretty far to be a low-carbon economy. 01:00:14.730 --> 01:00:17.930 align:middle line:84% So their reductions are even more expensive than ours are. 01:00:17.930 --> 01:00:20.558 align:middle line:84% So I'm not quite sure where Europe is on this front. 01:00:20.558 --> 01:00:22.350 align:middle line:84% I think it varies a lot country by country. 01:00:22.350 --> 01:00:25.150 align:middle line:84% I'm not sure the EU has got a general policy or it's.. 01:00:25.150 --> 01:00:27.830 align:middle line:84% Each country was a signatory, not the EU as a whole. 01:00:27.830 --> 01:00:29.770 align:middle line:84% So I'm not sure what each country is doing. 01:00:29.770 --> 01:00:31.485 align:middle line:90% It's a good question. 01:00:31.485 --> 01:00:32.610 align:middle line:90% Other questions about this? 01:00:32.610 --> 01:00:33.160 align:middle line:90% Yeah, Enoch. 01:00:33.160 --> 01:00:35.630 align:middle line:84% AUDIENCE: Subsidies are very expensive. 01:00:35.630 --> 01:00:37.150 align:middle line:84% Yeah we don't care about deficit. 01:00:37.150 --> 01:00:39.670 align:middle line:84% But if you look at the cost savings 01:00:39.670 --> 01:00:44.547 align:middle line:84% [? from ?] a healthier populace, does it impact [INAUDIBLE]? 01:00:44.547 --> 01:00:46.630 align:middle line:84% JON GRUBER: Yeah, this is a great general question 01:00:46.630 --> 01:00:47.880 align:middle line:90% we'll ask a lot this semester. 01:00:47.880 --> 01:00:50.150 align:middle line:84% One could call it generally the offset question, 01:00:50.150 --> 01:00:53.990 align:middle line:84% which is to what extent can the fiscal benefits. 01:00:53.990 --> 01:00:55.550 align:middle line:90% We know we'll be healthier. 01:00:55.550 --> 01:00:57.508 align:middle line:84% But that doesn't count for the government. 01:00:57.508 --> 01:01:00.050 align:middle line:84% Does being healthier have fiscal benefits for the government? 01:01:00.050 --> 01:01:03.070 align:middle line:84% We have to pay less to treat kidney disease. 01:01:03.070 --> 01:01:06.550 align:middle line:84% And to what extent does that offset the cost here? 01:01:06.550 --> 01:01:08.430 align:middle line:90% So there's two answers to that. 01:01:08.430 --> 01:01:12.310 align:middle line:84% One is, those are harder to measure. 01:01:12.310 --> 01:01:15.670 align:middle line:84% And so there's a lot of uncertainty in measuring them. 01:01:15.670 --> 01:01:17.657 align:middle line:90% Get three answers. 01:01:17.657 --> 01:01:19.990 align:middle line:84% My wife says, I should never give a number before a list 01:01:19.990 --> 01:01:21.890 align:middle line:90% because I always add one. 01:01:21.890 --> 01:01:25.890 align:middle line:84% Two is that the benefits are very long run 01:01:25.890 --> 01:01:27.770 align:middle line:90% and politics is very short run. 01:01:27.770 --> 01:01:29.010 align:middle line:90% So that's a challenge. 01:01:29.010 --> 01:01:30.510 align:middle line:84% The third thing which you'll learn-- 01:01:30.510 --> 01:01:31.770 align:middle line:84% I'm not going to spoil it, because it's one 01:01:31.770 --> 01:01:33.490 align:middle line:90% of the best parts of chapter 4. 01:01:33.490 --> 01:01:37.170 align:middle line:84% The way we do policy in the US says basically nothing matters 01:01:37.170 --> 01:01:39.730 align:middle line:90% after 10 years. 01:01:39.730 --> 01:01:42.330 align:middle line:84% And you'll learn about why when you do chapter 4. 01:01:42.330 --> 01:01:44.450 align:middle line:84% And that makes it pretty hard to justify something 01:01:44.450 --> 01:01:46.617 align:middle line:84% which is going to have savings in more than 10 years 01:01:46.617 --> 01:01:49.250 align:middle line:90% and cost in the first 10 years. 01:01:49.250 --> 01:01:51.770 align:middle line:84% But it's absolutely right theoretically. 01:01:51.770 --> 01:01:52.950 align:middle line:90% Other questions? 01:01:52.950 --> 01:01:53.450 align:middle line:90% Yeah. 01:01:53.450 --> 01:01:54.908 align:middle line:84% AUDIENCE: So like the first point-- 01:01:54.908 --> 01:01:57.325 align:middle line:84% the problem with subsidies was the same outsourcing issue. 01:01:57.325 --> 01:01:58.866 align:middle line:84% Is there a nuance between [INAUDIBLE] 01:01:58.866 --> 01:02:00.130 align:middle line:90% between subsidies and taxes. 01:02:00.130 --> 01:02:01.590 align:middle line:90% JON GRUBER: No. 01:02:01.590 --> 01:02:04.110 align:middle line:84% Well, when it's US-specific, there wouldn't be a difference. 01:02:04.110 --> 01:02:07.090 align:middle line:84% The difference is a tax would be easier to coordinate worldwide 01:02:07.090 --> 01:02:07.958 align:middle line:90% than subsidies. 01:02:07.958 --> 01:02:09.750 align:middle line:84% A worldwide tax wouldn't have that problem. 01:02:09.750 --> 01:02:12.250 align:middle line:84% I was being a bit subtle on that. 01:02:12.250 --> 01:02:13.270 align:middle line:90% Good question. 01:02:13.270 --> 01:02:13.770 align:middle line:90% Yeah. 01:02:13.770 --> 01:02:17.328 align:middle line:84% AUDIENCE: [INAUDIBLE] this is going back to cap and trade 01:02:17.328 --> 01:02:18.870 align:middle line:84% for power plants [? as ?] an example. 01:02:18.870 --> 01:02:19.830 align:middle line:90% But [INAUDIBLE]. 01:02:19.830 --> 01:02:22.570 align:middle line:90% 01:02:22.570 --> 01:02:25.010 align:middle line:84% How does it play out when you have a cap and trade scheme, 01:02:25.010 --> 01:02:26.468 align:middle line:84% but you have something like a power 01:02:26.468 --> 01:02:27.750 align:middle line:90% plant with a natural monopoly? 01:02:27.750 --> 01:02:30.830 align:middle line:90% 01:02:30.830 --> 01:02:33.910 align:middle line:84% The people supplied by the local power plant that's 01:02:33.910 --> 01:02:35.910 align:middle line:84% really, really dirty, does that market just 01:02:35.910 --> 01:02:37.423 align:middle line:84% get [? screwed ?] because they're 01:02:37.423 --> 01:02:39.590 align:middle line:84% going to have to pay a lot [INAUDIBLE] power plants? 01:02:39.590 --> 01:02:40.590 align:middle line:84% JON GRUBER: Well, I mean, the main thing 01:02:40.590 --> 01:02:41.730 align:middle line:90% is-- that's a great point. 01:02:41.730 --> 01:02:44.830 align:middle line:84% And there's the general question of over what geographic area do 01:02:44.830 --> 01:02:46.088 align:middle line:90% you want to regulate? 01:02:46.088 --> 01:02:47.630 align:middle line:84% So in other words, do you want to say 01:02:47.630 --> 01:02:49.430 align:middle line:84% it has to be nationwide below this level 01:02:49.430 --> 01:02:50.630 align:middle line:84% and we're gonna do it equally, or we're going 01:02:50.630 --> 01:02:52.330 align:middle line:90% to allow for different areas? 01:02:52.330 --> 01:02:54.790 align:middle line:84% And once again, that's the point of a cap and trade system. 01:02:54.790 --> 01:02:56.910 align:middle line:84% So those people will be screwed potentially 01:02:56.910 --> 01:02:59.178 align:middle line:84% in terms of having to buy a lot of permits. 01:02:59.178 --> 01:03:01.470 align:middle line:84% But once again, if they're selling to a national energy 01:03:01.470 --> 01:03:03.850 align:middle line:84% market, hopefully that will be mitigated. 01:03:03.850 --> 01:03:07.030 align:middle line:84% I mean, this is actually a big-- hopefully, 01:03:07.030 --> 01:03:08.570 align:middle line:90% the permit price will come down. 01:03:08.570 --> 01:03:11.230 align:middle line:84% But those people, if you live a power plant-- 01:03:11.230 --> 01:03:12.690 align:middle line:90% and that's why they allocate. 01:03:12.690 --> 01:03:14.670 align:middle line:84% Unless you allocate more permits to them, 01:03:14.670 --> 01:03:15.890 align:middle line:90% then they won't be screwed. 01:03:15.890 --> 01:03:19.010 align:middle line:84% So that's why the ACES plan did it that way. 01:03:19.010 --> 01:03:22.013 align:middle line:84% If you give them more permits to start, they won't be as screwed. 01:03:22.013 --> 01:03:23.930 align:middle line:84% AUDIENCE: I guess the question that I have is, 01:03:23.930 --> 01:03:26.410 align:middle line:90% does the cost get borne-- 01:03:26.410 --> 01:03:28.700 align:middle line:84% that increased cost of having to buy more permits? 01:03:28.700 --> 01:03:30.450 align:middle line:84% Ideally that would somehow get distributed 01:03:30.450 --> 01:03:31.570 align:middle line:84% throughout the market and everyone 01:03:31.570 --> 01:03:33.862 align:middle line:84% would have [INAUDIBLE] little bit [? more ?] expensive. 01:03:33.862 --> 01:03:36.450 align:middle line:84% But [INAUDIBLE] with an isolated power plant 01:03:36.450 --> 01:03:38.170 align:middle line:84% like that [? in ?] an isolated community, 01:03:38.170 --> 01:03:41.410 align:middle line:84% would it just be a lot more expensive there? 01:03:41.410 --> 01:03:43.210 align:middle line:90% JON GRUBER: It wouldn't-- 01:03:43.210 --> 01:03:47.370 align:middle line:84% once again, if you did not distribute extra permits 01:03:47.370 --> 01:03:49.010 align:middle line:90% to them, then yes. 01:03:49.010 --> 01:03:51.510 align:middle line:84% You would have geographic disparities. 01:03:51.510 --> 01:03:54.810 align:middle line:84% AUDIENCE: [INAUDIBLE] a question about [INAUDIBLE]. 01:03:54.810 --> 01:03:57.950 align:middle line:84% Was the US Senate blocking a [? lot ?] of these policies. 01:03:57.950 --> 01:03:59.630 align:middle line:90% What is the justification? 01:03:59.630 --> 01:04:02.430 align:middle line:84% Was it [? challenging, ?] like we saw China do it. 01:04:02.430 --> 01:04:06.290 align:middle line:84% I'm European, and so I don't fathom it. 01:04:06.290 --> 01:04:08.860 align:middle line:84% What is the justification [INAUDIBLE]? 01:04:08.860 --> 01:04:10.610 align:middle line:84% JON GRUBER: Look, the Senate and the House 01:04:10.610 --> 01:04:13.730 align:middle line:84% are both bad guys in blocking stuff. 01:04:13.730 --> 01:04:16.745 align:middle line:84% But basically, it's just political calculus. 01:04:16.745 --> 01:04:18.370 align:middle line:84% And we'll talk about this in chapter 9. 01:04:18.370 --> 01:04:20.578 align:middle line:84% Like I said, it's unfortunate that politics underlies 01:04:20.578 --> 01:04:22.495 align:middle line:84% everything we do this semester, but only spend 01:04:22.495 --> 01:04:23.490 align:middle line:90% one lecture on it. 01:04:23.490 --> 01:04:26.230 align:middle line:84% But really, just the view in the Senate 01:04:26.230 --> 01:04:32.210 align:middle line:84% was that politicians felt they'd lose their jobs. 01:04:32.210 --> 01:04:34.445 align:middle line:84% When I was on the flight to Kyoto, 01:04:34.445 --> 01:04:35.570 align:middle line:90% one of the most fun parts-- 01:04:35.570 --> 01:04:36.790 align:middle line:84% I spent about three hours chatting 01:04:36.790 --> 01:04:37.930 align:middle line:90% with a guy named Tom Foley. 01:04:37.930 --> 01:04:39.783 align:middle line:84% He was the former Speaker of the House. 01:04:39.783 --> 01:04:42.450 align:middle line:84% And it was a great conversation and I felt comfortable with him. 01:04:42.450 --> 01:04:45.248 align:middle line:84% And I said, look, I loved what you did as a Democrat. 01:04:45.248 --> 01:04:46.790 align:middle line:84% I loved what you did, except I really 01:04:46.790 --> 01:04:48.570 align:middle line:84% was upset you weren't strong on gun control. 01:04:48.570 --> 01:04:50.570 align:middle line:84% I mean, gun control is the most important issues 01:04:50.570 --> 01:04:52.790 align:middle line:84% in this country, and you would always oppose it. 01:04:52.790 --> 01:04:54.390 align:middle line:84% And he said, look, I'm from a district 01:04:54.390 --> 01:04:56.510 align:middle line:90% in rural eastern Washington. 01:04:56.510 --> 01:04:58.117 align:middle line:84% He said, my district cares about guns. 01:04:58.117 --> 01:05:00.450 align:middle line:84% It's one of the number one voting issues in my district. 01:05:00.450 --> 01:05:02.510 align:middle line:84% He said, if I ran a company that did 01:05:02.510 --> 01:05:04.505 align:middle line:84% a bunch of good stuff and one bad thing, 01:05:04.505 --> 01:05:06.630 align:middle line:84% and fixing the bad thing would drive my company out 01:05:06.630 --> 01:05:11.002 align:middle line:84% of business, would you say I'm morally obligated to do that? 01:05:11.002 --> 01:05:13.210 align:middle line:84% And he said, I voted for gun control once in my life, 01:05:13.210 --> 01:05:14.050 align:middle line:90% and I lost my job. 01:05:14.050 --> 01:05:15.467 align:middle line:84% And I was replaced by a Republican 01:05:15.467 --> 01:05:17.817 align:middle line:90% who does a lot of bad things. 01:05:17.817 --> 01:05:19.650 align:middle line:84% Politicians are always making this trade-off 01:05:19.650 --> 01:05:21.207 align:middle line:84% of the many things they could do. 01:05:21.207 --> 01:05:23.290 align:middle line:84% And some politicians who care about global warming 01:05:23.290 --> 01:05:25.350 align:middle line:84% may have decided, well, if I vote for this, I'll lose my job. 01:05:25.350 --> 01:05:28.050 align:middle line:84% And someone who doesn't care about anything will take it. 01:05:28.050 --> 01:05:30.607 align:middle line:90% So that's the positive spin. 01:05:30.607 --> 01:05:33.190 align:middle line:84% The negative spin is they just want power and have these jobs. 01:05:33.190 --> 01:05:35.490 align:middle line:84% And they'll do anything to hold on to them. 01:05:35.490 --> 01:05:38.890 align:middle line:84% And we'll talk about that in chapter 9. 01:05:38.890 --> 01:05:41.930 align:middle line:90% Other questions about that? 01:05:41.930 --> 01:05:43.570 align:middle line:90% This is a very important area. 01:05:43.570 --> 01:05:46.850 align:middle line:84% And it's very, very significant for your generation 01:05:46.850 --> 01:05:48.130 align:middle line:90% to be taking this on. 01:05:48.130 --> 01:05:50.430 align:middle line:84% OK, let's start with the next section. 01:05:50.430 --> 01:05:52.590 align:middle line:84% We'll do about 10 minutes on the next section, 01:05:52.590 --> 01:05:54.770 align:middle line:90% which is health externalities. 01:05:54.770 --> 01:06:00.543 align:middle line:84% And let's start with probably the easiest health 01:06:00.543 --> 01:06:01.710 align:middle line:90% externality to think about-- 01:06:01.710 --> 01:06:05.210 align:middle line:84% I'll explain why next time, which is cigarette smoking. 01:06:05.210 --> 01:06:09.610 align:middle line:84% Now, you guys don't think a lot about cigarette smoking 01:06:09.610 --> 01:06:11.050 align:middle line:84% because basically, not many folks 01:06:11.050 --> 01:06:13.910 align:middle line:90% in your social circle smoke. 01:06:13.910 --> 01:06:16.750 align:middle line:84% But there's actually still quite a lot of smokers in the US. 01:06:16.750 --> 01:06:21.830 align:middle line:84% So if you look at figure 6-4, almost half of all Americans 01:06:21.830 --> 01:06:26.510 align:middle line:90% smoked in 1955. 01:06:26.510 --> 01:06:28.070 align:middle line:90% Today, it's down. 01:06:28.070 --> 01:06:30.990 align:middle line:84% About 15% of Americans smoke now. 01:06:30.990 --> 01:06:32.290 align:middle line:90% Now, 15% is still a lot. 01:06:32.290 --> 01:06:34.180 align:middle line:84% You might say, 15%, that's 1 in 6. 01:06:34.180 --> 01:06:36.430 align:middle line:84% You might look around and say, look, one in six people 01:06:36.430 --> 01:06:37.710 align:middle line:90% I know don't smoke. 01:06:37.710 --> 01:06:39.790 align:middle line:90% How come 15% of Americans smoke? 01:06:39.790 --> 01:06:42.270 align:middle line:90% The answer is fascinating. 01:06:42.270 --> 01:06:45.190 align:middle line:84% One of the reasons it fell was education. 01:06:45.190 --> 01:06:48.370 align:middle line:84% We started learning that smoking is bad for you. 01:06:48.370 --> 01:06:50.830 align:middle line:84% My wife bought me great at a garage sale a sign from 01:06:50.830 --> 01:06:53.870 align:middle line:84% the 1940s of a doctor saying, smoke Chesterfields they're good 01:06:53.870 --> 01:06:54.570 align:middle line:90% for you. 01:06:54.570 --> 01:06:56.910 align:middle line:84% I mean, we started realizing in the 1950s, 01:06:56.910 --> 01:06:58.830 align:middle line:90% smoking was bad for you. 01:06:58.830 --> 01:07:03.370 align:middle line:84% So before 1955, smoking rates were about 45% in the US. 01:07:03.370 --> 01:07:04.450 align:middle line:90% And they were everyone. 01:07:04.450 --> 01:07:06.710 align:middle line:90% 45% of everyone smoked. 01:07:06.710 --> 01:07:08.910 align:middle line:84% Starting in '55, smoking dropped, but mostly 01:07:08.910 --> 01:07:11.110 align:middle line:84% among the most educated because they 01:07:11.110 --> 01:07:14.570 align:middle line:84% were the ones that could effectively absorb and use 01:07:14.570 --> 01:07:15.685 align:middle line:90% the information. 01:07:15.685 --> 01:07:17.810 align:middle line:84% So in fact, smoking rates against the most educated 01:07:17.810 --> 01:07:19.970 align:middle line:84% are down to close are very, very low. 01:07:19.970 --> 01:07:21.663 align:middle line:84% So that's the folks you hang out with. 01:07:21.663 --> 01:07:23.330 align:middle line:84% Smoking rates among less educated people 01:07:23.330 --> 01:07:26.390 align:middle line:84% are still much higher because of various things. 01:07:26.390 --> 01:07:28.890 align:middle line:84% But one could be the information has just not been processed 01:07:28.890 --> 01:07:30.530 align:middle line:90% appropriately or fully. 01:07:30.530 --> 01:07:33.150 align:middle line:84% So that's why 15% may seem high to you, 01:07:33.150 --> 01:07:34.770 align:middle line:90% but it's a true national number. 01:07:34.770 --> 01:07:36.690 align:middle line:90% It's still a lot of smoking. 01:07:36.690 --> 01:07:40.650 align:middle line:90% Smoking is a huge problem. 01:07:40.650 --> 01:07:43.770 align:middle line:84% Smoking causes 480,000 deaths each year. 01:07:43.770 --> 01:07:44.270 align:middle line:90% I'm sorry. 01:07:44.270 --> 01:07:44.890 align:middle line:90% Go ahead, question. 01:07:44.890 --> 01:07:47.473 align:middle line:84% AUDIENCE: [INAUDIBLE] [? how ?] did they [? define ?] smoking? 01:07:47.473 --> 01:07:51.330 align:middle line:84% JON GRUBER: This is smoked within the last month. 01:07:51.330 --> 01:07:53.750 align:middle line:84% Smoking causes 480,000 deaths each year. 01:07:53.750 --> 01:07:56.402 align:middle line:84% That's more than HIV, illegal drug use, alcohol use, 01:07:56.402 --> 01:07:58.610 align:middle line:84% motor vehicle injuries, and firearm-related incidents 01:07:58.610 --> 01:08:00.890 align:middle line:90% combined. 01:08:00.890 --> 01:08:03.010 align:middle line:84% More than 10 times as many US citizens 01:08:03.010 --> 01:08:04.810 align:middle line:84% have died prematurely from smoking 01:08:04.810 --> 01:08:08.290 align:middle line:84% than have died in all the wars fought by the US. 01:08:08.290 --> 01:08:10.380 align:middle line:90% Worldwide, it's even worse. 01:08:10.380 --> 01:08:12.700 align:middle line:84% There are 1.3 billion smokers alive today, 01:08:12.700 --> 01:08:15.340 align:middle line:84% and half will die of smoking-related diseases. 01:08:15.340 --> 01:08:18.312 align:middle line:84% Over 8 million people die every year 01:08:18.312 --> 01:08:19.520 align:middle line:90% from smoking-related disease. 01:08:19.520 --> 01:08:23.979 align:middle line:84% And soon, it will be the leading cause of death in the world. 01:08:23.979 --> 01:08:25.300 align:middle line:90% Now, that's bad. 01:08:25.300 --> 01:08:27.420 align:middle line:90% I think we can agree on that. 01:08:27.420 --> 01:08:30.779 align:middle line:84% Does that mean the government should be involved? 01:08:30.779 --> 01:08:34.620 align:middle line:84% And the answer is not necessarily. 01:08:34.620 --> 01:08:38.580 align:middle line:84% Remember, smoking is a private decision where people 01:08:38.580 --> 01:08:40.620 align:middle line:90% weigh costs and benefits. 01:08:40.620 --> 01:08:43.779 align:middle line:84% And unless there are externalities, 01:08:43.779 --> 01:08:47.300 align:middle line:84% there is no argument for the government being involved. 01:08:47.300 --> 01:08:52.220 align:middle line:84% If I am someone who smokes and I sit 01:08:52.220 --> 01:08:55.692 align:middle line:84% on a rock in the middle of nowhere, 01:08:55.692 --> 01:08:57.859 align:middle line:84% and never get medical care and never talk to anybody 01:08:57.859 --> 01:09:01.100 align:middle line:84% and no one cares about me, then why 01:09:01.100 --> 01:09:05.100 align:middle line:84% shouldn't I get to decide how much I smoke? 01:09:05.100 --> 01:09:10.120 align:middle line:84% So the only real argument in traditional economics 01:09:10.120 --> 01:09:16.479 align:middle line:84% for regulating smoking is the externalities caused by smoking. 01:09:16.479 --> 01:09:20.319 align:middle line:84% Now you might say, well, wait a second, Jon. 01:09:20.319 --> 01:09:22.600 align:middle line:90% Smoking is addictive. 01:09:22.600 --> 01:09:25.040 align:middle line:84% So isn't that a cause to regulate smoking? 01:09:25.040 --> 01:09:26.760 align:middle line:90% And the answer is no. 01:09:26.760 --> 01:09:30.060 align:middle line:84% Why does the fact, absent externalities, 01:09:30.060 --> 01:09:33.040 align:middle line:84% why is even addictiveness not enough for the government 01:09:33.040 --> 01:09:34.633 align:middle line:90% to regulate smoking? 01:09:34.633 --> 01:09:36.133 align:middle line:84% Think like a Chicago economist based 01:09:36.133 --> 01:09:38.640 align:middle line:84% on an article written by the Nobel Prize-winning economist 01:09:38.640 --> 01:09:42.380 align:middle line:90% Gary Becker in 1988. 01:09:42.380 --> 01:09:42.880 align:middle line:90% Why? 01:09:42.880 --> 01:09:45.792 align:middle line:90% AUDIENCE: [INAUDIBLE]. 01:09:45.792 --> 01:09:46.500 align:middle line:90% JON GRUBER: Yeah. 01:09:46.500 --> 01:09:49.890 align:middle line:84% So if you're rational, homo economicus, you say, well, look, 01:09:49.890 --> 01:09:51.640 align:middle line:84% smoking this cigarette is going to cost me 01:09:51.640 --> 01:09:53.520 align:middle line:90% whatever it costs-- $4 a pack. 01:09:53.520 --> 01:09:56.840 align:middle line:84% Plus, by smoking this, I understand 01:09:56.840 --> 01:09:59.040 align:middle line:84% I'm going to buy more packs in the future. 01:09:59.040 --> 01:10:02.640 align:middle line:84% So when I compute the cost, I compute the full cost 01:10:02.640 --> 01:10:05.640 align:middle line:84% to me, which is the effect on my health 01:10:05.640 --> 01:10:08.160 align:middle line:84% and the long-run cost to me of this additional cigarette. 01:10:08.160 --> 01:10:10.180 align:middle line:84% I understand that each additional cigarette, there's 01:10:10.180 --> 01:10:11.638 align:middle line:84% an extra marginal cost, which makes 01:10:11.638 --> 01:10:13.900 align:middle line:90% me smoke more in the future. 01:10:13.900 --> 01:10:18.700 align:middle line:84% As long as I understand that, no problemo. 01:10:18.700 --> 01:10:21.260 align:middle line:84% So the fact that smoking is addictive-- this 01:10:21.260 --> 01:10:22.300 align:middle line:90% is very important. 01:10:22.300 --> 01:10:24.340 align:middle line:84% It's very important to understand 01:10:24.340 --> 01:10:26.020 align:middle line:90% the basic economic case. 01:10:26.020 --> 01:10:29.700 align:middle line:84% The fact that smoking is addictive is not per se a reason 01:10:29.700 --> 01:10:34.060 align:middle line:84% to regulate it above and beyond its externalities. 01:10:34.060 --> 01:10:38.820 align:middle line:84% So the main reason a standard economic model to regulate 01:10:38.820 --> 01:10:42.180 align:middle line:90% smoking is externalities. 01:10:42.180 --> 01:10:46.540 align:middle line:90% So what are those externalities? 01:10:46.540 --> 01:10:48.300 align:middle line:90% Let's start talking about them. 01:10:48.300 --> 01:10:54.060 align:middle line:90% If you look at table 6-1. 01:10:54.060 --> 01:10:56.660 align:middle line:90% Let's talk about externalities. 01:10:56.660 --> 01:10:58.980 align:middle line:84% Let's start with increased health care costs. 01:10:58.980 --> 01:11:01.180 align:middle line:84% By one estimate, cigarette-related disease 01:11:01.180 --> 01:11:05.800 align:middle line:84% increases US medical costs by $176 billion a year, about 8% 01:11:05.800 --> 01:11:07.040 align:middle line:90% of total medical spending. 01:11:07.040 --> 01:11:08.360 align:middle line:90% That's big. 01:11:08.360 --> 01:11:10.080 align:middle line:90% That's a lot of money. 01:11:10.080 --> 01:11:16.020 align:middle line:84% So you might say, look, $176 billion, that's an externality. 01:11:16.020 --> 01:11:19.360 align:middle line:84% So cigarette taxes should be set to bear that externality. 01:11:19.360 --> 01:11:21.400 align:middle line:84% Why would that not necessarily be right? 01:11:21.400 --> 01:11:22.580 align:middle line:84% I shouldn't have you look at the handout. 01:11:22.580 --> 01:11:23.663 align:middle line:90% Don't look at the handout. 01:11:23.663 --> 01:11:26.780 align:middle line:84% Why would that necessarily be right? 01:11:26.780 --> 01:11:27.280 align:middle line:90% Yeah. 01:11:27.280 --> 01:11:29.280 align:middle line:84% AUDIENCE: [INAUDIBLE] [? if ?] the smokers [? are ?] the ones 01:11:29.280 --> 01:11:30.100 align:middle line:90% [INAUDIBLE] [? that ?] cost. 01:11:30.100 --> 01:11:31.142 align:middle line:90% JON GRUBER: Yes, exactly. 01:11:31.142 --> 01:11:33.840 align:middle line:84% Remember, the externality definition has two parts. 01:11:33.840 --> 01:11:35.880 align:middle line:84% Your actions affect someone else and you 01:11:35.880 --> 01:11:38.280 align:middle line:90% don't bear the consequences. 01:11:38.280 --> 01:11:41.160 align:middle line:84% So imagine the way all health insurance worked 01:11:41.160 --> 01:11:44.880 align:middle line:84% is that everybody bought health insurance for themselves 01:11:44.880 --> 01:11:49.160 align:middle line:84% and the price included the damage done by smoking. 01:11:49.160 --> 01:11:53.120 align:middle line:84% In that world, there'd be no externality. 01:11:53.120 --> 01:11:57.320 align:middle line:84% Basically, I would internalize the externality 01:11:57.320 --> 01:12:00.260 align:middle line:84% because I would bear the extra cost my smoking does. 01:12:00.260 --> 01:12:00.760 align:middle line:90% Yeah. 01:12:00.760 --> 01:12:02.480 align:middle line:84% AUDIENCE: [? In ?] that example, would there 01:12:02.480 --> 01:12:04.420 align:middle line:84% be an externality [INAUDIBLE] the insurance company 01:12:04.420 --> 01:12:04.640 align:middle line:90% [INAUDIBLE]? 01:12:04.640 --> 01:12:06.760 align:middle line:84% JON GRUBER: No, there's no external insurance company. 01:12:06.760 --> 01:12:08.343 align:middle line:84% The insurance company says, look, I've 01:12:08.343 --> 01:12:10.760 align:middle line:84% computed for you at your age and your background, 01:12:10.760 --> 01:12:13.760 align:middle line:84% this is how much your smoking is going to cost us. 01:12:13.760 --> 01:12:14.920 align:middle line:90% Now, there's a subtlety. 01:12:14.920 --> 01:12:17.128 align:middle line:84% There's a little bit of externality because remember, 01:12:17.128 --> 01:12:18.900 align:middle line:90% we don't buy lifetime insurance. 01:12:18.900 --> 01:12:21.940 align:middle line:84% The problem is, the externality might be on another insurer. 01:12:21.940 --> 01:12:23.120 align:middle line:90% So there is an externality. 01:12:23.120 --> 01:12:24.453 align:middle line:90% There is an externality insurer. 01:12:24.453 --> 01:12:26.400 align:middle line:84% There's a clever point-- externality insurers, 01:12:26.400 --> 01:12:27.500 align:middle line:84% because the insurer you have today 01:12:27.500 --> 01:12:28.960 align:middle line:84% won't be the insurer when you're old. 01:12:28.960 --> 01:12:30.960 align:middle line:84% And then when you're old, it's going to bear the medical costs. 01:12:30.960 --> 01:12:32.080 align:middle line:90% So there's that externality. 01:12:32.080 --> 01:12:33.205 align:middle line:90% But let's leave that aside. 01:12:33.205 --> 01:12:35.260 align:middle line:84% Let's imagine lifetime insurance, 01:12:35.260 --> 01:12:37.740 align:middle line:84% every individual buys on their own. 01:12:37.740 --> 01:12:39.560 align:middle line:84% It's in the premiums, no externalities. 01:12:39.560 --> 01:12:41.460 align:middle line:90% It's very important. 01:12:41.460 --> 01:12:44.202 align:middle line:84% Reality, of course, deviates from that in a number of ways. 01:12:44.202 --> 01:12:45.660 align:middle line:84% The first way it deviates is people 01:12:45.660 --> 01:12:47.700 align:middle line:90% largely buy group insurance. 01:12:47.700 --> 01:12:50.300 align:middle line:84% So the cost of my health insurance 01:12:50.300 --> 01:12:53.820 align:middle line:84% is based on the health of the pool of MIT employees. 01:12:53.820 --> 01:12:56.460 align:middle line:84% An MIT employee smokes, my premiums 01:12:56.460 --> 01:13:02.020 align:middle line:84% go up because the cost of the pool of MIT. 01:13:02.020 --> 01:13:05.240 align:middle line:84% Now that wouldn't be true if MIT could charge 01:13:05.240 --> 01:13:07.800 align:middle line:90% the smoker for insurance more. 01:13:07.800 --> 01:13:10.180 align:middle line:84% Before the Affordable Care Act, that was illegal. 01:13:10.180 --> 01:13:11.680 align:middle line:84% But the Affordable Care Act actually 01:13:11.680 --> 01:13:17.440 align:middle line:84% made it legal to base insurance premiums on smoking status. 01:13:17.440 --> 01:13:19.130 align:middle line:84% So that helps solve that problem. 01:13:19.130 --> 01:13:20.880 align:middle line:84% But there's also the fact that many people 01:13:20.880 --> 01:13:22.140 align:middle line:90% don't buy their insurance. 01:13:22.140 --> 01:13:24.720 align:middle line:84% For example, if you're on public insurance, Medicare 01:13:24.720 --> 01:13:28.140 align:middle line:84% or Medicaid-- we'll talk a lot about those this semester, 01:13:28.140 --> 01:13:30.360 align:middle line:84% that's just paid for by the taxpayer by your past tax 01:13:30.360 --> 01:13:31.320 align:middle line:90% payments. 01:13:31.320 --> 01:13:32.380 align:middle line:90% You're not paying. 01:13:32.380 --> 01:13:35.160 align:middle line:84% There's no way to charge you more if you're a smoker. 01:13:35.160 --> 01:13:39.160 align:middle line:84% If you are uninsured, and you go to the hospital 01:13:39.160 --> 01:13:40.660 align:middle line:84% and get free care from the hospital, 01:13:40.660 --> 01:13:42.960 align:middle line:84% we're not going to charge you more if you're a smoker. 01:13:42.960 --> 01:13:46.320 align:middle line:84% So there is an externality from smoking, 01:13:46.320 --> 01:13:48.300 align:middle line:84% from the medical costs of smoking. 01:13:48.300 --> 01:13:50.240 align:middle line:84% But remember, that externality only 01:13:50.240 --> 01:13:54.320 align:middle line:84% exists in the world where people don't internalize those costs. 01:13:54.320 --> 01:13:56.360 align:middle line:90% OK, I'm going to stop here. 01:13:56.360 --> 01:13:57.910 align:middle line:90% Thanks. 01:13:57.910 --> 01:14:02.000 align:middle line:90%