Question 10.6

1. Trees planted in urban areas improve air quality and lower summer temperatures.

   Planting trees generates an external benefit: the marginal social benefit of planting trees is higher than the marginal benefit to individual tree planters, since many people (not just those who plant the trees) can benefit from the increased air quality and lower summer temperatures. A Pigouvian subsidy could be placed on each tree planted in urban areas in order to increase the marginal benefit to individual tree planters to the same level as the marginal social benefit.

2. Water-saving toilets reduce the need to pump water from rivers and aquifers. The cost of a gallon of water to homeowners is virtually zero.

   Water-saving toilets impose an external benefit: the marginal benefit to individual homeowners from replacing a traditional toilet with a water-saving toilet is zero, since water is virtually costless. But the marginal social benefit is large, since fewer rivers and aquifers need to be pumped. A Pigouvian subsidy on installing water-saving toilets could bring the marginal benefit to individual homeowners in line with the marginal social benefit.

3. Old computer monitors contain toxic materials that pollute the environment when improperly disposed of.

   Disposing of old computer monitors imposes an external cost: the marginal cost to those disposing of old computer monitors is lower than the marginal social cost, since environmental pollution is borne by people other than the person disposing of the monitor. The difference between the marginal social cost and the marginal cost to those disposing of old computer monitors is the marginal external cost. A Pigouvian tax on disposing of computer monitors, or a system of tradable permits for their disposal, could raise the marginal cost to those disposing of old computer monitors sufficiently to make it equal to the marginal social cost.