1. What does economic analysis have to contribute to the understanding of the environment?
   Economists agree that perfectly competitive markets are usually economically efficient: they produce the right amount of output and allocate the right amount of resources to alternative uses. Market failure is the failure of the market system to make economically efficient decisions. In the real world, resource markets sometimes fail to produce the economically efficient output or fail to allocate resources efficiently because of externalities and/or poorly defined property rights.
   
   When a negative externality occurs, all the cost of an individual's actions are not borne directly by that individual. Instead, third parties bear some of the cost. This situation creates a market problem because the price of the good does not reflect all the costs of producing it, so too many units will be produced. Air pollution is an example of a negative externality. Those who pollute do not bear all the costs of pollution.
   
   A positive externality occurs when someone other than the buyer or seller reaps benefits from the production or consumption of a good or service. The price does not reflect all the benefits received by the third party, so too little is produced. A vaccination is an example of a good which involves positive externalities. The vaccinated person who does not get the disease benefits, but so do all the people who now cannot catch the disease from the vaccinated person. If the environmental problem is caused by externalities, the government must step in to reduce the externality—by making those who benefit from a good or service bear the costs they now avoid.
   
   There are two types of natural resources. Nonrenewable natural resources, like oil and natural gas, can be used only once and cannot be replaced. Renewable resources, like trees and animals, can replenish themselves.
   
   Since the amount of a nonrenewable resource is fixed, the more that is used in the present, the less that is available in the future. As the price for the resource increases, more is extracted now, leaving less for the future. As more is extracted, the supply for the future decreases, because costs increase as producers must extract resources from less and less accessible places. Since the price of the resource will likely be higher in the future, the resource owner must decide whether to extract the resource today or save it for the future. The supply and demand for nonrenewable resources limit the rate at which the nonrenewable resources are consumed.
   
   Renewable resources are not fixed in quantity; however, they cannot be consumed too rapidly, or they won't be able to reproduce themselves. The role of the market for renewable resources is to determine a price at which the quantity of the resource used is just sufficient to enable the resource to renew itself at a rate that best satisfies society's wants.
   
   Who decides the rate at which natural resources should be used? Normally, the owner of the resource decides, but some resources do not have owners. If the environmental problem is a lack of clearly defined property rights, the government can assign property rights. This is very difficult to do with global environmental problems. Nobody owns the air that blows from the United States into Canada. If U.S. power plant emissions cause acid rain in Canada, there is no market or government mechanism that allows the Canadians to restrict the behavior of U.S. firms, unless the Canadian government can convince the U.S. government to intervene. Solving global pollution problems requires governments to cooperate, sometimes in ways that aren't beneficial to their own interests.
   
   
2. Does the War on Drugs make economic sense?
   The government's objective is to reduce the use of drugs and the crime associated with drug use. However, current measures concentrate on reducing the supply of drugs by increasing the costs. This policy reduces the number of suppliers and increases the barriers to entry, thereby ensuring that the remaining suppliers control the market and earn positive economic profits.
   
   Instead of focusing on reducing the supply, it might be more effective to focus on decreasing demand. The demand for illegal drugs by hard core addicts is very price inelastic, while the demand for illegal drugs by experimental users is price elastic. Any policy designed to decrease drug use must take both types of markets into account.
   
   
3. Does discrimination make economic sense?
   Discrimination is the practice of treating people differently based on a characteristic having nothing to do with that market. In the labor market, discrimination occurs when some factor not related to the individual's value to the firm affects the wage rate someone receives.
   
   In a freely functioning labor market, discrimination should not exist; there is a profit to be made in not discriminating. Of course, discrimination does exist. One source of labor market discrimination is employers' personal prejudice. Hiring people on the basis of personal prejudice adds to employers' costs and is not compatible with free markets. A second source, statistical discrimination, is a way of dealing with a lack of information: employers wrongly perceive that all members of a group have characteristics that make them less productive.
   
   
4. Does a minimum wage make economic sense?
   A minimum wage is a government-imposed price floor defining the least that someone can be paid. A minimum wage creates unemployment among those who have the least value to a firm, namely teenagers and low-skilled workers. It also adversely affects firms who must now hire fewer workers and pay them more.
   
   
5. Why are incomes not equally distributed?
   In a market system, income is derived from the ownership of resources: people with more resources, or with more highly valued resources, receive higher incomes. Doctors are more highly paid than ditch diggers; people who have accumulated lots of capital receive more interest than people without any savings. In the United States, the top 20 percent of the population earns over 44 percent of the total national income, and the bottom 20 percent of the population earns less than 5 percent of the national income.
   
   A Lorenz curve shows the degree to which income is distributed equally (or unequally) within a society. If all incomes are the same, the Lorenz curve is a straight line; the more unequally distributed incomes are, the more bowed the Lorenz curve becomes. Lorenz curves provide an easy way to compare income distributions across countries or within the same country at different times.
   
   
6. What does it mean to be in poverty?
   Poverty can be measured in two ways. Lorenz curves look at poverty in relative terms: What share of the national income do the poorest people get? Poverty also can be looked at in absolute terms: What per capita income is necessary to meet basic human needs? The official U.S. poverty statistics gathered by the federal government use an absolute standard to set the minimum income level ($18,811 in 2003) that avoids poverty, based on the cost of a nutritionally adequate diet.
   
   The incidence of poverty is distributed unevenly across groups within the United States. Age is one factor here. Younger and older people make up most of the poverty group. The percentage of families headed by a female that are below the poverty line is much higher than that of families headed by a male; black and Hispanic families have larger percentages below the poverty line than do white families.