3. Efficiency and market failures Flashcards
Define a point of efficiency?
Where the total surplus is maximised (and the deadweight loss is minimised)
Why do peoples choices create environmental problems?
- Due to peoples values
- Due to peoples information
- Due to externalities, open-access resources and public goods
What are the solutions to environmental problems?
- Trade-offs
- Efficiency and distributional consequences
What is a potential Pareto improvement?
Where the winners can in theory compensate the losers by at least enough to make them indifferent
Where is an outcome efficient in Pareto terms?
An outcome is efficient if all potential Pareto Improvements have been achieved
Define Pareto efficiency?
Nobody can be made better off without making someone worse off
What is the difference between Pareto efficiency and potential pareto efficiency?
Potential pareto efficiency includes the use of transfars. Pareto efficient outcomes without transfers do not need to maximise total surplus
In environmental economics, what does efficient mean?
A situation of maximum social surplus
Define an efficient policy?
Is one that has the greatest total surplus, this means it achieves its environmental objective at lowest cost
What 4 aspects are needed for ‘well-defined’ property rights?
- Rival
- Excludable
- Transferrable
- Enforceable
What do well-defined property rights facilitate and why?
Efficient outcomes as owners can transfer property rights to those who value it more
What are the two fundamental theories of welfare economics?
- Market equilibrium is Pareto optimal
- Pareto optimum can be achieved by market forces
How does an offset scheme work?
An offset scheme works by saying people have a property right to the atmosphere, the right to clean air. As a polluter, I need to buy the right to pollute. Biodiversity offsets are similar, paying to destroy the forest, I am going to offset this by protecting forests elsewhere.
What assumptions underpin the theorems of welfare economics?
- Complete property rights
- No market power
- Complete information
- No transaction costs
Why is it useful for an economist to add consumer and producer surpluses?
Because we focus on the total benefits, we don’t particularly care where these come from
What is the use of price in markets?
It communicates the marginal benefit of consumption and the marginal cost of production
When does voluntary trade happen?
When MB >_ MC
When do markets fail regarding price?
They fail when prices do not communicate society’s desires and constraints accurately
What are the most common types of market failures in Environmental economics?
- Incomplete markets
- Externalities
- Open access goods
- Public goods
What is an externality?
When the actions of an economic agent directly affects the well-being of consumers or the production-possibilities of firms without any compensation or permission
What does Coase theorem assume?
- Property rights are clear and enforceable
- There is full information
- Transaction costs are low
What does the bargaining price under Coase theorem depend on?
Price depends on relative bargaining powers for compensation.
What does coase theorem state?
With low bargaining costs, property rights can get you efficient outcomes despite externalities, regardless of who owns the right
