Chapter 04: The Efficiency Standard

Question 1

What do proponents of the efficiency standard say?

Answer 1

Proponents: balance costs and benefits - seek to acheive “efficient” pollution level

Question 2

Pareto Efficiency:

Answer 2

> Pareto Efficiency: Situation (point) which impossible make one person better off without making anyone else worse off

Reach point:

• Market work out

Question 3

How does the pareto effect relate to maximizing the economic pie?

Answer 3

• Conditional existing distribution income, efficiency makes economic pie as big as possible
• At efficiency point: net monetary benefit (society as a whole) produced are MAX
• Not need to be fair
  (can be harmful but victims can be compensated)
  
  • Fairness often at the expense of efficiency
  • Fairness subjective and changes

> “Pareto-Improving” policy: one makes all parties better off

Question 4

What relationship does “fairness” play in the maximization of the economic pie?

Answer 4

• Efficiency need not be fair
• One pie larger - maximizes benefit to society as a whole
• By enlarging the pie, at least possible for everyone to receive larger slice in absolute terms

Question 5

How does equity relate to efficiency?

Answer 5

Equity need not be sacrifed when moving from less > outcome

• Ex. using resource rents from restricted fisheries access to compensate fishers who locked out

Changes policy: winners and losers

Question 6

What would be considered “efficient” pollution levels?

Answer 6

• MBp = MC_RP Pollution vs. Pollution Reduction

Any other level of pollution, both parties can be made better off

1. Decreasing pollution OR
2. Compensating polluters

see graph

Question 7

What would would the government need to play in the pollution vs pollution reduction market, assuming to externalities?

Answer 7

• Make sure loosers are compensated
• Determine how reduce pollution

NOT the role of government: get to the equilibrium level of reduction

Question 8

Marginal analysis

In relation to pollution reduction

Answer 8

Focus on reducing pollution one unit at a time

Question 9

Marginal Unit

In relation to pollution reduction

Answer 9

Last unit of pollution reduced

Question 10

Marginal cost

In relation to pollution reduction

Answer 10

Costs of reducing that unit

Question 11

Marginal benefit

in relation to pollution reduction

Answer 11

Benefits of reducing that unit

Question 12

What are the three section of reports?

Answer 12

Discource:

1. Who commisisioned the report
2. Who payed bais

Disclosure important

Politicians Use Political Agenda:

• Control the political adgenda

Parallysis by Analysis:

• Show information and drown in semantics/irrelevent

Show range of numbers rather than 1 specific number (like summaries)

Most poeple only read the abstract

Question 13

What is the marginal cost of clean-up: supply curve?

Answer 13

“Supply curve” for pollution cleanup = MC of reduction curve

Shows increasing costs to society of eliminate additional units of pollution

• Shifts with change in costs (determined by determinants of supply - new technology)

Question 14

What is the marginal cost of clean-up: demand curve?

Answer 14

“Demand curve” for pollution cleanup = MB of reduction curve

• Shifts with changes in tastes, income, price complimentary goods, and population

Question 15

Coase Theorem

Answer 15

> If polluter and victim can bargain easily and effectively, private negotiation arrive at efficient outcome regardless of who has initial right to pollute or prevent pollution

• Cost is low and the pool of benefits is high - parties figureout alone
  Cost negotitation low
• Ronald Coase

Question 16

How can Coase theorem be used to illustrate that MC=MB implies efficiency?

Answer 16

Proof that MC=MB Implies Efficiency:

If the conditions for the Coase Theorem hold, pollution level other than efficient level, one can show both victim and polluter can be make better off by negotiating a change in pollution levels

• Economics do not think free market generates efficient amount pollution
• Would require:
  1. No common property
  2. Perfect info costs/benefits
  3. Zero transaction costs
  4. No free riding

“Markets for pollution” seldom develop naturally.

Therefore, too much pollution efficiency persective

Question 17

What is the polluters pays principle?

Answer 17

“Property rights” matter and who pays who?

Pollutors pay for the right to pollute = more efficient

1. (Alternative) consumers pay the pollutors to not pollute = result free-riding hence inefficient
2. Firms go to countries easiest to pollute
3. Long run, “victim pays” encourages firm entry into polluting markets and increases pollution relative to polluter pays
4. Administratively easier to tax smaller businesses

Question 18

What ethical basis is there for the efficiency standard?

Answer 18

Some economists call efficient outcome “socially optimal”

Misleading: implies efficiency is good

• Efficient outcome balance the costs and benefits of pollution reduction at a level where the net monetary benefits to society are MAX
• Society may ultimately prefer safety or sustainability