Chapter 17 : Environment Economics Flashcards
What is an externality?
Something produced (good or bad) when producing a product.
What happens when there are negative externalities in terms of types of marginal costs?
Social marginal cost >private marginal cost
What is pollution qualified as?
A negative externality
How is the marginal external cost calculated?
MEC = MCs - MCp
By producing where price = MC and ignoring the externality, firms are producing ________.
Too much output.
What does the price that the consumer pays cover?
The private marginal cost, but it does not pay for the external damages.
What is the allocatively efficient level of output?
Where social marginal benefit = social marginal cost. (Q*)
What does it mean to “internalize the externality”?
To make polluting firms bear the entire social cost of their production (including the externalities)
Is the optimal amount of pollution 0?
No. Then, the marginal cost of abatement exceeds the marginal benefit of abatement.
When does the optimal amount of pollution abatement occur?
When marginal social benefit = marginal social cost. (Q*)
What is the form of environmental regulation that is used the most often in Canada and in the US?
Direct regulatory control.
It is inefficient.
Why is direct regulatory control inefficient?
Because the marginal cost of reducing pollution is not the same across all firms. In this graph, firm A has a lower cost of abatement than firm B.
What are 2 efficient forms of environmental regulations on pollution?
Emission taxes and tradable pollution permits
Since a firm saves t dollars for each unit of pollution it does not produce, t = ?
t = firm’s marginal benefit from pollution abatement
2 advantages of emissions taxes
- Forces firms to internalize the externality : efficient.
- No knowledge required about firm’s technologies (regulators do not specify how polluters should abate pollution)
How do tradable pollution permits work?
- The government mandates a limit on the total amount of pollution allowed
- Government distributes permits to firms allowing them to emit a specific amount of pollution, which can be traded in a free market.
Here, which firm can abate more?
Firm A can abate more, from Q* to A
Firm B can abate less, from Q* to B
What do governments need to decide in the 2 efficient environmental regulation strategies?
Cap and trade : total amount of permits
Emission tax : tax rate
In economic growth, is there a higher or lower permit price?
Higher, because the demand increases due to new firms in polluting industries.
What is a problem with the cap-and -trade system?
The idea that the government is condoning the “crime” of polluting the environment.
What are 5 effects of global climate change?
- Melting glaciers /loss of fresh water
- Rising sea levels
- Reduction in biodiversity
- Reduced crop fields
- Intense and volatile weather patterns
Role of the UN in the global climate crisis
UN sponsored a set of international conferences, starting in the 1990s.
These conferences resulted in formal international agreements in which countries pledged to reduce their greenhouse gas emissions.
Which agreement was important in the UN process?
The 2015 Paris agreement
True or False? Canada has experienced significant increases in their annual emissions.
True.
On the other hand, France, Sweden and the UK have decreased their emissions and saw economic growth.
What is the identity equation for greenhouse gas?
GHG = (GHG /energy) x (energy / GDP) x GDP
What are 3 approaches to reducing GHG emissions?
- Reducing global GDP
- Reducing the energy intensity of GDP
- Reducing the GHG intensity of energy
What must any coherent and effective climate policy do?
- Place a price on GHG emission such as an emission tax or a cap-and-trade system.
- Provide strong public support for technological development.
