Chapter 4 Flashcards
First welfare theorem?
a competitive equilibrium is pareto optimum.
Pareto Optimum?
if there’s no additional exchange that satisfies all parties involved.
Exception to pareto optimum?
presence of externalities makes intervention welfare improving
Economically efficient allocation?
not possible to make one or more persons better off without negatively affecting another.
Externality?
actions of one agent have an unintentional positive/negative impact on another.
Conditions for efficient outcome in competitive equilibrium?
- Markets for all goods and services produced
- No externalities
- All markets perfect comp
- Perfect information
- Property rights fully assigned
- No public goods
- All agents are maximisers
Pigou approach?
When MSC doesn’t = MPC, charge a Pigouvian tax equal to the difference.
(polluter pays -> externality internalized)
Coase approach?
grant property rights to one party and one compensating the other.
Issues with Coase?
Marginal analysis doesn’t always lead to right conclusion.
May not be equitable
Assumes low transaction costs, doesn’t hold if many actors involved.
Command & control?
prescribes aspects of the production process. Inputs, production or outputs.
Issues with command & control?
Requires substantial knowledge by regulator.
Requires relatively homogenous products.
Market based policy instruments?
imposing price on goods = the marginal cost of their use.
Strengths of economic instruments?
Cover costs of environmental damage
Provide incentive
Raise revenue
investment in alternatives
Weaknesses of market based policy instruments?
Uncertainty in damage & abatement costs means hard to set price.
Asymmetric information.
Distributional inequity.
Taxes?
charge for every unit consumed, produced or emitted.
Subsidy?
receive a premium for every unit not consumed, produced or emitted.
Taxes & subsidies have same…
effects in the SR, but different distributional effects (transfers)
In the long run taxes…
increase cost of doing business, reducing investment, shrinking sector.
In long run subsidies…
reduce cost of doing business, increasing investment, expanding industry.
If permit market is perfect…
All producers pay same price, MC’s of production increase uniformly
Taxes & tradeable permits are equivalent provided…
regulator knows all marginal abatement costs.
Grandfathering?
Permits given to current emitters
- politically easy
- starts without price
Auctioning?
sell permits to highest bidder.
- generates revenue
- cap & trade like a tax, except price variable
Coase theorem?
separates efficiency & equity.
regardless of initial allocation, market will find the same allocation.
Coase initial allocation?
who pays what
Coase final allocation?
who does what
Least cost emissions reduction requires…
all emitters face same marginal abatement costs. MBI = costs effective
C&C is if full knowledge.
environmental effects of taxes & subsidies are…
uncertain, but MC is certain
environmental effects of tradeable permits are
certain, but costs are uncertain
If MD curve is LESS STEEP than marginal abatement cost curve…
mistakes with price instruments less costly than mistakes with quantity instruments.
If MD curve is STEEPER than marginal abatement cost curve…
mistakes with quantity instruments less costly than mistakes with price instruments.
If MD curve is flat…
taxes preferred over tradeable permits
Problems with initial EU ETS?
Allocation of permits
- Grandfathering rewards inefficiency
- Over allocation = price drop to 0
Electronic registry’s hacked
Monitoring & enforcement
Carbon leakage in some sectors
Phase III features
Single Eu wide cap
Auctioning instead of grandfathering (40%)
Harmonized allocation rules
Phase IV features
cap reduces by 2.2% p/year
57% allowances auctioned
Innovation & modernization funds
Member states with GDP<60% EU average may continue grandfathering.
ETS 2 features
Includes buildings, road transfers & additional sectors
Upstream ETS: suppliers
42% reduction by 2030
All allowances auctioned
revenue used to support vulnerables
Can permit markets be coupled?
Requires mutual regulation
Heterogeneity in permits, monitoring & enforcement
Don’t fall under WTO so regulated at will.
Still reluctant to accept others permits.
CDM
Allows rich countries to invest in emissions reduction in poor countries.
Not Certified Emission Reduction Credits
(HFC23)
R&D risky because…
Knowledge can be copied
knowledge production is uncertain
Future market uncertain
Redirects investment
