EC138 Term 2 Flashcards
3 central questions in environmental economics
If environmental protection is costly, how much should we spend on pollution control? Is it worth reducing pollution to zero, or is there any optimal level of pollution?
In making these decisions, how can we measure the benefits of reducing pollution
What sort of environmental measure should the Government adopt? Should we adopt market-based instruments or command-and-control instruments?
Why does market failure occur with the enviornment?
The environment does not have a market. Does clean air have a market, hold monetary value?
What is a Pareto optimal point?
There is no other point on the diagram that would offer a more efficient point.
What is static efficiency
Maximising the social benefits from the use of resources
Net benefits = total benefits - total costs
MB = MC = q* (in which q* is pareto optimal)
What is dynamic efficiency?
Maximising the present value of net social benefits over time (taking account of the timing of benefits accrued and costs incurred)
Present value of net benefits over time = sum PV in all periods considered
What is the present value?
What something received in the future would be worth today
1st efficiency theorem (welfare theorem)
In a competitive economy, a market equilibrium is Pareto optimal
2nd efficiency theorem
In a competitive economy, any Pareto optimum can be achieved by market forces, provided the resources of the economy are appropriately distributed before the market operates.
Four efficiency theorem assumptions
Atomistic participants (consumers and producers take prices as given)
Symmetric information (consumers and producers know about current and future prices, and know the quality of the good or service being traded)
No transaction costs (costless to attach prices to goods and services traded)
Complete property rights (all costs and benefits are borne by participants)
____ When any of these assumptions are not met -> ‘market failure’
Externality
An externality exists when the consumption or production choices of one person or firm enter the utility or production function of another entity without that entity’s permission or compensation
Negative externality
Imposes external costs on society, e.g. my neighbour blasts Ed Sheeran on repeat, air pollution
Positive externality
Imposes external benefits on society, e.g. my neighbour plants a beautiful flower garden, immunisation
Two different enviornmental externality types
Global externalities
Local externalities (affects people more the closer they are to the activity)
Public goods fundamental characteristics
Non-rival
Non-excludable
Non-rivalrous goods
One agent’s consumption of a unit does not preclude or impinge on another agent’s consumption of that same unit.
Non-excludable goods
Once units are provided to one agent no other agent can be excluded from consuming those same units.
A non-exludable, but rivalrous good
Open-access resources
“Tragedy of the commons” (e.g. collective action problems, fish stock)
An excludable, but non-rivalrous good
Club goods
e.g. gym, swimming pool, car-sharing service, cable TV, private Wi-fi
Two conditions of Tragedy of the commons
Access to the resource must be unrestricted
Diminishing marginal returns
Two key assumptions for the Coase Theorem
Property rights are clearly defined
Transaction costs of bargaining are low
Total GHGs stock equation
Total GHGs stock = Man-made GHGs - Natural Removal GHGs (e.g. ocean, plants)
What happens in the absence of govt policy for negative externalities?
No economic valuation - implicitly assign a value of zero
Private firms impose negative externalities on other members of society and will fail to provide efficient amounts of public goods
Market outcome not efficient: social marginal cost (includes marginal damage (MD) of pollution) > private marginal cost
Firms rationally ignore the MD in the absence of incentives since damage is external (i.e. externality)
Pigou vs Coase theorem
Pigou - Let the polluter pay (i.e. make the polluting party liable for damages)
Coase - Don’t bother (i.e. private bargaining will reach the efficient outcome)
Types of regulation
Information provision (ecolabelling, certification programs, right-to-know laws)
Command-and-control (prescriptive) - Technology standard, emissions (performance) standard
Market (incentive) based - price incentives (e.g. taxes, charges, subsidies, fees) and quantity limits (e.g. cap-and-trade system)
Incentivising the efficient quantity of pollution control - incentivising pollution abatement
Perfect competition
Complete information
MC (abatement supply) = MB (abatement demand)
Incentivising the efficient quantity of pollution control - Abatement demand doesn’t exist
Public good / free-riding -> price for abatement falls to zero
What is the role of Gov then?
What is a cap-and-trade system?
Tradeable allowances effectively convert a nonrival, nonexcludable public good (clean air) into a collection of (excludable) private goods (allowances)
The authorities specify the total level of allowable emissions, it assigns permits (a specific amount of emissions per permit) and then distributes the permits to the parties involved.
They can also sell allowances instead of issuing them for free, raising revenue.
From an economic perspective the revenue could be used to correct distortionary taxes e.g. income tax (Double dividend!)
Two main challenges with carbon targets in the buildings sector
Decarbonising heating and hot water
Energy efficiency ‘win-win’ - Easy installation done (loft and cavity wall insulation), left costly measures (solid wall insulation, solar thermal energy and other forms of renewable resources)
Examples of pricing policies in developing countries
Two-part tariff (CBB) - Energy price reform in China
An example subsidy: Payment for Ecosystem Services - (PES) in Uganda
International environmental pricing policy: pollution offset programs - Clean Development Mechanisms (CDM) in India
Example of regulations in developing countries
1) Air and water regulation in India
2) When regulation fails -> measuring cheating: Vehicle pollution monitoring in Mexico
3) Getting regulation right -> monitoring and enforcement (India)
Reasons why the differences in WTP and WTA are likely large
When there are no close substitutes
Loss aversion: losses could be valued more than equivalent gains
Sureness of preferences: do we know what our preferences are?
Types of values
Use values (Direct - ‘consumptive’ - e.g. fishing, water extracted from irrigation)
Option value (preserving the environment for the future use)
Non-use values (existence and/or intrinsic values/bequest values/altruistic values)
- Passive or Non-consumptive, like preserving the environment we shall never use; existence and/or intrisic value/bequest value/altruistic value; difficult to quantify - estimates typically controversial!
WTP equation
Total Willingness to Pay (WTP) = Use value + option value + non-use value
Intrinsic value
Value independent from human interests
Instrumental value
Dervied from its usefulness in satisfying human wants
Why are benefits (of environmental goods) not easy to quantify?
Many environmental goods and services do not have markets (i.e. prices)
What is an Endowment effect?
Willingness to accept WTA > WTP
The psychological value of something you own > the value of something you do not…Losses loom larger than gains!
VS. substitution effects, type of good/service, context, timing
What is energy intensity measured as?
The amount of energy consumed given a unit of GDP. It is a measure of energy efficiency in a country; the lower the energy intensity, the less energy consumed and the less climate is affected.
What is carbon intensity measured as?
The amount of CO2 emitted per unit of energy. It practically reveals the change in CO2 emissions when a country switches from high-intensity energy sources (oil, coal, lignite) to low-intensity sources (solar energy, hydropower, nuclear).
What is Mitigation?
The process of reducing the sources of GHG emissions or enhancing the “sinks” of GHG (which accumulate GHG: oceans, forests, soil)
Nudge theory
Possible to ‘nudge’ people to decisions that are better for their health/wealth/happiness (paternalistic)
Without restricting their choices (libertarian) simply by changing the framework in which they are made (choice framework)
Incentives, feedback and information
Nudges exploit bahvioural biases to correct human behaviour
An example of a framing effect
If you use energy conservation methods, you will SAVE $350 per year
Energy efficiency labelling
What is transboundary pollution?
Pollution that originates in one country but, by crossing the border through pathways of water or air, is able to cause damage to the environment in another country.
Dimensions of transboundary problems
SPATIAL:
Local: the damage is confined close to the emission source.
Regional: the damage could be far from the emission source e.g. acid rain.
Global: the pollutant can spread globally (CO2) and the problem has a global character (climate change).
TEMPORAL: the stock of the pollutant can spread globally (CO2) and the problem has a global character (climate change).
POLITICAL, SOCIAL, CULTURAL
Things to consider in transboundary problems
UNIFORMITY OF DAMAGES (not all places experience the same damages, not all have same absorptive capacity)
UNIFORMITY OF MIXING (extent to which each unit of emission from different countries contributes to overall pollution potential) - The UK production of SO2 contributes less acid rain in England than in Scandinavia (due to prevailing westerly winds)
Unidirectional externality
One country (or group of countries) is the polluter and another country (or group of countries) is the victim.
Regional reciprocal externality
A group of countries is both the source and victim of the pollution.
Global externality
Some countries (one or a group of countries) is the source of the pollution, and all other countries are affected by the pollution.
Protocol
An agreement that diplomatic negotiators formulate and sign as the basis for a final convention or treaty. The treaty itself may not be completed for many years.
Treaty
An agreement where the parties to it negotiate to reach common ground and avoid further conflict or disagreement. It is normally ratified by the lawmaking authority of the govt whose representative has signed it.
Convention
Begins as an international meeting of representatives from many nations that results in general agreement about procedures or actions, they will take on specific topics.
Examples of International Environmental Agreements (IEAs)?
Agreements like the Montreal Protocol for ozone-depleting substances and the Kyoto Protocol for GHGs.
Numerous problems that could arise when negotiating an IEA
The degree of co-operation: full/partial/no co-operation on the problems?
Co-ordination: plans and resources are unified?
Compliance/Defection
Free-riding (some countries might benefit from an agreement without however paying a price for the agreement)
Enforcement or self-enforcement? What will be legally binding? Will sanctions be on the table?
Basic principles for something like an IEA
Non-discrimination (all parties equal)
Reciprocity (no unilateral action)
Transparency
Reasons why the Montreal protocol (an IEA) was successful?
Abatement costs for CFC gases were low since alternative solutions were available.
Damages from ozone depletion were high and the mitigation costs lower.
The number of countries producing CFCs was relatively small (46 signatories), so potential transaction costs were lower and international co-operation more likely.
The impacts from ozone depletion were expected to be felt rather soon and the burden would not be felt mainly by future generations.
What is a ‘social dilemma’
A situation in which actions taken independently by individuals in pursuit of their own private objectives result in an outcome which is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals.
Common pool resources characteristics
They are non-excludable i.e. individuals cannot be excluded from using the resource.
However, this could cause free-riding.
These resources are rivalrous i.e., one person’s use of the resource, reduces the available amount for the other individuals who use the common property. This implies that the availability of the resource is finite.
Tragedy of the commons with examples
Common resources being used more than is socially desirable (cosnumed at the expense of other individuals and could lead to the depletion of the resource).
It is when private incentives outweigh social incentives.
Land/Land use
Fishing
Forests/Timber
3 general groups of solutions to the tragedy of the commons
Creating and selling property rights of scarce resources, which allows for a change in incentives and for exclusion of others from the use of said resources.
Top-down regulations of the right to enter areas endowed with such resources.
Bottom-up institutions. There are examples that show under the right conditions, some communities were able to establish rules that allowed for a long-term and sustainable use of shared resources. Contrary to what has been implied by Hardin’s work, people using a common resource are not necessarily condemned to repeat the tragedy of the commons. They can talk things through and create adequate institutions.
Descriptive norms
People’s perceptions of how other people typically behave and act (often without much deeper thought)
Non-renewable resources
Mostly materials and energy-related stock (fossil fuels, minerals, metal ores) which are created very slowly in a natural way; they exist in fixed quantities and once extracted they can be replaced very slowly according to natural procedures.
Renewable natural resources
Stock can change across time (it can be replaced), so in practice, it cannot easily be completely depleted.
What is biodiversity?
Biodiversity is all the different kinds of life you’ll find in one area - the variety of animals, plants, fungi, and even microorganisms like bacteria that make up our natural world.
Two related concepts:
1) The amount of genetic variability among individuals within a single species
2) The number of species within a community of organisms.
What were the three main concepts in The Economics of Ecosystems and Biodiveristy (TEEB)?
Natural resources should be considered economic assets given their contributions to the economy.
The loss of ecosystems services tends to be ignored given the difficulties in measuring since they are viewed as public goods.
Subsidisation to industries that affect negatively ecosystem services (fisheries, fossil fuel industries) should be reported and potential perverse components should be eliminated.
What did Hanley et al. (2019) say about ecosystems valuation?
“The total economic value of all biodiversity is the sum of all human welfare for current and all future generations.”
The nice diagram in the ecosystem slides
Built and human capital are embedded in society which in embedded in the rest of nature. Ecosystem services are the relative contribution of natural capital to human well-being, they do not flow directly.
It is therefore essential to adopt a broad, transdisciplinary perspective in order to address ecosystem services.
Difference betweem the two methodological approaches of ecosystems valuation (preferences)
The revealed preference methodology (observing people’s choices in the real world).
The stated preferences approach (hypothetical question through which one can determine the WTP for a product/service).
Using discrete choice experiments (the 2nd) seems to be better and most prefered.
You could also separate these approaches into market-based methodologies (using data for marketed products like timber, fish, etc.) and cost-based methdologies (using costs as an assessment of WTP for an ecosystem service, like for water filtration)
The benefits that people derive from ecosystems
Provisioning services (direct benefits like water, food, fuel, fiber)
Regulating services (flood control, climate regulation, water quality)
Cultural services (recreational, aesthetic, spiritual services).
Supporting services (photosynthesis, soil formation).
What is ecotourism?
Responsible travel to natural areas that conserves the environment, sustains the well-being of the local people, and involves interpretation and education.
TIES definition
Reasons why economists (who measure and identify, establishing causal relationships) can help us think about solutions to climate change
Tracking changes in temperature and sea levels over time
What are the potential damages as a result of changes in these variables?
How much would it cost to avoid these damages?
How changes in climate affect humans and ecosystems?
For what goods do the tragedy of the commons apply to?
Non-excludable, but rival goods.
