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)