Economics of the Environment Flashcards
Unit 4 Memory
- Free-rider: benefitting from the contribution of others to
some cooperative projects without contributing yourself - Prisoner’s dilemma: mutually beneficial strategy (cooperation) not the dominant strategy equilibrium
- Public (non-rival) good: use by one person does not reduce its availability to others (this lecture recording!)
- Tragedy of the commons: overexploitation of shared resources
Key Concepts
- Market failure: when market allocate resources in a
Pareto-inefficient way - External effect (externality): an effect of an economic decision that is not specified as a benefit or liability in the contract
- Negative externality: passive smoking
- Positive externality: getting vaccinate
Private and social costs
- Marginal private cost (MPC) = marginal cost to decision- maker
- Marginal external cost (MEC) = costs imposed by decision-maker on society (fishermen)
- Marginal social cost (MSC) = MPC + MEC
Pareto Inefficient
- Market outcome: Price = MPC (Point A)
- Pareto efficient: Price = MSC
- Market outcome leads to overproduction
Possible solutions
- Coasen bargaining: Legally assign property rights: e.g.,
the right to pollute, the right to clean air (Unit 12.2) - Issues: transaction costs, enforcement, missing info
- Regulation: ban or cap production (more coming soon)
- Compensation: polluter pay principle (Unit 20.10 and
Figure 12.6) - But is it fair? Poor people or developing countries may pollute more. Subsidize clean solutions might be better
- Pigouvian tax/subsidy: tax/subsidy on firms generating negative/positive external effects, in order to correct an inefficient market outcome
- Issues: missing information, measure MC, lobbying
Pigouvian tax: example
- Government puts a per-unit tax on output
- Profit-maximising producer chooses output where MPC = after-tax price, which is the socially optimal output
- Tax forces producers to face the full cost of their decisions
- Government receives tax revenues
- Alternatively, government could set a quota (examinable)
Are markets good enough?
The supply of natural resources (raw materials in the Earth’s
crust) is vast.
World commodity prices (inflation adjusted) have not changed much over the long run: growing demand pushes prices up, but cheaper extraction technology pushes prices down
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*
Are markets good enough? No
Absence of prices for some natural resources (clean air)
Changes (e.g. overfishing, deforestation) may become
self-reinforcing due to positive feedback processes Vicious cycles and tipping points can make things worse
Abatement policies
Policy designed to reduce environmental damages
* Adopt new less polluting technologies
* Consume less damaging goods
* Ban harmful substances
Ø banning plastic products
Abatement cost curve
The abatement cost curve shows the per-unit cost of abating greenhouse gas emissions using abatement policies, ranked from the most cost-effective to the least (the marginal cost curve)
Choice of abatement level
MRT = marginal productivity of abatement expenditures
MRS = opportunity cost of abatement expenditure
Optimal choice: MRS = MRT
Optimal choice depends on:
1. Citizens’ value for the environment (affects MRS)
2. Costs of abatement (affects MRT)
Technological progress
Technological improvements can enlarge the feasible set by making abatement more efficient or reducing the environmental costs of consumption
Technological improvement increases the marginal productivity of abatement expenditure, making the feasible frontier steeper
Solar energy example
- Subsidies to firms that produce solar panels has helped fund R&D in alternative energy sources.
- Growing demand for solar panels led to a sharp decrease in their price, thanks to learning by doing in the production process
Win-win policies
There is not always a tradeoff between consumption and environmental quality: some technologies are cost-saving
Unrealised potential
This abatement potential means that part of the feasible frontier has a positive slope. These unexploited mutual gains suggest more is needed than market incentives
Types of abatement policies
There are 2 types of abatement policies:
1. Price-based policies use taxes and subsidies to affect prices (remember: Pigouvian tax)
Aim to internalise the external effects of individual choices
2. Quantity-based policies use bans, caps, and regulations
