Economics of the environment Flashcards
External costs
Has an effect on someone other than the consumer.
E.g. second hand smoke from people smoking in public places.
Negative externality
Externality = a cost or benefit that arises from production/consumption and falls on someone other than the producer/consumer.
Negative externality = imposes an external cost.
Cost externalities
Cause social costs to be underappreciated by resource allocation decision makers in the market, causing too much of the activity creating the externality to be produced.
Benefit externalities
Cause social benefits to be underappreciated by resource allocation decision makers in the market, causing to little of the activity creating the externality to be produced.
Private cost of production
Borne by the producer.
Marginal private cost
The private cost of producing one more unit of a good/service.
External cost of production
Is borne by others, not the producer.
Marginal external cost
The cost of producing one more unit of a good/service that falls on people other than the producer.
Marginal social cost
The marginal cost incurred by the whole society.
MSC = MC + marginal external cost
The marginal external cost is represented on a graph as…
the vertical distance between the MC and MSC curves
Efficient quantity
MSC=MSB
The competitive market…
overproduces and creates a deadweight loss
Externalities arise because…
of the absence of property rights.
Property rights
legally established titles to the ownership, use, and disposal of factors of production and goods and services. These rights are enforceable in court.
The role of property rights in the market
The owner of well-defined property rights receives the social benefit and bears the social cost of using that resource.
Property rights “internalise” the externality.
Coase theorem
The proposition that, if property rights exist, only a small number of parties are involved; and, if transactions costs are low, then private transactions are inefficient.
There are no externalities because all parties take into account the externalities involved.
The outcome is independent of who has the property rights.
Transactions costs
The cost of conducting a transaction.
E.g. the transactions costs of buying a home include: fees for an estate agent, mortgage advisor, and legal assistance.
3 methods used by government to cope with external costs:
- taxes
- emissions charges
- cap-and-trade
Tragedy of the commons
The overuse of a common resource that arises when its users have no incentive to conserve it/use it sustainably.
Emissions charges
Government sets a price per unit of pollution - the more a firm pollutes, the higher are its emissions charges.
Taxes
The government can set a tax equal to marginal external cost for the producers of pollution.
Cap-and-trade
Each firm has a permitted level of pollution per period. Firms trade permits. The market price of a permit confronts polluters with the marginal cost of their actions and leads to an efficient outcome.
Renewable resource
One that replenishes itself by birth and growth of new members of the population.
Sustainable catch
the amount of fish that can be caught year after year without depleting the stock.
Individual transferrable quotas (ITQs)
A production limit that is assigned to an individual who is free to transfer the quota to someone else.
