Environmental Economics Flashcards
What is the first law of thermodynamics?
Energy can neither be created nor destroyed, but converted from one form into another
What is the second law of thermodynamics?
Entropy (amount of energy unavailable for work) increases in a closed system
What is the equimarginal principle?
In controlling emissions from several polluters emitting the same pollutant, efficiency requires that the MC of emission is the same for all polluters
Name and explain the types of efficiency in a trading economy
- Exchange efficiency. Two individuals will trade until the rate at which they are willing to substitute a good for another is the same (MRSa = MRSb) = price ratio
- Production efficiency. Producers will produce until their MRTa = MRTb. Efficiency occurs when the MC is equal for all firms.
- Product mix efficiency. When the MRSa = MRSb = MRT
What are the implications of the equimarginal principle?
An efficient price should reflect the marginal cost of emission
Cost of emissions should be the same internationally
What is the first theorem of welfare economics?
The allocation of resources will be a Pareto optimum if:
- A complete set of markets with well-defined property rights exist
- Consumers and producers behave competitively
- Market prices are known by all consumers and firms
- Transaction costs are zero
A market failure will occur if one of these do not hold, so the allocation of resources will be inefficient
What is the second theorem of welfare economics?
Depending on the starting point, we will have a different efficient allocation
What are the four characteristics of property rights?
Essentially characteristics of a good/service that make them tradeable:
1. Comprehensively assigned
2. Exclusive
3. Transferrable
4. Secure
What do the characteristics of property rights of assets mean for an individual’s use?
The owner has an incentive to use the resource efficiently. A decline in value represents a personal loss.
What is the Tragedy of Commons scenario?
A situation in a shared-resource system where individual users, acting independently according to their own self-interest behave contrary to the common good of all users by depleting or spoiling the shared resource through their collective action.
The good is usually non-excludable and rivalrous.
How does the Tragedy of the Commons arise?
The marginal benefit of using one more additional unit accrues to one person, but the marginal cost of this is shared among everyone in the community
What is the Coase theorem?
As long as trade is possible and property rights are well defined, it doesn’t matter if right to pollute is with firm or victim, the outcome will be efficient
Name the conditions/assumptions of the Coase Theorem
Well-defined property rights, and no transaction costs
Assumptions:
- Everyone has perfect information
- Consumers and producers are price-takers
- There is a costless court system for enforcement
- Producers max. profits and consumers max. utility
- There are no income/wealth effects
- There are no transaction costs
If any of these assumptions do not hold, then the initial assignment of rights does matter
Name two potential transaction costs in property rights allocations
Free-riding. A problem where the polluter has property rights (ie. don’t want to pay polluter to move)
Rent-seeking. A problem when the victim has property rights (ie. potential for overcompensation or under-provision of pollutants)
How do we solve transaction costs from a utilitarian point of view?
If free-riding leads to a greater welfare loss than rent-seeking, give polluter property rights.
If rent-seeking leads to a greater welfare loss than free-riding, give victim property rights
Name the characteristics of public goods
Non-rival and non-excludable
What is the Samuelson Condition?
The efficient level of public good provision
Recall PME
For a pure public good, efficient provision occurs when ∑𝑀𝐵(G) = 𝑀𝐶(𝐺). Sum of marginal benefits of individuals = marginal cost
What is the pricing solution for public goods?
Optimal pricing:
Consider entrance to a park. Assume there is plenty of space.
People value the visit differently, the optimal price is zero as this is a Pareto improvement. There are more attendees which increases total welfare, but total costs remain the same.
This is the same for non-rival public bads too.
But we need to balance the budget:
Lindahl equilibrium. You pay according to your willingness to pay
What is a club good?
A good that is non-rivalrous but excludable
Explain the solutions to managing a common good, and their pro and cons
Create an element of excludability: formal regulation:
(1) Privatisation (aquaculture):
+ : All costs/benefits internalised, as now has excludability. Incentives to grow/invest
- : Problems of disease, more pollution externalities
(2) Raise cost of fishing:
+ : Sustainable
- : Not efficient at all. Large capital/labour expenditures required to catch same number of fish. Created perverse incentives
(3) Taxes:
+ : Results in rotation of total cost curve
- : Fishers unhappy
(4) ITQs - either by auction (fair but politically difficult) and grandfathering (politically appealing, but basically gives them a free asset they can use/sell. Difficult for new entrants to get in)
(5) Subsidised decommissioning:
+ : Increase total pie, profit per fisher more sustainable.
- : Creates incentives to act unsustainably
(6) Marine protected areas:
+ : Protect individual species. Reduce habitat damage. Can promote ecosystem balance
What is the maximum sustainable yield?
The maximum catch (of fish) that can be sustained (MB = MC).
Is fishing at the maximum sustainable yield efficient?
No. It would be if marginal cost of fishing effort were zero. The efficient level of effort is less than MSY
How do you prevent poaching?
Raise the relative costs of illegal activity - sanctions. Only effective if monitored well - incentivise locals to enforce monitoring?
Name typical informal enforcement
- Exclude outsiders from accessing the resource
- Enforcing compliance by those within a community.
Why does informal enforcement work?
Compliance. Social norms, etc. overcomes perception that regulations work against fishers rather than with them. Local groups have greater legitimacy than outsiders.
Security. If someone else is in charge, it is no longer ‘our’ resource. We do not have the same incentive to collectively manage into the future
Name the conditions required for efficient markets
Markets exist for all goods and services. Property rights, no transaction costs, no externalities exist.
All markets are perfectly competitive
All agents have perfect information
Define voluntary regulation
An environmentally beneficial action by a firm/organization that is not induced by regulatory requirements or by substantial positive or negative mandated economics incentives (taxes/subsidies)
How do voluntary agreements play out?
Voluntary agreements (define) have two types:
1. Market-driven (a) Green-goods. Some consumers are willing to pay more for ‘green’ products (b) Signalling. Improves stakeholder interaction. Improves investor relations
2. Regulatory games. The incentives are:
- Regulator wants strict regulation. Doesn’t want transaction costs
- Firms prefer no regulation. Willing for VA to avoid stringent mandatory regulation
- Parliament wants whatever keeps them in power
In games, the regulator will offer a VA where the Net Social Benefit is at least as great as the expected value under mandatory agreement
Success depends on the threat strength of mandatory regulation
Both result in undershooting the social optimum
