Environmental Economics Flashcards
Is the invisible hand enough?
- Market failure - when market allocates resources in a Pareto-inefficient way
- externality effects - an effect of an economic decision that isn’t specified as a benefit or liability in the contract
eg. negative externality - passives smoking
positive externality - getting vaccinated
Marginal private cost (MPC)
marginal cost to decision maker
Marginal external cost (MEC)
costs imposed by decision maker on society
Marginal social cost (MSC)
MPC + MEC
negative external effect when MSC>MPC
in this case market outcome leads to overproduction (market failure)
Possible solutions to market failures
- Coasen bargaining - legally assign property rights
e. g right to pollute, to clean air
issues include transaction costs, enforcement, missing info
- Regulation - ban or cap production
- Compensation - polluter may pay principle
Fair? poor people may or developing countries may pollute more (subsidising 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 include missing info, measure MC, lobbying
Pigouvian tax example
govt puts a per unit tax on output
tax is the difference between MSC and MPC
profit maximising producer chooses output where MPC = after tax price which is the socially optimal output
tax forces producers to face the full cost pf their decision
Are markets good enough?
world commodity prices, inflation adjusted, have not changed much in the long run due growing demand pushing prices up but cheaper extraction technology pushing prices down
NO:
- absence of prices for some natural resources (clean air)
- changes (overfishing, deforestation) may become self-reinforcing due to positive feedback processes
e. g Farming reduces forest area
deforestation reduces rainfall
drought conditions increases fire likelihood
fires reduce forest area and so process continues
Environmental dynamics
measure of sea ice now and in a year:
line of unchanging environment is 45 degree line
- system moves towards an equilibrium
- high stable equilibrium with extensive summer sea ice
- tipping point is unstable equilibrium (middle)
- low stable equilibrium with no summer ice
at high stable equilibrium
lower temps leads to extensive summer ice, so solar radiation is reflected rather than absorbed
a virtuous cycle
at low stable equilibrium
higher temps leads to no summer ice so solar radiation is absorbed rather than reflected
vicious cycle
adding climate change to environmental dynamics curve
EDC shifts down as climate change reduces winter ice
the last tipping point disappears ( tipping point where EDC touches 45 degree line) and environmental collapse to the equilibrium without summer sea ice occurs
for the first time since records began, the Lapter sea has yet to start freezing by late October 2020
Abatement policies
policies designed to reduce environmental damage
- consuming less damaging good e.g cars
- ban harmful substances
Abatement cost curve
shows the per-unit cost of abating greenhouse gas emissions abatement policies, ranked from the most cost-effect to the least - an MC curve
least-cost abatement curve
curve shows all the combinations of environmental quality and cost of abatement, when the abatement technologies are adopted in ascending order of cost
feasible set of abatement curves
shows the trade-off between consumption and environmental quality
ideal policymakers indifference curves: slope = MRS
feasible frontier slope = MRT
MRT = marginal productivity of abatement expenditures
MRS = opportunity cost of abatement expenditure
want MRS = MRT
