final Flashcards
all market based instruments for enviroment work by
forcing the relevant parties to internalize the external costs
market-based approaches to negative externalities
reduce deadweight loss
a characteristic of an efficient property right structure is
enforceability and exclusivity
the Coase theorem
shows that participants may reach an economically efficient outcome in limited circumstances
a potential barrier to achieving the efficient level of an externality through voluntary incentives is
- a large number of participants
- realization on the part of generators and victims that they are participants
- the willingness to bargain on the part of participants
place a fee or tax on a negative externality
-provides an incentive to innovate
- reduces the deadweight loss from the externality
- provides for the potential for a double dividend
the creation of efficient property right strucutres
may achieve the efficient outcome under limited circumstances
a tax on emissions of 5 is instituted to achieve a target level of emissions Et. we know
MAC = 5 for all emitters
a tax on emissions of 5 is instituted to achieve a target level of emissions Et. we know
MDF = 5
4 categories of market failure
- lack of competition
- asymmetric information - incognizant market
- public goods
- externalities
the ultimate goal is the economic approach to remedy market failure is to reach
economic efficiency
economic remedy for externalities involves techniques for creating or mimicking a complete market which is
getting the participants to internalize external costs and benefits as much as possible
two market-friendly approaches toward and externality
- mimicking a market
- establishing or energizing “efficient property rights”
coase theorem
as long as all the relevant parties are willing and able to negotiate, an economically efficient outcome will be reached regardless of whether or when the property rights are assigned.
limitations to applying the coase theory to remedy and externality.
- victims and perpetrators have to recognize the effects
- small number of relevant participants
- liquidity impediment
property right
bundle of entitlements defining the holders (owners) limitations and privileges in the use of assets (resource)
characteristics of good property rights
- exclusivity
- transferability
- enforceability
exclusivity
all benefits and costs as a result of owning or using the assets should accrue only to the owner either indirectly or directly via the sale to others
-ownership is complete
transferability
all property rights should be transferable from one owner to another through voluntary exchange
enforceability
property rights should be secure from involuntary seizure or encroachment of others
-climate change = air pollutants that encroach on the lungs and affect you negatively
characteristics of a pseudo market
a price that is established either directly or indirectly for the external cost
direct encroachment on a price
charging of fee or levying a tax
each generator of the externality faces the same charge tax or fee per unit of externality, each generator will abate until their MAC= the charge and then equals (MAC) are equalized across all generators
nothing
charge in the fee or tax per unit generates the least cost achievement or the target level of the externalities
nothing
two general sources of uncertainty
- MDF
- MAC
advantages of an externality tax or fee
- internalizes the cost of externalities (completes the market)
- provides an economic incentive to innovate
- provides economic incentive for the generators to find the best solution for themselves
- raises revenue (double dividend) (raises revenue allows tax collector to use the revenue
1st dividend
tax or fee reduces the dead weight loss from externality
2nd dividend
sets a limit on the total externality
allows trading (market activity) to establish the price
Advantages of a tax or fee for an externality
- completes the market
- possibility of double dividend
- provides incentives innovate
4.provides incentives for generators to find the best solution for them - minimize economic cost of reaching the target level of an externality
cap and trade
- establish an outcome
- establish permits so the sum of P= Et
- establish a mechanism for initially distributing there permits
- enforce the use
- allow permits to be traded
total MAC
MAC== MACa + MACb
when MACa > MACb
A has an incentive to purchase permits from B and B has incentive to sell
When MACb > MACa
B has an incentive to offer to buy permits from A at a price that exceeds A’s MAC has an incentive to sell
advantages of cap and trade
- w a thick market (participants are willing and able to trade) reach the target level of the externality at least cost
- provide more certainty about the realized level of the externality
- permit prices provide quick and readily available information
- allows for non generators to participant
- permits provided incentives for innovation - gives business owners a better reason to find less costly ways of doing business
- persons are potential assets when reducing opposition
disadvantages of cap and trade
- permit prices fluctuate which adds uncertainty
- caps are easily manipulated for political reasons
- market may be thin if firms don’t trade with each other
characteristics of good economic policy
- administrative aspects - simple to understand, simple to comply with, transparency (operation and effects)
- economic aspects - minimize the costs of achieving the desired goal, provide incentives for innovation, limited scope for exceptions
legislative burden
who is legally required to remit the tax
economic burden
who ends up paying the tax
regulation
mandating specific activities or technology
- simple to comply with
- do not minimize cost of achieving the desired goal
- do not provide incentives for innovation
issues with cap and trade
- potential price volatility
-in general, the price of an item is the result of the interaction between demand and supply - enforcement costs are probably higher under cap and trade
- distribution of permits
- permits are potential assets to the initial recipients
- allows for experts to receive a rebate on carbon tax
possible distribution strategies
- auction them -eliminate the issue of handing them out potentially assets for free
- possible stifling of competition by buying and holding permits
- eliminates support
possible distributions strategies 2
initial distribution of permits is based on historical emission patterns
- viewed as fair or. reasonable by the historical emitters
- biggest emitters benefit the most from this
- enables the worst defenders
- gives them less incentive to innovate if they get free permits
guidelines for a carbon tax in the USA
- simple to administer
- low compliance tax
- broad coverage
- good signal to reduce emissions
- avoid exemptions and different rates by user or use
us official social cost of carbon is
51 per metric ton
- recent studies in nature -cost of carbon = 180
