Social choice mechanism and Efficiency Flashcards
What is biocentrism
Biocentrism is the philosophy that all living things have intrinsic value, regardless
of their instrumental value.
Precautionary principle
The safe minimum standard at its extreme can be roughly characterized as minimizing regrets:
Are man-made resources and knowledge substitutes (Solow view) and what did Barnett and morse prove
Yes - as we deplete resources, we invent ways of getting along with less energy eg apart from timber , resources have been getting more plentiful
Weak sustainability meaning
Path of consumption overtime that yields and non delicing utility level, assuming man made resources and knowledge are substitutes
Strong sustainability meaning
No substitution
bundle meaning
A bundle defines how (available) resources are allocated in the economy => an
assignment of goods to each individual.
Potential Pareto Improvement
(Kaldor- Hicks principle)
A situation is considered a Potential Pareto Improvement if the gains from a policy or change are large enough that the winners could, in theory, compensate the losers, and still be better off.
Key point: The compensation does not actually have to happen. It’s the potential for compensation that matters.
Tangency condition for individual preferences
Highest feasible utility where MRS = −pf /pc
What does Concave ICs illustrate
preference for mixed baskets
Where does Allocative efficiency occur
Allocative efficiency occurs at the point of tangency between the ICs and the budget line
Efficiency Criterion
For efficiency: Abate (reduce) emissions until the point where MSC = MSB.
Economic efficiency occurs when the marginal social cost of reducing pollution equals the marginal social benefit of doing so.
At this point, the resources are used in such a way that the net benefits to society are maximized. If we abate less, we miss out on potential benefits; if we abate more, we incur unnecessary costs.
benefit of being at e efficient
When a firm internalizes the external cost, it faces a higher cost of production for polluting activities, leading it to reduce pollution to the efficient level.
Efficiency vs. Equity
Efficiency focuses on maximizing total welfare, regardless of who gains or loses. It’s about getting the most value out of resources.
Equity concerns the fairness of the distribution of benefits and costs among different members of society.
A policy that achieves economic efficiency (MSC = MSB) may not be equitable. For example, it might disproportionately benefit some groups while harming others.
Society might need to consider additional policies or compensation mechanisms to address any inequities created by pursuing efficiency alone.
Efficiency vs. Equity with MSB=MPC
Efficiency vs. Equity:
Is what is efficient also equitable?
Efficiency is achieved when the congestion charge reflects the true cost of driving (MSC = MSB), reducing traffic to an optimal level.
Equity concerns might arise because the congestion charge could disproportionately affect lower-income drivers, who might not be able to afford the fee but still need to travel for work or other essential activities.
The city might need to consider additional measures, such as providing better public transportation or offering discounts to lower-income drivers, to address these equity concerns.
The Coase Theorem is a concept in economics that suggests the following:
Efficiency of Outcomes:
If certain conditions are met, such as low transaction costs and clear property rights, it doesn’t matter who initially owns the rights to a resource (like the right to pollute or the right to clean air). The parties involved can negotiate with each other and reach an agreement that leads to an efficient outcome, meaning the most economically beneficial level of pollution will be reached.
Explain The allocation of property rights does matter for equity
While the efficient outcome will be reached regardless of who starts with the property rights, who gets the rights does matter for fairness. The initial allocation determines who has to pay whom. For example, if the factory has the right to pollute, residents might need to pay to reduce pollution, but if the residents have the right to clean air, the factory would have to pay them.
Coase Theorem (Assumptions)
Assume a world in which some producers or consumers are subject to externalities
generated by other producers or consumers.
Further assumes:
1. Perfect information (know the damages)
2. Consumers and producers are price-takers
3. Costless court system for enforcing agreements
4. Producers maximize profits and consumers maximize utility
5. No income or wealth effects (what if steel plant can pass on costs? or consumers are poorer?)
6. No transaction costs
Coase Theorem (Real-World Limitations)
Coase Theorem (Real-World Limitations)
* Transaction costs can be large
* Collective action problems: hard to coordinate a lot of people
* Free riding and private information
* Behavioral ‘frictions’: myopia, risk misperception, cognitive biases (See Kahneman and Tverski
behavioural economics literature)
Last, but not least:
* Equity matters! Property rights may not matter for efficiency, but they certainly have
distributional consequences. The Coase Theorem does not consider the equity-efficiency trade
off in environmental policy.
2 forms of moral suasion
The government encourages people and businesses to act in a more environmentally friendly way without using strict regulations (command and control) or financial incentives (like taxes or subsidies). This is moral suasion in its true form.
gov provides info about the environment, ways to avoid pollution
Many economists and social scientists are sceptical about whether this approach can bring about significant changes. They doubt that just asking people to do the right thing, without any real consequences or rewards, will lead to substantial behavioural shifts.
What is the Equimarginal Principle?
It states that to minimize the cost of reducing pollution, each polluter should reduce their emissions until the cost of reducing one more unit of pollution (called the Marginal Abatement Cost, or MAC) is the same for all polluters.
How Does a Pollution Fee Help with equimarginal principle
A pollution fee (like a tax on emissions) automatically encourages polluters to reduce their emissions until their MAC is equal to the fee. Since every polluter faces the same fee, they’ll adjust their emissions until their costs of further reduction are the same, satisfying the equimarginal principle.
Pigouvian Fee
A Pigouvian Fee is a fee paid by the polluter
per unit of pollution. It is equal to the
aggregate marginal damage caused by the
pollution when evaluated at the efficient level
of pollution. The fee is generally paid to the
government.
