The Economics of Pollution

Question 1

Coarse Theorem

Answer 1

According to Coase:
– an optimal solution is only possible via private negotiations
– role of the state: clear definition of property rights
(No government intervention)
– Example:
• polluter A has the property rights and could expand his economic activities and the pollution
• sufferer B could pay compensation to A
• both would be better off by negotiating => some compensation and pollution

Question 2

Problems with the Coarse Theorem:

Answer 2

• Transaction Costs
• Difficult to identify the bargain parties
• Threat-making

Question 3

Measures for pollution control:

Answer 3

• Taxes
• Subsidies
• Standards
• Labeling
• Pollution permits
• Payments for Environmental Services (PES)

Question 4

Advantages and disadvantages of taxes

Answer 4

• Advantages:
- Tax gives the producers the incentive to select the least-cost method of
pollution control (reduce production, or introduce pollution control methods
etc.), and stimulates the search for new technologies
- Allows those polluters who face lower costs of reducing pollution to make
a greater adjustment than those who face high costs, minimizing total
costs of pollution reduction – more cost-effective than standards
- Disadvantage:
- Difficult to determine the optimal pollution tax