Week 1: The Economic Approach To Environmental Problems

Question 1

What are property rights?

Answer 1

Property rights refer to the entitlement defining the owner’s right and limitation for the use of a resource.

The right is not only legal entitlement; they can be derived from tranditions or social norms.

Legislation limitations can create property rights.

E.g. smoking prohibition in pubs –> right to clean air around pubs.

Question 2

What are the three characteristics that make a property right ‘well defined’?

Answer 2

1. Exclusive: All the benefits and costs of the property rights are borne by the owner and only the owner.
2. Transferable: Can transfer right to benefits and costs to buyer who has higher willingness to pay than your value of the property.
3. Enforceable: Cannot be seized, as the rights are enforceable (i.e. strong institutions and governance)

Question 3

What are property rights a good thing?

Answer 3

Ownership of property rights encourages the owner to look after said property as their own self interests are aligned with the state of the property.

(i.e. owner derrives all the costs and benefits of the property).

If a decline in value occurs -> Owner will bear this cost.

Question 4

Who can have property rights?

3 types of ownership?

Answer 4

1. Individual
2. Group
   
   • Jointly owned and managed by a group of co-owners
   • e.g. club tennis courts, grazing rights in Switzerland, tranditional fishing rights system in Sri Lanka.
   • Property rights can be formal (based on legal claim) or informal (based on tradition and customes).
3. State owned
   
   • Example: state parks, forests, roads and in some country’s energy network, water services.

Question 5

What is an externality?

Answer 5

Externalities can be both positive and negative.

They reflect a flow on effect onto a third party due to the actions (e.g. production).

These costs or benefits are reflected in phrases like:

• Spill over, unintended consequences, side effects.

Question 6

What is the market failure when a steel manufacturer produces pollution due to their production?

What are the market outcomes?

Are there any further repercussions for steel production.

Answer 6

Steel production producing pollution will reflect a negative externality, this is because the pollution reflects a cost (higher air pollution) bore by a third party (i.e. surrounding residence).

NB: costs are external to the firm.

This would be reflected in the following graph:

MCs > MCp (i.e. marginal cost to the society is > marginal cost to the producer).

Therefore there is an oversupply and too low of a price (deadweight loss).

Further repercussions:

• Steel used in cars, and other emission-based activities.

Question 7

What are the potential solutions to addressing externalities?

Should be 3 methods.

Answer 7

1. Market-based: Subsidies and Taxes
2. Market-based: Coase Theorem MBIs, creating markets to supplant either non-existent markets or inefficient ones.
3. Command and control (e.g. emissions targets)

Question 8

How does the Pigouvian tax/subsidy work?

Answer 8

Basically it seeks to adjust the costs to ensure that firms face the actual costs to society.

This works by placing a tax (cost for companies), that equally reflects the negative cost placed on society.

Thus forcing companies to take this cost into account, and adjust their supply and costing down to socially optimal conditions.

Question 9

What are the command and control policies?

What are the potential problems with command and control policies?

When it appropriate?

Answer 9

Bans and sanctions.

Problems:

• The government is not always aware of trade-offs.
  
  • Does not have enough information to pick the least cost method
• Rarely efficient
  
  • does not necessarily lead to an efficient outcome, does not take into account individual situations of key stakeholders.

It can be appropriate when we need full compliance. E.g. during an epidemic.

Question 10

What are the 4 types of goods?

Answer 10

1. Private Goods
2. Public Goods
3. Common Goods
4. Club Goods

Question 11

What is a private good?

Give an example.

Answer 11

A private good is a rivalrous and excludable good.

Rivalrous: your use of the good prevents someone else from using the good. (i.e. your use of the good diminishing the amount available for others)

Excludable. You can control and prevent others from consuming the good.

Example: Goods and services, with property rights (excludable), e.g. food, house.

Question 12

What is a common good?

Answer 12

A common good is a good that is rivalrous (i.e. one’s consumption diminishes the amount available for others), but is non-excludable (typically very difficult to exclude).

Primary example: fish stocks (if you catch a fish, someone else cannot catch that fish), however, you also cannot be prevented from catching said fish (thus non-excludable).

Question 13

What is a club good?

Give an example.

Answer 13

A club good is a good that is excludable, but non-rivalrous (typically to an extent).

Examples: cinemas, national parks, satellite TV.

The TV example works best as it is truly non-rivalrous (in that one’s consumption does not hinder the consumption of another) and is excludable, in that you only gain access if you pay for it.

Typically not many goods are truly club goods, as they are only non-rivalrous to an extent. E.g. a cinema only has so much capacity, the more people who visit national parks, the less scenic it is going to be, more people on a mobile network, will undermine the quality of the signal.

Question 14

What is a public good?

What is the primary problem with providing such a good?

How do we go about providing for public goods?

Answer 14

1. A public good is a good that is non-rivalrous and non-excludable.
   
   1. e.g. lamp posts, climate change, meteor defence network, public roads.
   2. I.e. people cannot be prevented from using such a good, nor does their use undermine the consumption of others.
2. The free rider problem is the primary issue with providing public goods.
   
   1. It is derived from the non-excludability of public goods, in that, one cannot be charged for using the good and prevented from consuming its benefit.
3. We provide public goods via the government, who source the funding from taxes.

Question 15

What is perfect competition?

Answer 15

Perfect competition is when there exist perfect information and perfect competition.

Perfect information: No information asymmetry or missing info.

• The second-hand dealership, organic foods, c02 footprint of a product.

Perfect Competition: A large number of buyers and sellers (to an extent that no individual buyer or seller acting alone can influence the price of the market).

• e.g. no monopolies or cartels.

Question 16

How do we define the level of information asymmetry that exists within a good?

3 types.

Answer 16

1. Search Goods
   
   • Can be easily ascertained prior to purchase (i.e. search for the information)
2. Experience Goods
   
   • Quality cannot be determined before consumption but can be after consumption
   • e.g. restaurant
3. Credence Goods
   
   • Quality cannot be determined after purchase or consumption.
   • E.g. Vitamin supplements or organic food.

Question 17

What is moral hazard and adverse selection?

What is the difference?

Answer 17

Moral hazard is post-transaction, in which an agent’s behavior cannot be monitored, thus the fulfillment of an agreement is only observable from one side.

e.g. Eating food at a restaurant, car service.

Adverse selection is pre-transaction, in which the seller has more information than the buyer, and thus the buyer is likely to adversely select.

e.g. Buying shares in a company, purchasing a used car.

Question 18

Why is inappropriate government intervention a market failure?

Answer 18

Let’s take subsidies for an example. Subsidies can be used to increase the production of a particular goods or material, thus lowering the cost of production throughout the economy. However, when drafting this policy, the government does not look beyond the surface level gains in economic activity but fails to recognise the external costs (externalities) that flow on.

Keywording here is a ‘band-aid’ solution:

e.g.

subsidising steel production can increase national security, but increase production of emissions.

Question 19

What is a charge/levy?

Answer 19

Aimed at raising revenue from a user in order to cover a cost.

Typically collected by all levels of government.

Env examples:

• Local Government
  
  • Community recreation (gardens and watering)
  • Maintaining public buildings, library
  • Waste management
• State Government
  
  • Fire services levy
• Federal Government
  
  • Airport noise levy

Can be used to evoke a certain type of behaviour, Medicare levy encourages adoption of private health care insurance.

Question 20

What are fees?

Answer 20

Fees are requested in order to recover payment for the provision of services or use of resources.

Often Lump sum or per person.

Revenue typically goes to state or commonwealth/Fed government.

e.g. mining royalty, national park fees, stumpage fees (right to harvest timber)

Question 21

What is a deposit refund system?

When is it used?

Answer 21

A deposit refund system typically is used when the monitoring costs are high. It works by individuals self ‘type revealing’ themselves, by demonstrating their compliance and thus receiving a refund.

e.g. the 5c/10c refund when you return a bottle in Qld.

Question 22

What makes a Pigouvian tax difficult to administer?

Answer 22

Difficult to measure actual marginal cost to society and thus consequently optimal Q*.

Question 23

How should we use the tax revenue generated from a Pigouvian tax?

Answer 23

If the Pigouvian tax is correctly set, we should not need to use the tax revenue to make any further adjustments, as a further reduction in pollution would not be efficient (too costly).

Question 24

What are market-based instruments (MBIs)?

Answer 24

MBI’s is the creation of markets to provide price signals into the economy about the costs and values of these goods and services.

If created well, MBIs can:

• Reveal abatement costs
• Align individual interest with public objectives.

MBI’s are typically created when there are inefficient or no markets at all.

The most common is the creation of property rights derived from a ‘share’ of allowable actions.

E.g. allowable pollution, sustainable harvest, ecosystem services

Question 25

What is Coase Theory?

What are the 3 conditions that are required for it to succeed?

What is the primary conclusion?

Answer 25

Coase Theory suggests that in an efficient market, regardless of initial allocation, the market will reach an efficient outcome.

This is hinged upon 3 assumptions;

1. No transaction costs
2. Property rights are well defined
3. Free negotiations can take place.

Key conclusion: regardless of initial allocation, an efficient outcome will occur.

Question 26

What are the 3 types of regulations that are typically used to mitigate emissions?

Answer 26

• Technology standards
• Emission standards
• Pollution intensity targets (non-tradable)

Question 27

What are the technology standards?

What are the risks of a technology standard?

Answer 27

Two methods:

• Restricting, banning the use
  
  • Certain times (timing)
  • Certain locations (zoning)
• Can also mandate
  
  • Production technology or
  • Pollution abatement technology (i.e. end of pipe solution

Let’s take a catalytic converter as an example (an end of pipe solution):

Pros:

• Easy adoption, simple and cheap technology

Cons:

• Does not change the root cause of the problems, the fuel used (does not incentivise behaviour change) i.e. change of fuel.
• Also, stagnates innovation or more efficient traffic management.
• Pollution levels can be measured – linked to fuel if we regulate fuel (e.g. imports, pump, etc.) is that a stronger more direct cause and effect link.

Question 28

What is an emissions standard?

Answer 28

Emission standards:

• Basically, a cap on the amount of pollution each firm (pollution source) is allowed to emit.
• No trading
• Each firm has to comply with the exact level of emission standard.
• Basically, a command and control policy.

Question 29

What are the pollution intensity targets?

Answer 29

Pollution intensity targets are a limit based on the ratio of emissions to output, in which the government will mandate a set ratio.

Therefore there are two ways of abiding by the policy and becoming more efficient.

1. Reducing emissions (and not decreasing output).
2. Increasing output (and not increasing total emissions

Question 30

What are information-based policies?

What do they seek to address?

Answer 30

Information based policies seek to address imperfect information, to help consumers avoid adverse selection.

Question 31

How do we assess policy instruments?

Answer 31

• Policy objective: Does it have a clear objective?
• Effectiveness: Does it or is it likely to achieve the objective?
• Cost-effectiveness: Is it value for money?
• Distributional impact: Who benefits and who bears the cost?
• Technology neutral (prescriptive or flexible): Does the policy allow flexibility or is it prescriptive?
• Unintended consequences: Does it lead to undesirable outcomes that are ‘side effects’ of the policy?

Question 32

What does technology-neutral mean?

Answer 32

Technology-neutral means that the policies are not set up with an inherent bias away from future technological development.

I.e. are broad and flexible in the inputs required to generate the given output.