week 8: externalities + uncertainty Flashcards
Climate change presents several critical features:
Stabilizing yearly emissions isn’t enough; total greenhouse gas levels affect climate.
Climate change effects are partially irreversible, impacting future generations.
Uncertainty exists about the scale and timing of global change effects, urging consideration of worst-case scenarios in policy.
International cooperation is vital, especially among powerful nations, to address climate change effectively.
Balancing interests of individuals in different economic situations and future generations presents a conflict.
We have a limited “carbon budget” of 1 to 1.5 trillion tonnes of CO₂ to reasonably limit temperature increase to 2°C. Even achieving this, there’s a 1% chance of a catastrophic 6°C rise. Exceeding the limit to 3.4°C raises the probability of climate-induced economic catastrophe to 10%.
Like other environmental problems, climate change can be addressed by … what policies?
Environmental Damage Abatement Policies
e.g.
1] Discovering + adopting technologies that are less polluting
2] Choosing to consume less environmentally damaging goods
3] Banning/limiting use of environmentally harmful goods
However, the ________ of immediately eliminating all CO₂ emissions would surely exceed the environmental benefits.
economic costs
What is the trade-off between the benefits of producing and consuming more, and the enjoyment of a less-degraded environment?
The abatement cost curve shows the ______
Per-unit cost of abating greenhouse gas emissions using abatement policies, ranked from the most cost-effective to the least
The degree of abatement chosen depends on what?
The relative costs + benefits
What is the marginal cost curve of the abatement curve?
Shows cost of an additional tonne of abatement at any given level of abatement.
– assuming that we adopt the most efficient technologies first
Abatement curve diagram
What is the least-cost abatement curve?
Shows how total abatement (at least cost) depends on total abatement expenditures
The least-cost abatement curve gives _________
All combinations of environmental quality [E on y axis] and cost of abatement [x axis], when abatement technologies are adopted in ascending order of cost.
– combinations of expenditures & resulting abatement when the
lowest-cost changes are introduced first and higher cost ones introduced later
Least-cost abatement curve diagram
Explain this diagram
the least cost abatement curve: shows all the combinations of environmental quality (E) and cost of abatement, when the abatement technologies are adopted in ascending order of cost.
Point A is dominated by points A’ and A”, but may still be chosen if:
**abatement policies are inefficient **
e.g. adopting more costly methods first
Flipping the least-cost abatement curve horizontally gives the _______
The Feasible Set
Environment-consumption trade-offs: feasible consumption and environmental quality.
EXPLAIN THE DIAGRAM
☆ Vertical axis still measures the quality of the environment
☆ Horizontal axis now measures the goods available for consumption** after **abatement costs (from left to right).
☆ – Abatement expenditures are now measured from right to left.
The slope of the feasible frontier is known as the
marginal rate of transformation (MRT)
What does the MRT of the feasible set show?
It measures how much of the quantity on the vertical axis you would get by giving up one unit of the quantity on the horizontal axis
(marginal rate of transformation of foregone consumption into
environmental quality)
Formula for MRT?
inc in environmental quality/decrease in consumption
What is the policymaker’s environment-consumption indifference curve?
Indifference map showing how much consumption citizens are willing to trade in exchange for better environmental quality
The slope of the indifference curve is called the…?
Marginal Rate of Substitution (MRS)
How to calculate the MRS from the policy-makers environment-consumption IC?
Diagram of policymaker’s environment-consumption IC
The higher the indifference curve, the ___________ of utility from consumption and environmental quality
Higher the level of utility
A Steeper indifference curve means the marginal utility of abatement is ____
LOW
What does a steeper indifference curve mean for MRS?
LARGER MRS
What does a steeper indifference curve mean about how the individual values consumption to environment?
A preference where consumption is valued highly by the citizens (large M.U of consumption)
while abatement of environmental damage has low value
Draw an indifference curve diagram where consumption is valued higher than the abatement of environmental damage
Why are the indifference curves straight?
We are assuming, for simplicity, that:
The marginal utility of consumption/ environmental quality are both constant i.e they do not depend on the quantity of consumption or on the amount of abatement
A flatter environment-consumption indifference curve means…?
Consumption is valued less highly by the citizens relative to the value that they place on the abatement of environmental damage
In a flatter IC, marginal utility of abatement is ____
High!
Where would be the level of abatement policymaker wants to implement?
Point X is the lvl of environmental protection the policymaker wants to implement, with environmental quality at E*.
What’s wrong with B?
MRS < MRT (the slope of the feasible set at B)
So the policymaker would be better off by switching more resources from consumption into improving environmental quality.
☆ spending more on abatement shifts the policymaker onto higher indifference curves until point X is reached ☆
Cap and trade model diagram
Till what point do firms trade?
Firms will trade until
☆ PERMIT PRICE = MC OF ABATEMENT ☆
– pareto-efficient
Draw pollution as an externality
Negative Production Externality
☆ supply curve = marginal private cost of production (to the firm)
☆ SOCIAL cost of production is higher for each level of output produced
the social equilibrium ⇒ less production + a higher market price
What is the solution to a pollution externality? + Diagram
Government introduces a tax per unit of pollution produced that firms must pay.
☆ An accurate estimation of the tax can increase the MPC of production to the actual MSC of production so the optimum level of output is produced ☆
Worldwide sugar tax examples
UK sugar tax
Drinks containing more than 8g of sugar pet 100ml will face a tax rate equivalent to 24p per litre.
Sugar causes a _________ externality
+ diagarm
Negative consumption externality
☆ SUB-OPTIMAL OVERCONSUMPTION and hence OVER-PRODUCTION ☆
when consumed, benefits to society are lower than benefits enjoyed by the consumer
How do we address market failure from overconsumption of sugar?
Indirect taxation!
A well calibrated tax could increase the price to the level where socially optimum level of output is consumed.
Specific tax
With an elastic demand, who pays for the sugar tax? + draw this
Flatter demand curve
So, consumers react strongly to the increase in price set by tax by reducing their consumption by a large amount.
So with price elastic consumers, the burden of the tax falls more on producers than on consumers.
With an INelastic demand, who pays for the sugar tax? + draw
Burden of the tax falls more on consumers than producers.
