Micro-Economie Topic 10 Environmental Protection

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Micro-Economie Topic 10Environmental Protection

• Externalities and Public Goods/Bads
• Pollution the bargaining solution
• Policy alternatives for pollution control
• Who pays for pollution control?
• Is pollution control bad for business?

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An externality occurs when an activity generates
unintended effects on others for which no payment
or compensation is made. Externalities arise
because of the absence of private property rights
if they existed payment/compensation would
occur. They are an example of market
failure. Externalities may be beneficial or
harmful In the absence of corrective policy, the
level of an activity that gives rise to a
harmful/beneficial externality will be too
high/low. External effects often have the
characteristics of public goods/bads.
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• Public goods/bads have two characteristics
• Non-rivalry consumption by one agent does not
  reduce the amount available to others
• Non-excludability if provided for one agent,
  others cannot be excluded from consumption
• Examples of public goods national defence,
  lighthouses
• Examples of public bads air pollution
• Because of non-rivalry and non excludability,
  the market cannot supply the right amount of
  public goods/bads the free rider problem

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Externality Originating In Beneficial Harmful
Production Activity Externality Honey production Pollination for fruit growing Fossil fuel combustion Atmospheric pollution
Consumption Activity Externality Vacination of one person Reduced risk of infection for rest of population High stereo volume in apartment Noise pollution
All of these externalities are non-rivalous and
non-excludable
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Bargaining The Coasian Solution
MCN
MBT
Figure 13.6
a
c
b
d
Noise
?2
?1
?3
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Limitations to the Bargaining Solution to
Pollution Problems

• Transactions Costs
• Large numbers of generators and/or sufferers
• Linkage identification

2. The effect is Public a) non-excludable b)
non-rival
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Pollution Control Two Questions for Public Policy

• How much pollution should be allowed? What is the
  policy objective?
• 2. How to affect polluters behaviour so as to
  bring about the desired level of pollution? What
  policy instrument to use?

MC(P) MB(A)
MB(P)MC(A)
Although the Coase analysis is not very helpful
in regard to Q2, it does provide the answer to
Q1. The efficient level of pollution is where
marginal cost equals marginal benefit.
Pollution,P
P
Abatement,A
A
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• There are 3 classes of Instrument for controlling
  pollution
• Command and Control
• a. Limits on permitted discharges
• b. Regulation of process and/or equipment
• 2. Discharge taxation, also known as emissions
  taxation
• 3. Tradeable discharge permits, also marketable
  emissions permits
• Historically, class 1 has been the most popular
  with legislators.
• But, economists favour classes 2 and 3 on the
  grounds that they involve lower costs.

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Taxation of a negative externality
Figure 13.5
SMCPMCEMC
PMC
P2
P1
EMC
SMBD
Q, P
Q2 Q1
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With uniform taxation across discharge sources,
the overall reduction is achieved at least cost
MNPB1
MNPB2
a
b
t
t
P2
P1
P2t P2
P1t P1
MNPB is Marginal Net Private Benefit MPB
MPC No tax - Profit maximised where MNPB 0 With
tax Profit maximised where MNPB t Total Cost
of pollution reduction ?aP1P1t
?bP2P2t There is no re-allocation of pollution
reduction as between the two firms that can
reduce the total cost
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There is a problem with emissions taxation if
the firms MNPB(P) functions are not known, it is
not possible to calculate the tax rate that will
bring about the desired overall reduction in
pollution. Whatever reduction is achieved will be
brought about at least cost, but it could be too
big or too small. Tradeable permits avoid this
problem. Since the quantity of permits issued is
equal to the desired level of total emissions,
assuming compliance, the achieved reduction is
that intended. Tradeable permits are dependable,
as well as least cost. They have the least cost
property because with a single market price per
permit, all firms move to where their MNPB
permit price, and the situation is as in the
previous slide. If the permits are initially
issued free, there is no revenue arising, as
there is with taxation.
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Who bears the cost of pollution control?
P
Figure 13.7
S2
t
S1
P2
P1
P3
t
D
Q
Q1
Q2
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• Is pollution control necessarily bad for
  business?
• It may promote technological innovation that
  reduces costs
• Reputation effects
• Niche marketing environmentally concerned
  customers
• First mover effects international trade
• Environmental tax revenues can be used to reduce
  other taxes on business

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Team Tasks 10

1. What is the optimal level of pollution?
2. If an emissions tax is imposed, does the polluter
   pay?
3. As CEO of a chemical company, should you oppose
   the introduction of legislation to reduce
   environmental pollution by the chemical industry?