EEP 101/Econ 125 lecture 7 Property rights - PowerPoint PPT Presentation

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EEP 101/Econ 125 lecture 7 Property rights

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Title: EEP 101/Econ 125 lecture 7 Property rights


1
EEP 101/Econ 125 lecture 7 Property rights
  • David Zilberman

2
Outline
  • Property rights and the Coase Theorem
  • The economics of clean up and restoration
  • Limited information
  • Political economy models
  • Capture
  • Rent seeking

3
Property right and the environment
  • Property right define entitlement that can not eb
    taken away
  • Polluter may have rights to pollute-
  • precedent establishes right in many cases
  • A chemical plant got the right to pollute when a
    plant is established
  • Victims( pollutees) may have rights for
    protection from pollutions
  • Downstream users have rights to clean water

4
The Coase theorem
  • Assumptions
  • property rights are clear and enfrocable
  • Full information
  • Zero transaction costs
  • Then
  • No need for intervention in cases of
    externalities
  • Pareto optimality
  • Regardless of initial distribution of rights

5
Negotiations and the Coase outcomes
  • Clear property rights lead to Pareto efficient
    outcomes
  • The exact distribution of surplus gain depend on
    negotiation
  • We assumed the parties are splitting the benefits
  • In case of polluter rights the pollutee pay the
    polluters not to pollute
  • In case of pollutee rights the polluter pays the
    pollution to pollute

6
Initial outcome B Pollutee pays CEBD,gains CEF
Final outcome C Polluter gains BCE Social gains
FCB
Gain to polluters
F
D


Polluter marginal benefits
Marginal pollutee benefits
C
E
A
D
B
Pollution
CASE OF POLLUTER RIGHTS
7
Initial outcome A Polluter pays GCDA,gains DCG
Final outcome C Polluter gains GCA Social gain
DCA
Gain to polluters
F
D


Polluter marginal benefits
Marginal pollutee benefits
C
E
G
A
D
B
CASE OF POLLUTEE RIGHTS
Pollution
8
Implications and limitations of Coase theorem
  • A functioning legal system is key for
    environmental policy
  • Externalities-caused by
  • Missing markets
  • Undefined property rights
  • Market failure
  • The Coase theorem works when
  • Small number of actor-low transaction costs
  • It does not work when there are many parties and
    negotiation and collaboration are costly

9
Liability rules
  • Allow violation of property rights but imposes
    penalties
  • Polluter has to pay damages for accidental water
    contamination.Has to pay a penalty for
    intentional
  • Pollution tax is a liability payment
  • Negligence Rules Penalize individuals for not
    exercising sufficient care in action.
  • Due care standards-set basis for liability
  • A farmer may not be liable for run off damages if
    she performed due care.
  • Part of policy is establishing these standards

10
(No Transcript)
11
Full Restoration May Be Suboptimal
Price
MC of Restoration
MB of Restoration
Q
Quantity
Q Full Restoration Optimal Restoration
12
Waste management
  • Liability may be retroactive- New owners are
    liable for pollution of old ones.
  • It leads to care in purchases of new properties
    and prevent people from polluting and selling
  • In cases of ex Soviet Union may prevent
    development-many sites are worth to buyer less
    than clean up cost-
  • Government may pay if public gain from clean up
    and development is greater than private gain

13
Point vs. non point source pollution
  • When pollution can be assigned to pollution we
    have polluters we have source point
  • Example-when each smoke stack is monitored
  • When individual pollution can not be assigned we
    have non point source
  • Pollution at point source can be taxed
  • In case of non point pollution of individuals can
    not be observed- other action related to
    pollution can be regulated or taxed

14
Contamination by firms-point vs non point
  • Suppose that there are N firms, each firm is
    index by n who assume values from 1 to N
  • Pollution of the nth farmer is Zn.It is produced
    by the input of this farmer Xn.This input is
    generating output Yn.
  • The production function of the nth producer is
    YnFn(Xn). The pollution function of the nth
    producer is ZnGn(Xn)
  • Suppose output price is P, input price is W and
    pollution damage per unit is V.

15
Case of point source
  • If the policy maker can observe Zn, he will
    charge the nth firm VZ. It will lead to optimal
    outcome.
  • The optimal choice of the firm will be
  • The optimality is
  • At optimal outcome
  • value of marginal benefit of production is equal
    to
  • input price plus
  • marginal pollution damage cost

16
Example
  • If
  • Optimality condition
  • Implying
  • If
  • A tax of 2 will lead to optimality if Zn is
    observable.
  • If Zn is not observables but Xn is a tax on input
    2VcnXn.It will also be optimal.In our case the
    input tax is 12.

17
Heterogeneity
  • Suppose all firms have the same production
    function, but vary pollution function.
  • 50 have cn1and the other 50 have cn0
  • If the policy maker observes Zn
  • Firms with cn1 pay tax of 2 per unit of
    pollution and produce 3 units making
  • The clean firms have Xn.5(20-2)9 and make
  • Average income is 54 per firm

18
Non point source
  • If only Xn is not observable the policy maker
    will optimize average behavior
  • So the tax will be based 2 per unit of output
    resulting in output of Xn.5(20-2)/(11)6
  • The profit per firm will be
  • The social welfare will be 72 for clean firms
    and 0 for dirty ones. Since the cost fo their
    pollution is 236.
  • Average welfare is 36 per firm
  • Information will generate welfare gain of 9 per
    firm.

19
The Gain From Information
Avg. MEC
MECH
MB
A
High Tax
MECL
C
Avg. Tax
E
Low Tax
B
D
The area ABC is loss of pollution generated by
dirty firms. The area CDE is loss of insufficient
pollution by cleaner firms.
20
Investment in Monitoring
  • Monitoring of pollution allows discrimination
    among polluters and non-polluters and increases
    welfare.
  • If monitoring cost is greater than the gain from
    information, do not invest.
  • Government can induce monitoring by assuming that
    everyone is a heavy polluter and is being taxed
    accordingly. Refunds will be issued to firms that
    prove to be clean.
  • This leads to an industry of monitoring and
    environmental auditors.
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