Lecture 1:
the greatest challenge for current environmental policy
Dependence on dirty non-renewable energy
Past pollution (USSR)
Tragedy of commons/acceptance of responsibility
What is externality?
Externality- effects on people/ agents outside of a specific transaction.
Air pollution from industrial output
Effects public good- air quality (party outside transaction)
Cap and trade legislation/ Emissions trading
Pigouvian taxes- companies are taxed so that the production of goods is lessened to the point where demand meets social marginal cost instead of private marginal cost.
main attributes of public good? free rider problem
non-rival and non-excludable
free rider problem/ ignore their responsibilities to the social good
Security- People who live in a nation but don’t pay taxes and are not in the military benefit from the collective security of a national military
Conscription would be a solution
Cleaning a park/lake-increased ticketing (costs $)
Lecture 2
“fouling our own nest.”
social cost > private cost
tragedy of the commons = the depletion of a shared resource by individuals, acting independently and rationally according to each one's self-interest, despite their understanding that depleting the common resource is contrary to the group's long-term best interests.
externalities - your actions affect everyone else
environmental protection to enhance property
With property rights comes responsibility. A proprietor has incentive to keep his or her property clean and to reduce pollution. When spaces are shared, not only can the area be used inefficiently, it is more easily polluted and/or destroyed.
Problem 1 from Schotter’s textbook
A) The genius imposes a negative externality on the rest of class because they are affected negatively by his grade, which is out of their control and outside the transaction of giving and taking the test. The marginal externality is 15 points, because if he had also gotten an 85, each student would get an additional 15 points, bringing them all to 100.
B) If the genius gets an 85, they would all have a 100. This would be pareto-optimal because there is no room for improvement without making somebody worse off.
C) A marginal tax of one dollar per point would incentivize the genius to get an 85 if that was the second highest score, since if he did get a 100, he would end up with 85 anyway.
D) Any amount of money over $15 would incentivize the genius. The maximum is limitless.
Problems w/ Pigouvian, S&C
Pigouvian taxes - tax on unit of produced to encourage decreased production (internalize externality)
Problem with pigouvian taxes: to set taxes government needs to know exact cost of externality
afflicted party might exaggerate, afflicting might underestimate, an accurate measure might be cost prohibitive
Paper Mill: Paper mill and water treatment have incentive to change estimate and cost of problem
S&C - government sets acceptable level of pollution, taxes per unit of pollution (reduce externality to acceptable level)
Problems with S&C - gov’t needs to know damage to set standard, and cost of abatement to set charge
has to use guess and check, but can’t change too often or else the administrative cost would be too great
Main objectives main results of Plott
Plott’s object is to answer two questions: Do markets with externalities behave in accordance with the law of supply and demand? How do the pollution tax, pollution standard, and pollution licenses compare as methods for correcting the externality?
Externality - each subject was given a damage schedule indicating how much his profits from trades would be reduced as a function of the total number of trades in the market.
Tax- the optimal tax has been imposed on sellers as an inescapable cost
Standard - market volume is limited to the optimal thirteen units on a first come, first served basis.
Permits - Thirteen licences were distributed among subjects, which could be resold in an organised licence market. The sale of a unit in the primary market could only be made by a seller who had acquired a licence (one licence per unit) to make the sale.
traditional models found in the economics literature are amazingly accurate
Standards is noisy because # of trades is limited to 13. Buyers and sellers able to make a deal jumped at the opportunity.
Lecture 3
tradable emission allowances
Cost-effective- flexible system-> companies can sell/buy accordingly
Limits are set by government through permits, which over time become stricter
What is EU ETS?
=EU Emissions Trading System-> cap-and-trade system,
Emission allowances are the ‘currency’ of the EU ETS, and the limit on the total number available gives them a value
Businesses report and verify their annual EU ETS report-heavy fines if inaccurate
2006/2007 to the prices of EUAs
Number of allowances was excessive-> price of allowances falls to zero in 2007
second phase EU ETS from first phase
Budgets stricter///less allowances///prices up
Macro Incentive-No longer require NatAllPlns///EU-wide cap///moving towards auctioning instead of allowances///Longer phase
Micro Incentive-Use of grandfathering rather than benchmarking///No free allowances for new power installations///less allowance=highprice=high eff.
Why is auctioning EUAs not bad?
Polluter-pays, Windfall profits(from consumers), Incentives to innovate are stronger
Incentives for replacement, Updating the base period distorts incentives to innovate, Diffusion effect, Early price signals and planning reliability for investment
three bidders that have willingness to pay of 10, 8, and 6
Sealed-bid auction: Highest bidder wins (pay indi max)
Standards ascending clock auction: learn value of item (pay +.1 of lower)
Virginia NOx allowance auction.
Auction b/c f budget shortfall, suggest sealed bid, can disc price
Lecture 4
real world a third party certification/ cheap-talk from established companies
Yes, ppl respond and pay more, higher marginal profit makes it worth it///C.T doesn’t matter when est REPS,sellers est then cheap talk but buyers refuse uncertified for high price
Cason and Gangadharan (2002).
Objectives: willingness to pay for green in mrkt with imcplt info///look @ cheapt tlk, cert., and REPS./// Findings: supers sold, 12% baseline, cheap tlk 33%, Reps only 40%, cert. 66% so many certify for compet. & high price→ qual. up A)need reps first bc no prev. price to form them B)lying not obvious until REP suffers C)after last round reps dnt matter, w/ cert cont. buy supers for high price D)not efficient buy high prices make up for cost
Airplane
Intercompany externalities, more problems more time to erase less airplanes,clean up cost is ext., round 2 deal can be reached with reg. effort, producer paid 2 for receipt of clean paper, A dirties less for profit, abatement=small writing; Intercompany externalities, more problems more time to erase less airplanes,clean up cost is ext., round 2 deal can be reached with reg. effort, producer paid 2 for receipt of clean paper, A dirties less for profit, abatement=small writing
lecture 5
zero transaction in Coase’s Theorem.
Transaction Costs cannot be prohibitive to negotiation. Activity discontinued/ not start that wouldnt if market transactions were costless. Fencing in cattle, victim rights or unrestricted grazing-rights prevail, who pays for the fence.
intuitively expect from sequential and non-sequential in H&S experiment.
Sequential: group profit
Non sequential: makes no sense to group profit max (what h&m investigated)
No, controller chose payoffs nearly evenly or demanded (sociology intuitive) at least their individual maxima (game theory), none game theory approach to pareto optimal doesnt make sense
main results of Hoffman & Spitzer
Experimental testing of Coase’s main idea that rat indi, if allowed to negotiate costlessly, will rectify the damage from externality;
provide support to Coasian solution. Moreover, subjects do not seem to behave selfishly (or, rationally in economic sense)
H&M’s main objective?
to get further insights on that part of H&S results that suggests non-selfishness (choosing joint max not individual max)
Most important change: introduce training before game explaining unilateral property rights
Main result of H&M.
strong support for the Coase Theorem
in contrast to H&S results, which violate the indi rational req of the Coase Theorem (as well as game theory).
teaching the subjects value of unilateral property rights has indeed helped to increase the number of individually rational bargains
Environmental Kuznets Curve?
EKC - hypothesized relationship between environmental quality and economic development
no development->environment fine->developing->environment worse->developed->environment better
name comes from kuznets curve that says a natural cycle of economic inequality driven by market forces which at first increases inequality, and then decreases it after a certain average income is attained
critique - wealthy nations externalize pollution to poorer countries
Lecture 6
command and control vs voluntary programs regulation
Technology forcing regulation may bring about high compliance costs→hurts productivity and profits so argue voluntary self reg. better (ie. US clean Air Act), Voluntary-Set standards of conduct targeted to produce public benefits, Club sponsors develop, monitor and enforce the membership standards, Cost of joining the club and adhering to its standards is offset by benefit
ISO 14001 and why, in Potoski & Prakash’s weak sword
Worlds largest club of Intnl. Standards,WS=no public disclosure or sanctions just monitoring, still mitigates shirking in voluntary program