env econ chatper 2

why perfect markets create efficient results

subjunctive value judgments vs lenses

• choosing what to do about environmental challenges requires a yardstick (an analytical baseline), but can’t rest on purely objective criteria

yardstick for zoologist field

• preserving biodiversity has infinite intrinsic value in itself

yardstick for religious/theological field

• preserving nature is an obligation to protect god’s legacy/creation

• sinning against nature is a sin against ourselves

yardstick for economic field

• it is rational to preserve nature only if the social benefits are larger than the costs of doing so (eg if it is efficient)

the social definition

• in econ, ‘social’ refers to the whole of society

• ‘social benefits’ & ‘social costs’ represent the total aggregated sum of all benefits & costs experienced by the whole population

resource allocation baseline

• environmental econ views the environment as a scarce resource

• in a perfect market, prices signal relative scarcities, steering competition to promote innovation & erode market power

economic truth of perfect markets: core takeaway

• if the whole word were a perfect market with respect to environmental usage, no environmental problem would exist from an economic perspective

• even if the environment were completely destroyed, if that destruction happened efficiently (if marginal social benefits = marginal social costs), it would not present an economic problem

• environmental issues exist purely because real-world markets fail, are imperfect, or lack market prices entirely for environmental goods

social welfare maximisation (the baseline equilibrium)

• equilibrium price (P*) maximises total social welfare (consumer surplus + producer surplus)

• achieves the absolute best outcome possible under scarcity

price inefficiencies & deadweight loss (welfare loss)

• any deviation from equilibrium price (P*) shrinks consumer & producer surpluses, creating a net reduction in overall social welfare

the merit-order effect in electricity

• step-by-step staircase graph plotting the price of electricity (€/MWh) against generation quantity (GW)

• power plants are queued up along the supply curve from lowest to highest marginal cost

  • renewables (solar, water, wind) have near-0 marginal costs & sit at the bottom left

  • nuclear and biogas next

  • fossil fuels (coal, then natural gas) have highest marginal operational costs & sit on the far right.

• market clearing price: vertical line for demand intersects this staircase.

  • marginal cost of the very last (most expensive) power plant needed to meet that demand sets market clearing price for all suppliers

• shows how pricing signals scarcity → when demand is high, expensive fossil fuels set a high market clearing price, making low-carbon renewables highly profitable (yielding them massive producer surplus)