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Explain diminishing marginal utility
As a person consumes more of a product, each additional unit provides less satisfaction. Third slice of pizza less satisfactory than second
Explain indifference curves
curve displays all combinations of consumption for two goods that will give the same level of utility. ex U(2x,4y) = U(1x,2y)
Explain marginal rate of substitution.
the rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility. ex I get the same utility by giving up 2 apples for 1 orange
consumer surplus
the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays
Give an example of where consumer surplus can differ while the price of the products are the same
f the price of the two soaps is the same and you like eco-friendly products more than other products then your consumer surplus is higher with the eco-friendly soap, as you were willing to pay more for it initially
Why are profits equal to zero in perfect competition in equilibrium?
If profits are above zero (prices >MC), firms will enter the market. Once the price decreases, firms will either leave market or reduce production until
MC = Price --> no profits
Explain the EU carbon market and the relation between permits and marginal cost of abatement
Cap placed on carbon emissions.
A and B have the same amount of permits
A has high MCA
B has low MCA
B has incentive to abate because the price of selling the permit is higher than MCA, can sell to A where it makes more econimical sense to buy permit than abate.
In equilibrium price of MCA = permit price
perfect market
* Homogenous goods
* Many agents (buyers sellers)
* all firms have equal access and influence to all the factors of production.
Explain the competitive forces that determines the price of a good
*An excess of buyers increases competition among buyers
-> rising prices
*An excess of sellers increases competition among sellers
-> decreasing prices
*At the equilibrium price,there is a buyer for every unit supplied in the market. Demand=supply
Assumptions for perfect market equilibrium
*An large number of economic agents
(producers and consumers)
*Full information
*No collusion
*No government intervention
Explain Pareto efficiency
Resources are allocated in a way so that no one person is worse off.
"Pareto-efficiency is reached at the socially optimal production and abatement levels."
Example two people find 100kr. Dividing it 50/50 or 100/0 is equally optimal as in both case no one is worse of than before
Explain asymmetric information
Examples:
- Consumers often don't have information about the quality of aproduct (e.g., food, cosmetics, repair services)
If a consumer is informed, demand reduces and the socially optimal equilibrium moves. Reducing the price
informational asymmetries may result in market failure, a situation where a free (unregulated) market does not provide the socially optimal allocation of resources.
Market failure occurs when:
a free market, that has no intervention, fails to allocate resources efficently leading to suboptimal outcomes for society. This can occur due to factors such as externalities, imperfect competition, asymmetric information.
Example: air pollution is a market failure. Industries didn't consider the environmental cost of their production. Without intervention (regulations) they won't reduce emissions which causes harm to society (externalities), that the market doesn't account for.
what are public goods
Public goods are things everyone can use, and using them doesn't stop others from using them too. Examples include clean air, street lighting and public parks. Because not everyone may voluntarily contribute, governments often step in to provide them.
What is antitrust legislation?
Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices.
What are externalities?
a cost that is suffered by a third party as a consequence of economic activity.
Negative externality: CO2 pollution from transport. When I order something online (economic activity), fossil fuels are combusted releasing CO2 --> contribute to climate change for everyone else (third party, not in the chain of production)
Positive externality: beekeeping, a person keeps bees to produce honey, the bees also contribute to the pollination of nearby crops, benefiting neighboring farmers are not involved in beekeeping activity.
Example of a public good and how it can be paid for
Covid-19 vaccine. Herd immunity the positive externality.
This case both financed by "taxes", EU approved funding for research and production. Also financed through "voluntary provision", you could pay UNICEF to produce and give vaccines to people.
Examples of performance and technology standards
A performance standard might require cars to emit no more than a specified amount of pollutants per mile traveled.
Technology standard could be the mandate the use of a specific type of lights, like LEDs since they are energy efficient.
Why are performance and technology standards less flexible than taxes?
Firms can freely choose to abate emissions or pay the tax.
While a standard is mandatory. Note that performance standard is more flexible than technology standard also.
property rights
property rights as the rules that say who gets to own and control something. All property rights has defined owner, rights and duties.
For example: individual property right over a knife.
I own it, my rights are all that are socially acceptable and my duties are to not use it for illegal use.
For example: Communal property rights of a public park.
Owned by the people in the community, our right is to exclude outsiders, and our duties is the maintenance and limited use.
permit trading
an alternative to emissions limits or emissions caps.
Allocate property rights over pollution and makethese rights tradable ("cap and trade").
Creating a market for polluting rights and a price. Creates a structure for cost minimizing solutions.
What's the difference between emission limit and cap
Limit:
Factory can't release more than 100 pollutants a month
Cap:
The entire sector, including the company, can't release more than 1000 pollutants a month
Procedure of permit trading
1. Policy-maker determines the cap
2. Policy-maker issues one "permit" for each unit of emissions allowed
3. Permit owner has the right to emit one unit of emissions
4. Duration of right may be a year or longer
5. Permits can be traded - The owner can either sell somepermits on the market or buy additional permits.
How can permits be allocated?
Auctioning: sold to firms in an auction
Grandfathering: free allocation based on past emissions (in proportion to firms' historical emissions)
Why is permit Trading Beneficial?
More flexibility for maximizing profit:
By the ability to compare marginal abatement cost to permit price.
Target will be reached at the lowest total cost to society,regardless of the initial allocation of permit:
Firms with low abatement costs will sell permits and abateinstead, while firms with high abatement costs will buy permitsand abate less Abatement is done where it is cheaper (cost-efficiency)
Name some hybrid policy instruments
Deposit-Refund
Tax-Subsidy
REP
Name a deposit-refund system
Panta
With the possibility of illegal dumping, a deposit-refund schememay be better than a tax
Explain the hybrid tax-subsidy system
Limit is set by regulator
Each emission above, taxed
Each emission below, subsidized
Good when little information on abatement cost
Explain Refundable Emission payments
All companies taxed on emissions
the tax revenue refunded to the on average cleaner firms.
Less political resistance than under a tax (approximately halfof the industry receives a net payment
Price Elasticity Equation
% change in quantity demanded / % change in price = Price elasticity
budget line
A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices.
Slope defined by -p2/p1
Socially optimal production
Socially optimal production refers to the level of output where the marginal social cost (the cost to society) equals the marginal social benefit (the benefit to society)
producer surplus
the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
riparian legal concept
Riparian legal concept grants water usage rights to landowners with properties adjacent to a water source.
Describe how the market fails to capture the external costs associated with CO2 pollution from transport.
Provide a policy intervention that could adress this negative externality.
The market fails to capture this negative externality since I don't have to pay for the cost that I impose on society.
Carbon tax that amounts to the total cost that society endures.
How much would an industry emit in a non regulated market?
With no regulations the industry will have no incentive to abate and thus emit the maximum.
Where is the pigouvian tax?
In the socially optimum of production, where marginal cost and marginal benefit to society intersect.
How to calculate Socially optimal level of abatement
MCi = Marginal Damage
Suppose that the government does not have any information on firm abatement costs. Would it make sense for a regulator to request such information directly from the firms? Under what circumstances would the firms have an incentive to under- or overstate their marginal abatement costs?
If a price based instrument like a tax is being considered the firms have incentive to understate the marginal cost of abatement as this will result in a lower tax. If instead a quantity based instrument is considered for example permit auctions scheme the firms have incentive to overstate the marginal cost of abatement as this will lead to a higher cap of permits.
the regulator does not know each firm’s MCA, it does know the overall abatement cost curve for industry as a whole. Under these circumstances, what can we say about the regulator’s ability to achieve the socially optimal outcome using either (i) an emissions tax or (ii) emission standards? (4 points)
i)To reduce the pollution with abatement of a_tot of k numbers of firms to reach the social optimal level of production/pollution. For this to happen a_tot=sum a_i for all i in [1,k] this will be at the tax level T where marginal cost of abatement MCa of firms is equal to the tax, T=MCa_i=MCa_j for all j in [1,k]. At this tax level the social optimum of production/pollution is reached. In a clumped marginal cost for the whole industry the tax could be calculated as you now have "one" marginal cost function.
ii) With emission standards you will not reach this as the social optimum level of emissions can be reached but the "wrong" firms can be responsible for the abatement.
Why is it overabating bad?
Cost of abatement higher than benefit of reduced emission
--> deadweight loss --> loss in social surplus/welfare
Who would argue for allocation by GF, why and counter
China
They have the highest current emissions --> they would be allocated the most. They would argue that hard for them to suddenly cut their emissions drastically, since it will drive to the closing of many of their industries, and caused the economies to plummet.
Counter: They are the biggest emitter, more reasonable to ask them to reduce than the small polluters
Who would argue for allocation by GDP, why and counter
USA
They want to maintain high GDP, (equal to wellbeing). High reliance of fossil fuels will make it hard for them lower emissions.
Counter: USA is a developed country with big economic power. Therefore investing in lower emission alternatives won't be as hard in USA compared to other country
Who would argue for allocation by Capita, why and counter
India
Most populated country in the world.
Therefore, there will be high demand of production,
--> high emission rate.
Not big enough allocation --> the same as cutting off people from their basic needs.
Counter:
Should try to provide the production with low emission, if they keep using high population as a reason, then the emission rate will keep increasing while they don't feel the need to improve their abatement method
Polluter pay principle (PPP)
states that those who produce pollution should bear the costs of managing or preventing it. For example Carbon Tax, pay per unit of emission. Incentivizing abatement
What were the problems with the Kyoto agreement that led to the type of agreement we are now working with (the Paris agreement)?
1- Paris Ag, bottom up:You choose your own targets,
Kyoto, top down: Targets were assigned, mainly on developed
2-World leaders like US did not join Kyoto, making it not popular
3-No real commitment from undeveloped or developed countries, making china not bound to reductions.
What are the weaknesses and challenges with the construction of the Paris agreement?
No quantitiataive absolute emission reduction commitments' required
Not strong enough Monitoring, reporting and verification system
Individually decided contributions - no coordination mechanism . Like voluntary contributions to a public good
pros lowering taxes on oil, fuels in Europe after price increase from russia war
*Lower the cost for vulnerable citizens in need to use fossil fuels, for instance for heat and transportation
*Inflation control, many other products require the use of fossil fuels, ex as transportation or as energy input in process. Reducing this cost would stop all other products from increasing
*Lower the cost for European businesses so that they can stay competitive in internaitnol markets against competitors who are less affected
*lowered cost boosts consumer spending --> helps national economy
cons for lowering taxes on oil, fuels in Europe after price increase from russia war
* decreased tax revenue
* Continued reliance on Russian oil would finance the war
* Humanity usually pivots or develops when times are tough, a bandaid in such a scenario could stop critical development or pivot away to electrification from fossil fuels
* Bad precedent and short term solution for an energy security issue. Not required to be energy independent, just not dependent on a bad faith actor.
What are the main mechanisms of the paris agreement
*Intended National Determined Contribution (NDC), each country sets its own emission reduction targets
*A decided upon long term goal, limiting global temperature increase to 2°C or preferably 1.5°C, translated into carbon emission budgets.
*The agreement is legally binding, a country has to submit NDCs and report on progress.
*Every five years, countries must review and potentially increase their commitments during the Convention of Parties (COP).
*Developed countries provide financial aid to developing countries to help them reduce emissions and adapt to climate change impacts.
What are the overriding and remaining issues of the UN climate negotiations? (Name at least three and very briefly describe why the issues are so hard to deal with)
* Even If legally binding, no mechanism for keeping countries responsible or penalize
*Not every country has signed on as it is voluntary, and there is no way to force them. Everybody has to reduce, not just some.
*Agreements are based on the national emissions. The "imported emissions" (emissions due to goods manufactured abroad) are not counted and thus can drive a country to increase its importations to reduce national emissions.
The optimal consumption bundle is characterized by
he marginal rate of substitution equals the price ratio.
Voluntary agreements
the polluters get together and do the necessary abatement
voluntarily rather than basing their actions on state regulation.
What are the two characteristics of a public good
Non-rivalrous consumption: Consumption of one good does not reduce the amount available to others
Non-excludability:
It is difficult or impossible to exclude individuals from benefiting from the good once it is provided
