Climate Change Econ Unit 3 & 4

Private Cost:

• The cost to producers. 

  • Labor, materials, energy, equipment.

• Incurred privately by the producer

Social Cost:

• Private cost + the cost borne by everyone else 

  • Pollution, health damage, climate impact.

The Environment as Source and Sink

Source:

• The environment supplies raw materials for production (timber, minerals, fossil fuels, clean water).

• Overusing a source causes resource degradation.

• We need to use them at an efficient rate.

Sink:

• The environment absorbs waste from production and consumption - CO2, garbage, chemical runoff.

• Overusing a sink causes pollution. 

Negative Externality (definition + examples)

Harmful side effects

• Pollution, noise, congestion.

Positive Externality (definition + examples)

Beneficial side effect

• Vaccinations, education, research & development.

What are 2 factors that makes something a public good? (Name and define them)

(Also name an example)

Non-excludable:

• You can’t stop someone from benefiting, even if they don’t pay for it.

Non-rival:

• One person using it doesn’t reduce how much is available for anyone else.

Example:

• Public defense is both non-excludable and non-rival. Everyone benefits from it, and once it is paid for, everyone benefits the same. 

Social cost equation

Social cost = private cost + external cost

Define what a public good is:

• For everyone.

• Non-rival.

• Non-excludable.

What is one of the biggest issues with public goods (why are they not offered as much?)

Free riders: get the benefits but do not pay for them.

People like to benefit but do not like to pay.

Excludable =

• Buying a pizza, you exclude others from consuming said pizza. Property rights.

• You can exclude someone from it.

Tragedy of the Commons

• Basically, it's a shared resource, and we can’t really limit people on it.

• Can’t limit one country to only emit X amount of pollution.

• Good is non-excludable but not non-rival. As in, there is a limit to how many people can use it. There is a limited resource.

Why can the market just fix it?

• The price of external costs is not captured, so the market on paper looks like it is working, but it is not because the external cost is not captured.

• No one wants to pay. 

	Rival	Non-rival
Excludable	Private goods (normal markets, food, cars, clothes).	Club goods (not related to climate. Ex: cable, satellite)
Non excludable	Open access goods	Public Goods

Efficiency defined:

An outcome is efficient when total net benefits to society are as large as possible - when we can’t make anyone better off without making someone else worse.

• Maximizing the total net benefit. Even if it hurts some people.

• Finding the level of pollution reduction where the benefits of reducing it further no longer outweigh the costs.

Max benefit > Max cost

Means:

• Each additional unit of reduction adds more benefit than it costs - total net benefit is still rising (we can benefit more).

Max benefit < Max cost

Means:

• Each additional unit costs more than it is worth - total net benefit starts falling (adding more will be more harmful than good).

The ideal is when?

Marginal Benefits = Marginal Cost

Marginal (Define)

• Change from ONE more unit. 

• The cost or benefit of reducing pollution by just one more ton.

• “Is adding one more unit worth it?”

Marginal cost curve of reduction

Rises or falls?

Define

• Rises

• The first unit to cut is cheap; it gets more expensive for more units.

Marginal benefit of reduction

Rises or falls?

Define

• Falls

• The first bit of cleanup avoids the worst damage. Each additional ton avoided provides a smaller benefit than the one before.

• Benefits are large initially, but then benefits become smaller and smaller.

What is an externality?

An externality is a cost (or benefit) of an economic activity that falls on someone who did not choose to be part of that activity.

Deadweight Loss

Too little control =

Too much control =

Too little control = preventable damage is left on the table (we can still prevent some damage).

Too much control = Cleanup spending exceeds the damage it prevents (more harm than good is being done).

The Ethical Basis of Efficiency

The efficiency standard rests on utilitarian foundations — maximize total net benefits, without regard to who bears the costs.

The Coase Theorem

If property rights are clear and negotiation is costless, parties will bargain to the efficient outcome — regardless of who holds the rights.

However, it is hard to do when it is a large group and a high transaction cost; that is why we turn to regulations instead.

Problems one runs into when facing real-world benefits and costs:

Measuring benefits is hard:

• How do you put a value on cleaner air?

Costs are uncertain:

• New tech and long time horizons make estimates shaky.

Policies shape the numbers:

• Who runs the analysis can influence assumptions used.