6.2-6.3: property rights and environmental mfs

property rights

define ownership of a common pool of resources and set out have they can be used

common pool resources tend to

be natural resources over which no property rights have been established, so when left to the free market they are over exploited and used in an unsustainable way resulting in the tragedy of the commons and environmental market failure

the extension of property rights can help reduce market failures by

internalising the externality by transferring common land over to private ownership, the owner has a strong incentive to manage the resource and take care of it for future use

advantages of the extension of property rights are

ensures that resources are allocated efficiently, reduces the harm caused by negative externalities, external costs of overusing common resources are taken into account

disadvantages of the extension of property rights are

difficulty in allocating and dividing up some resources, air is difficult resource to distribute, difficult to allocate rights in a fair way, regulating and enforcing property rights is expensive

pollution permits are

government issues licences that allow companies to emit a certain amount of pollutants, creating a market-based approach to controlling environmental polluction

pollution permits work by

forcing companies to either buy a permit, or if the cost of the permit is higher than the cost of reducing emission, then reduce emissions to below permit requiring level

pollution permits correct market failures are

the cost of the permit represents an additional cost of production, which should reduce supply and output closer to the socially optimal level, reducing the associated negative externalities. firms are also incentivised to invest in new pollution technology and cleaner tech

advantages of pollution permits are

may encourage firms to switch to green production methods in the long run, raises government revenues from the sale of permits

disadvantages of pollution permits are

firms may relocate production to places where they can pollute without limits, expensive and difficult for firms to monitor emissions, firms may pass on the higher production costs to consumers