week 8: Environmental Policy

abatement

reduction of pollution from unregulated emission levels

damages

negative impacts that result from environmental degradation

• depends on the type of pollutant and the environment that the pollutant is interacting with

human effects from damages

adverse health effects, being unable to swim at the polluted beach, deterioration of the visual environment, etc.

nonhuman effects from damages

endangering plant and animal species, reducing biodiversity

marginal damage (MD) function

the additional damages stemming from one more unit of emissions or ambient concentration

• shape depends on the pollutant and the environment or people that it affects

other reasons why marginal damages can take different shapes

different populations

different times of the day/year

different ecosystem conditions

different calculation of damages

how do we get aggregate marginal damages?

add MD curves vertically

Marginal Damages (MD) is equal to

Marginal damages (MD) = Marginal Abatement Benefits (MAB)

what is the benefit of the first unit of abatement equal to?

cost of the last unit of emissions

abatement costs

the costs of reducing the quantity of emissions

Marginal abatement cost (MAC) function

depicts the additional costs from one unit increase in abatement

if it is very expensive to abate, how steep will the MAC be?

very steep

what are shifts in the MAC curve usually related to?

technology

how do we get aggregate MAC?

add individual MAC curves horizontally

equimarginal principle

cheapest way to allocate abatement is to equalize marginal abatement costs

socially efficient level of emissions

the level at which marginal benefits of abatement are equal to marginal abatement costs, MAB = MAC

who will enforcement costs fall on?

• some will fall on the polluter

• many other costs will fall on public agencies that regulate pollution control

what will increases in enforcement costs do to MAC?

increases the MAC so A* would fall

coase alternative

if they can negotiate, they will work it out without regulation

coasian bargaining

the idea that in the presence of an external costs or benefit, the relevant parties are incentivized to exchange to reach the efficient level of externality

• easy when there are few parties and behavior is verifiable

when is coase bargaining hard?

• many parties

• private information/hidden actions

• one-shot interactions

coase theorem

if transaction costs are negligible, negotiation is free, and property rights are clearly assigned, then private negotiation will lead to an efficient allocation even when there are externalities, regardless of who holds property rights

• conditions under which pollution regulation isn’t necessary (and why those conditions are rarely fulfilled)

coase theorem requirements

• transaction costs are negligible

• negotiation is free

• clearly assigned property rights

gains from trade

the net benefits from negotiating for each party

what are some other problems for the coase theorem (besides transaction costs)?

• market power

• imperfect information

• costly enforcement (courts)

• producers and consumers don’t always maximize

• no income or wealth effects

• because it’s a model

what is the assumption for the coase theorem?

transaction costs of bargaining are often too high for parties to work the problem out on their own

key insights as to why the coase theorem is useful?

• government interaction may lower transaction costs

• intial assignment of property rights is irrelevant to social efficiency if transaction costs are low