wk8: environmental market failures 1+2

excludability

• excludable goods and service are this for which one can at low cost prevent those who have not paid for the good from consuming it (e.g. all consumer goods, postal services, public transport)

• non excludable goods and services are those for which it is difficult to prevent ppl from using them (e.g. many natural resources, radio stations)

depletability

• depletable (or rivalrous)

  • g/s is deplorable if consumption by one agent means another cannot use it (e.g. candy bar, t shirt)

• non-deletable (non rival)

  • g/s is non-depletable if one person’s consumption odes not affect the supply available for other individuals (e.g. movies, mail)

excludability & depletability

• private goods: single use, restricted to payers (excludable + depletable)

• toll goods: joint use, restricted to payers, going to cinema, public mail (excludable + non-deletable)

  • forces of free market work well for these goods

• global commons: natural resources and vital life support services that belong to all humanity rather than to any one country (non-excludable + depletable)

market failure

• describes a situation when market dos not allocate scarce resources to generate greatest societal welfare

• a wedge exists btw what a private person does given the market prices and what society might want him or her to do to maximize welfare in the longterm

  • prices do not reflect the full societal cost, long term desires of society and existing environmental constraints

tragedy of the commons (market failure example)

• common grazing lands that are open to everybody, non-excludable

• an individual shepherd is better off by putting an extra animal to graze on the commons

• but this degrades the commons, which results in the entire community to be worse off in the long term

• rational self interest ≠ community welfare

• even if individual shepherd realizes this, them putting fewer sheep on land, does not mean the commons will be preserved bc other shepherd may take advantage of this

• requires additional force, “invisible hand” of free market does not work

high sea fisheries

• International waters outside of the 200 nm exclusive economic zone of countries

• fish are a depletable resource

• fish are a “fugitive resource” (they swim around) - hard to monitor

• new harvesters can enter at will (open access) → fisheries are unregulated “global common property”

• rational acting fishermen will increase the capacity of their fishing fleets to maximize their catch before somebody else does

  • overharvesting → depletion of resources

blue whale fishery in Antartica

• large scale commercial whaling started in early 1900s

• hunted till the 70s, and were almost extinct at this point

• external organization stepped in to outlaw it

space debris

• amount of space in near earth atmosphere is limited

• parts of rockets that launch/debris are float around

• “space junk” can crash into working satellites and destroy them

• no incentive for ppl to get junk back would harm revenue

• non-excludable, depletable resource - overused/over-harvested/depleted in free market

  • failure of free market system

global commons - solution

• averting the tragedy w open access requires restraining

  • consumption: limit withdrawal of resource units to a sustainable rate

  • access: excluding others from using resource

• difficult to implement on international stage: short term economic pressures, clashes among nations on worldviews

free rider problem - public goods

• bc one cannot be excluded, there is little incentive for an individual (or country) to supply or protect a good

• free rider: smo who benefits from a g/s without paying for it

protection of biodiversity

• benefits of biodiversity

  • defence against ecological instability

  • rich gene pool may contain cure for diseases

  • simple intrinsic value

• country decides to preserve a large forest, as a result plan is found that contains a cure for cancer. why is this a problem?

  • only the forest country paid the costs of preserving the forest, but all countries share in the benefits as ‘free riders’

  • protecting the forest for intrinsic value noble but may not be able to handle the costs

  • forest country may end up logging it instead to capitalize on short term economic value

public goods - solutions

• government take over a providers and collect taxes or encourage private providers with subsidies

• introduce an exclusion mechanisms (e.g. patents)

• alternative funding mechanisms (ads on radio, applying for grants)

• changing of social norms/social sanctions: change the way ppl do things, discourage free riders

• volunteer organizations/special interest groups (wilderness search and rescue)

externality

• cost or benefit of the production or consumption of a g/s that is experienced by ppl other than producer or consumer

negative externality

• relates to negative impacts of production or consumption

• third party has no choice

• no compensation paid to third party who endure negative impacts

• e.g. effects of pollution, deforestation, pesticide use –everyone is impacted, second hand smoke

  • “public bad” vs public good

acid rain

• emission of nitrogen and sulphur from human sources creates acid rain

• high acidity causes surface water systems to be too acidic for fish to survive

• run off gets into ocean → ocean acidification

• also ruins buildings

• transboundary effects: many negative externalities lead to damages across borders

externality market failure

• bc there is no compensation paid to third party for damages, consumes are not paying the full societal costs for production or consumption of the good

• products are too cheap!

• goods with negative externalities are typically overproduced/over-consumed

climate change

• activity: burning fossil fuels

• users: primarily industrialized countries since Industrial Revolution

• impact: climate change, sea level rise, ocean acidification

• third party: large part of global population, non-human parts of global ecosystem, future generations

• globally shared negative externality of the consumption of fossil fuels

solutions

• internalizing the cost of negative externality so that price of g/s better reflect the true societal cost of the production and consumption

• examples:

  • carbon tax

  • cap and trade systems

pigouvian tax

• tax on any market activity that generates negative externalities

• intended to correct undesirable market outcome

• adds the social cost of the negative externalities to the cost of activity

• challenges

  • not effective at addressing transboundary externalities

  • how do you monetize damages to ecosystems and ecosystem services, reduce opportunities for future generations

positive externalities

• benefit that an activity imposed on an unrelated third party

• examples:

  • beekeeper who keeps bees for their honey

    • pollination of surrounding crops

  • construction of airport

    • benefits local businesses

  • maintenance of attractive house

    • increased property values for neighbours

• typically underfunded

subsidy

• form of financial aid or support to businesses or individuals, usually by govt, to increase public welfare/promote a public good

• can be direct (e.g. cash grants) or indirect (e.g. tax breaks, low interest loans, rebates)

perverse subsidies

• net effect reduces public welfare (often unintended environmental impact)

• agriculture: ‘yield based’ subsidies encourage farmers to overproduce → severe environmental degradation

• fisheries: promotes expansion of fishing fleets → reproduce depletion

• subsidies often perverse bc they reduce opportunities for other forms of spending to improve public welfare (env. conservation, education, health, infrastructure)