environmental externalities

What do we need/use the environment for?

1. Provides natural resources for consumption and production
2. Leisure purposes — hiking, running, swimming
3. A place to deal with and dump society's waste products

What does it mean to use resources sustainably?

Meeting the needs of the present without compromising the ability of future generations to meet their own needs. I.e. producing and consuming at a rate that doesn't use up/destroy aspects of the environment

Give an example of using resources sustainably

• Fishing sustainably and avoiding overfishing
• Cutting down trees but also being involved in tree regrowth efforts

Give examples of negative environmental externalities (8)

1. Factory pollution, greenhouse gases (methane from cattle etc), global warming
2. Fracking results in tremors. Mining results in possible landslides and ruins natural landscapes
3. Deforestation ruins habitats and oxygen production, worsening air quality. Also interrupts food chains
4. Urbanisation ruins natural landscapes/views
5. Excessive construction and use of concrete can cause flooding
6. Littering — plastic ends up in oceans, landfill pollutes waterways
7. Overfishing
8. Smoking

What is fracking?

The process of injecting liquid at high pressure into subterranean rocks, boreholes, etc., so as to force open existing fissures and extract oil or gas.

Key point about littering and the oceans

Research shows that if we continue at current trends of littering, then by 2050, there will be a greater quantity of plastic in the oceans than fish.

What are property rights?

The rights individuals or firms have to the exclusive use of their property, which prevent other people from being able to access the resource

Explain how property rights provide an incentive to look after a resource

If you look after the asset, you benefit from its rise in value, and suffer directly from the fall in value if you don't take care of it.

Explain the issue of the lack of property rights with common resources

No one can be blocked from accessing the resource, and nobody has the incentive to look after the resource as they do not own it — leading to the tragedy of the commons.

What are common pool (access) resources?

Natural resources over which no private ownership has been established. They are non-excludable but rivalrous in consumption

Give examples of common pool resources

• Oceans (especially international waters)
• Natural forests and rainforests
• Communal grazing land
• Water sources such as rivers

What is the tragedy of the commons?

• This occurs when common pool resources are used in an unsustainable way. Left to the free market, all users use the resource for their own purpose and only consider the PB and PC, ignoring the negative externalities.
• As the resource nears capacity (due to being rivalrous), the sum of each user's marginal cost becomes a problem and the resource is eventually degraded/destroyed/depleted over a long period of time.
• This is due to the lack of property rights. Neither firms nor consumers have the incentive to limit their use of the resource, and eventually the resource is overused.

What does it mean to use a resource unsustainably?

A situation that occurs when resources are used at a rate faster than they can be replenished, ultimately resulting in extinction or loss of that resource

Give examples of the tragedy of the commons (AO2)

• If a pond is open for fishing to the public, and the public overuses the pond, the amount of fish will significantly decrease.
• Over-tourism can cause significant amounts of rubbish. Venice has implemented a 5 euro entry fee to 1. potentially curb the number of tourists and 2. raise money to fund the clean-up efforts
• Mount Everest has excessive rubbish problems at the peak of the mountain due to over-tourism. Nepal has issued permits worth $11,000 to fund clean-up efforts

What does the tragedy of the commons result in?

Creates negative externalities of production and consumption. These often include pollution, environmental damage and resource depletion, which prevents future generations from benefitting in the same way. This results in a partial market failure.

What is a partial market failure?

When a market for a good exists but it is not provided at a socially optimal quantity.

Example: The tragedy of the commons can be applied to the grazing of cattle on public lands. What is the nature of this market failure?

Overgrazing results in degradation of grazing lands

Due to the presence of environmental externalities due to lack of property rights on common resources and the tragedy of the commons…

Government intervention is required

What are the two ways that methods of government intervention can be classified?

1. Intervention in the price mechanism e.g. taxation/subsidy to green firms using environmentally friendly technology/max or min pricing
2. Command and control measures e.g. legislation and regulation

What is environmental taxation?

A tax on a good or service that is judged to be detrimental to the environmental, or a tax on a factor input used in production which is bad for the environment

Give some examples of environmental taxation

• Fuel duty (petrol)
• Vehicle excise duty/road tax (the more fuel your car uses, the more you pay in road tax)
• Congestion zone tax

Explain how environmental taxation works. What are its aims? (6)

1. Increase in price, rationing demand as the good is less affordable and less desirable
2. Reduce output towards the social optimum (Qs)
3. Raise the private cost of producing the good/service so that both producers and consumers are paying for the damage caused (the negative externalities)
4. Provides continuous incentive for producers and consumers to take the negative externalities into account
5. Encourages consumers to switch to more environmentally friendly alternatives, and encourages producers to invest in green energy sources/technology — reducing dependency on nonrenewable energy sources.
6. Provides government revenue for environmental projects, e.g. grants/subsidies to renewable energy firms

What are the problems with environmental taxation? (8)

1. It is difficult to accurately value the environment and assess damage value.
2. Implementing changes in environmental taxation is a lengthy process — only really possible in the yearly budget — and costly to implement
3. It is difficult to achieve the target quantity of reduction of pollution — it is impossible to predict how consumers/producers will respond to taxation
4. Impact on consumer welfare — raising prices makes people worse off, and if demand for the good is inelastic, the tax burden can easily be passed onto consumers with little impact on demand, resulting in overall worse standards of living
5. Impacts on the income distribution. Taxation on demerit goods, e.g. cigarettes, have regressive impacts — the impact is greater on the poor. Additionally, a higher % of lower income people smoke, and those paying the most car tax + petrol duty are those with old/cheaper cars.
6. Employment FDI impacts — pollution taxes may cause businesses to move abroad and deter FDI
7. How is tax revenue spent?

What are the alternatives to environmental taxation? (5)

1. Implement property rights
2. Subsidy
3. Minimum pricing
4. Maximum pricing
5. Tradable pollution permits
6. Legislation and regulation

How can implementing property rights prevent the tragedy of the commons?

The tragedy of the commons occurs due to block of property rates so to prevent the tragedy of the commons is to assign property rights where possible for example council run parks national parks forestry commission is the national trust however this is very difficult with things like waterways ocean where there's quiz pull over effect property rides do not work with these properties

What is a subsidy?

A grant/payment from the government to a producer

How does a subsidy work? (Brief points - 6)

1. Lower COP
2. Supply shifts out to S1
3. Excess supply at the original price
4. Price falls from P to P1
5. Demand rises via movement
6. Quantity rises from Q to Q1

Give some examples of environmentally-based subsidies

• Solar panels on people's houses
• EVs
• Recyclable/biodegradable packaging
• Green energy production

What is the impact of subsidies on solving environmental issues?

The subsidy causes some latent demand to become effective, making the product more affordable and desirable. Demand therefore rises, which discourages purchase of non-environmentally friendly products

What are the possible issues with subsidies? (4)

1. A subsidy is expensive for the government — including the opportunity cost — and they therefore must increase the tax burden (which has impacts on AD) or increase the budget deficit (which adds to national debt). It is also difficult to fund during a recession
2. Firms may become reliable on a subsidy and become inefficient.
3. There could be unintended consequences on businesses which did not receive subsidies, e.g. subsidising solar panels but not wind farms
4. Subsidies don't directly tackle the information failure, so they can have an inelastic effect on increasing consumption.

What is minimum pricing?

A legally imposed price floor beneath which firms cannot sell a good/service for. Must be set above the equilibrium to be effective.

How does minimum pricing work?

The minimum price is set above the equilibrium and it's illegal to sell the good/service for less. This therefore reduces the demand to Q1, as some people can't afford the product and there is an incentive to use less of the product and moderate consumption.

Give examples of products that have a minimum price.

Minimum price per litre of petrol, minimum price on palm oil and single-use plastic

What is the impact of minimum pricing on solving environmental issues? (3)

1. Minimum pricing provides people with an incentive to look for alternative products.
2. This decreases use of environmentally unfriendly products and incentivises a switch towards environmentally friendly products.
3. Some people/firms are priced out of the market.

What are the possible issues with minimum pricing? (2)

1. Pricing raises no tax revenue which could've been used to tackle the information failure
2. Minimum pricing is ineffective when demand is inelastic and can have regressive impacts on the population.

What is maximum pricing?

A legally imposed price ceiling above which firms cannot sell a good/service for. Must be set below the equilibrium to be effective.

How does maximum pricing work?

The maximum price is set above the equilibrium and it's illegal to sell the good/service for less. This therefore makes the product more affordable and desirable, some latent demand becomes effective, and the demand for the good/service increases from Q to Q1.

Give examples of products that have a maximum price/could possibly have a maximum price imposed (3)

Electric vehicles, recyclable packaging solar panels

What is the impact of maximum pricing on solving environmental issues? (3)

1. Encourages consumption of environmentally friendly products (as they have become more affordable and therefore desirable)
2. Cross-market shift from environmentally unfriendly substitutes towards the environmentally friendly product (which is now more affordable)
3. There is no cost for the government, compared to subsidies

What are the possible issues with maximum pricing?

1. There is a loss of the profit motive for firms, meaning they have no incentive