Modules 3 & 4: Review, Economic Efficiency and Market Failure

aggregate demand

add individual demand curves horizontally

reservation price

choke price, where demand reaches 0

aggregate supply

add individual supply curves horzontally

social costs

private + external costs

• supply and demand curves shfit when external costs are added

abatement costs

cost of reducing the quantity of residuals emitted into the environment or of lowering ambient concentrations

• MAC is additional cost of reducing emissions by one unit

aggregate MAC

sum individual firms’ MAC horizontally

equimarginal principle

the way to reduce emissions at the lowest cost is to distribute abatement costs in such a way that equalizes MAC across firms

• some firms abate more, some abate less, but they all pay the same MAC

1st theorem of welfare economics

Given certain ideal conditions, a competitive market equilibrium is an efficient allocation

• MC = MWTP, total WTP - total costs minimzied

positional concern

an individual’s utility (satisfaction) depends not only on their own absolute level of income or consumption, but also on their position relative to others

positional good

goods/services whose value is partially or wholly determined by scarcity and exclusivity, which serves as a symbol of social status

positional externality

one person’s actions impose a cost on another person who is not part of that action; can lead to misallocation of resources

preference revelation problem

problems the government faces when determining which and how much of a public good to provide

• Preferences discovered through surveys or revealed preference methods (choices they make in the market)

reciprocal externalities

the actions of two parties impose costs or benefits that affect everyone; the emitter and receiver share responsibility for the external effect

double dividend

hypothesis that environmental taxes simultaneously improve environmental quality (1st dividend) and help restore economic efficiency by being used to reduce other distortionary taxes (2nd dividend)

social cost of carbon

monetized damages associated with 1 additional ton of CO2

steps to calculate the SCC

1. project future GHG emissions

2. determine the effects of past and future emissions on the climate system

3. determine the impacts of climate changes on biological and physical processes

4. translate environmental impacts into monetary damages

why is taxing gasoline a “second best” option to discourage driving?

road/congestion pricing is the best option for disincentivizing driving

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