Environmental Economics - Summary

The Coase Theorem

• States that if property rights are defined, markets can achieve the optimal level of externality.
• Argues parties can come to an agreement through bargaining that is economically satisfactory.
• Whoever values the right more should end up with it through negotiation.
• Regardless of who holds the property rights, there should be an automatic tendency to approach the social optimum.
• Coase believed bargaining to be a more favorable approach than government regulation.
• Examples:
  • Polluter paying compensation.
  • Sufferer paying compensation.

Barriers to Coasean Bargaining

• Unclear allocation of property rights.
• High cost of enforcing property rights.
• Transaction costs exceeding benefits.
• Asymmetric information.
• Public good nature of pollutants.
• Long-lived nature of pollutants.
• Spatial separation of polluters and victims.
• Large numbers of polluters and/or sufferers.

Formal Statement

• Perfect information.
• Price takers.
• Costless court system.
• Profit maximization for producers, utility maximization for consumers.
• No income and wealth effects.
• No transaction costs.
• Initial assignment of property rights doesn't matter for efficiency.

Instrument Choice Under Uncertainty

• Firms may claim control costs (MAC) are greater than they are, regulator implementing policies based on inaccurate MAC curves.
• Regulator may implement a pollution tax on a firm but doesn’t know what the firm’s MAC curve looks like.
• Taxes or Permits:
  • Uncertainty surrounding the MAC curve can have implications for the choice between taxes and permits.
  • Quantity regulations are preferred if marginal damages are more steeply sloped than marginal abatement costs.
  • Taxes are preferred if marginal abatement costs are more steeply sloped than marginal damages.
• Firm Incentives:
  • Firms may have an incentive to misreport their MACs to the regulator.
  • In response to a tax a firm has an incentive to report a low MAC as they will then face a lower tax.
  • A quantity regulation gives an incentive to the firm to overstate its MAC curve since this will increase the amount of pollution that the firm is allowed to emit.

Imperfectly Mixing Pollutants

• Pollution damage does not vary across space.
• Many pollutants can be called imperfectly or non-uniformly mixing pollutants and their impact will vary across space.
• Local air pollutants are imperfectly mixing pollutants (e.g. Sulphur Dioxide $SO_2$).
• Need to distinguish between pollution sources and pollution receptors.
• Imperfectly mixing pollutants require us to distinguish emissions from concentrations.

Transfer Coefficients

• Show what an additional ton of pollution emitted by an emitter in location i causes in terms of a change in pollution concentrations at location j.
• Pollution concentrations are often referred to as ambient pollution.
• Ambient pollution $(P)$ at receptor j can be defined as: ${P = \sum a<em>{ji}M</em>i}$
• $a_{ji}$ is a transfer coefficient which describes the impact on pollution concentrations at receptor j attributable to source i.
• It can be defined as $a<em>{ji} = \frac{\Delta p</em>j}{\Delta e_i}$

Pigouvian Taxes

• Upwind and downwind sources will have different transfer coefficients.
• The efficient tax per unit emission is not the same (sources should be differentially charged according to their contribution to the problem).
• The regulator not only needs to adjust the tax on emissions but also needs to know the transfer coefficients for individual sources.
• It is cheaper to attain an air quality standard by charging polluters different amounts than to persist with a uniform tax.

Ambient Tradeable Permits

• The tradable permit system can also be adapted to account for imperfectly mixing pollution.
• With an ambient permit system the permits do not refer to the right to emit pollution but rather to the right to cause a unit change in pollution concentrations at a receptor.
• Each receptor site will have a pollution concentration target.
• A pollution source is prohibited from making an emission to a receptor site above the quantity of permits that it holds for emissions to that site.
• Each firm will therefore be required to hold a portfolio of permits, each allowing the firm to worsen concentrations at specific receptor sites.