Chapter 10
Economics and
Environment
10.1 ENVIRONMENTAL
PROBLEMS
Reasons for Reluctance
because of benefit,it is difficult to demand that
people in developing countries should give up
economic opportunities for the sake of the
environment.
because of individual freedom,governments are
reluctant to tell consumers what to buy and
producers how to produce.
disagreement about the level of environmental
damage and disagreement about the best way to
limit or prevent it.
Environmental Debates
Views about Environmental Issues
Intergenerational equity
the goal of trying to make sure that future
generations have access to resources and
the natural would to at least an equal extent
to that of current generations.
environmental capital
sustainable development
10.2 MARKET FAILURE
AND EXTERNALITIES
Market failure
the situation that arises when the actions of
some people adversely and significantly
affect others in one or more ways.
The inability of some unregulated markets to
allocate resources efficiently.
Externalities
Externality
something that result from the actions of a person or persons,
that affect others who are not parties to the original action.
one party undertaking an action to gain a benefit,while another
party has to bear some cost associated with that action.
Negative externality
the cost that the other people have to carry.
Positive externality
without some form of intervention or market adjustment,the
producers in each cases do not pay that cost.
Summarize:
the government can internalize the externality by taxing goods
that have negative externalities and subsidizing goods that
have positive externalities.
10.3 ENVIRONMENTAL
POLICIES,DEALING WITH
EXTERNALITIES
1,Regulation
government can remedy an externality by
making certain behaviors either required or
forbidden.
a politically,scientifically or economically
optimal level of activity.
2,Tradeable Rights and
Permits
these could be sold at a fixed price to
each of the producers or a more market
orientated approach would be to auction
them to the highest bidder.
this gives firms time to adjust and gives
them more management freedom.
3,Incentives and
Disincentives
the government could persuade
consumers to change their behavior and
this would then send a market signal to
producers to be environmentally friendly.
4,Green Taxes
Pigovian Tax
a tax enacted to correct the effects of a
negative externality.
Arthur Pigou,1877-1959
Compare:
Regulation,not exceed 18 litres/wk
Green Tax,$20 for each ton of paper
Preference
1,Tax is just as effective as a regulation in reducing the overall
level of pollution,The higher the tax,the larger the reduction in
pollution.
2,Tax reduces pollution more efficiently,It places a price on the
right to pollute,which allocates pollution to those factories that
face the highest cost of reducing it.
3,Tax is better for the environment,Under the command-and-
control policy of regulation,the factories have no reason to
reduce emission further,By contrast,tax gives the factories an
incentive to develop cleaner technologies,because it would
reduce the amount of tax the factory has to pay.
4,Conclusion,Unlike other taxes,e.g,income tax,distort
incentives and move the allocation of resources away from the
social optimum,Tax raises revenue for the government,also
enhance economic efficiency,the bystanders who are affected
are also be cared.
5,Negotiation and Private
Bargains
Coasian bargains
most efficient means of achieving a social optimum
was for the winners to compensate the losers.
Coase theorem
the proposition that if private parties can bargain
without cost over the allocation of resources,they
can solve the problem of externalities on their own.
The initial distribution of rights does not matter
for the market’s ability to reach the efficient
outcome.
10.4 ENVIRONMENTAL
POLICIES,WORKING WITH
MARKET
Economics and
Environment
10.1 ENVIRONMENTAL
PROBLEMS
Reasons for Reluctance
because of benefit,it is difficult to demand that
people in developing countries should give up
economic opportunities for the sake of the
environment.
because of individual freedom,governments are
reluctant to tell consumers what to buy and
producers how to produce.
disagreement about the level of environmental
damage and disagreement about the best way to
limit or prevent it.
Environmental Debates
Views about Environmental Issues
Intergenerational equity
the goal of trying to make sure that future
generations have access to resources and
the natural would to at least an equal extent
to that of current generations.
environmental capital
sustainable development
10.2 MARKET FAILURE
AND EXTERNALITIES
Market failure
the situation that arises when the actions of
some people adversely and significantly
affect others in one or more ways.
The inability of some unregulated markets to
allocate resources efficiently.
Externalities
Externality
something that result from the actions of a person or persons,
that affect others who are not parties to the original action.
one party undertaking an action to gain a benefit,while another
party has to bear some cost associated with that action.
Negative externality
the cost that the other people have to carry.
Positive externality
without some form of intervention or market adjustment,the
producers in each cases do not pay that cost.
Summarize:
the government can internalize the externality by taxing goods
that have negative externalities and subsidizing goods that
have positive externalities.
10.3 ENVIRONMENTAL
POLICIES,DEALING WITH
EXTERNALITIES
1,Regulation
government can remedy an externality by
making certain behaviors either required or
forbidden.
a politically,scientifically or economically
optimal level of activity.
2,Tradeable Rights and
Permits
these could be sold at a fixed price to
each of the producers or a more market
orientated approach would be to auction
them to the highest bidder.
this gives firms time to adjust and gives
them more management freedom.
3,Incentives and
Disincentives
the government could persuade
consumers to change their behavior and
this would then send a market signal to
producers to be environmentally friendly.
4,Green Taxes
Pigovian Tax
a tax enacted to correct the effects of a
negative externality.
Arthur Pigou,1877-1959
Compare:
Regulation,not exceed 18 litres/wk
Green Tax,$20 for each ton of paper
Preference
1,Tax is just as effective as a regulation in reducing the overall
level of pollution,The higher the tax,the larger the reduction in
pollution.
2,Tax reduces pollution more efficiently,It places a price on the
right to pollute,which allocates pollution to those factories that
face the highest cost of reducing it.
3,Tax is better for the environment,Under the command-and-
control policy of regulation,the factories have no reason to
reduce emission further,By contrast,tax gives the factories an
incentive to develop cleaner technologies,because it would
reduce the amount of tax the factory has to pay.
4,Conclusion,Unlike other taxes,e.g,income tax,distort
incentives and move the allocation of resources away from the
social optimum,Tax raises revenue for the government,also
enhance economic efficiency,the bystanders who are affected
are also be cared.
5,Negotiation and Private
Bargains
Coasian bargains
most efficient means of achieving a social optimum
was for the winners to compensate the losers.
Coase theorem
the proposition that if private parties can bargain
without cost over the allocation of resources,they
can solve the problem of externalities on their own.
The initial distribution of rights does not matter
for the market’s ability to reach the efficient
outcome.
10.4 ENVIRONMENTAL
POLICIES,WORKING WITH
MARKET
