Gains from Trade
Figure 8.1 represents a country that does not trade. The domestic market equilibrium is given by the quantity demanded, which equals the quantity supplied QD QS at price PD. The net benefits from the rice market i.e., the net social value to the economy is the shaded area, which can be divided up into the benefits to consumers, the consumer surplus triangle CS, and the benefits to producers, the producer surplus triangle PS.3 Figure 8.1 represents a country that does not trade. The domestic...
CapandTrade Safety Valves
Implementing emissions trading policies, like tradable carbon permits, faces many obstacles, including strong disagreements 5Stavins, Experience with Market-based Environmental Policy Instruments. about how costly it would be for industry to comply with the desired reductions. If the marginal abatement cost curve is steep, then a higher level of permits and emissions would be appropriate than if the MAC curve is flat. With no solid estimates of costs, policymakers are often caught between...
Multiple Users
Let's add more people to the Robinson Crusoe story to make it a community of individuals, some who practice farming, some forestry, and some fishing. They all understand that sustainability is about stocks and flows and that their resources are interconnected. But they also have the idea that, for them, sustainabil-ity means sustaining their ability to practice what they know. If we look at the current allocation of resources and determine that changes are needed in the stocks or flows of these...
Limits to Growth and the Environmental Kuznets Curve
Many observers believe that continued economic growth will only lead to worsening environmental problems as production of more commodities uses up the earth's natural resources, and as the economy generates ever-increasing amounts of waste byproducts and pollution. Other, more optimistic observers expect solutions for scarcity to be found in human ingenuity and technology. One line of reasoning has been the argument that poverty is an important cause of environmental degradation, and that as...
Production Profit and Supply
The supply side of a market is just the reverse of the demand side. While demand is based on marginal benefit, which determines consumers' willingness to pay, supply is based on marginal cost, which determines producers' willingness to sell. In a market, supply comes from firms or producers that combine inputs to make the goods and services that consumers will buy. Economists sometimes refer to these inputs as factors of production, meaning labor, capital, and land, as well as other more...
Forests and Tree Growing
Forest policy provides an opportunity to apply and highlight some important economic concepts such as opportunity cost and positive externalities. It is also a great example of a resource where private objectives will often differ from social objectives, because the resource in question is a complex one with multiple dimensions and several competing kinds of value. It's also a resource where the uses and values to local communities may diverge from those of more distant interest groups. Let's...
An Unfortunate Dualism
Regrettably, comparisons of the advantages of private versus common property have become entangled in an ideological debate between the merits of free markets private property and free enterprise on the one hand and the role of government on the other hand. What is unfortunate is that these issues are framed as an either or choice between free markets and government regulation. In reality, neither choice can be said to always be better than the other. Some resources can go either way, private...
The Market for Funds
These transactions across time involve the market for funds, like at a bank. To simplify just a bit, let's assume that the supply curve in figure 4.1 reflects people's willingness to postpone consumption of their income until a later period. The demand curve in figure 4.1 represents people wanting to borrow to make productive investments. Investors' willingness to pay a premium to borrow money for their investments depends primarily on the expected return on their investments. As in earlier...
Congestion Pricing
Let's put some of these ideas to work on a common externality problem, highway congestion. A highway is a congestible public good, which means that it is nonrival with low numbers of users Even when direct policies are impractical, economic reasoning and market incentives can help identify creative solutions to difficult problems. Here's an example. Poachers of ivory and rhino horn kill the animals in the process, which creates an externality problem because of concerns over the possible...
Tradable Pollution Permits
Tradable pollution permits, also referred to as emissions allowances, represent an important innovation with a number of potential advantages over other approaches. In some respects tradable permits are like a CAC approach because emissions are 1Martin L. Weitzman, Prices vs. Quantities, Review of Economic Studies 41 1974 477-491. limited to a predetermined quantity permits are issued for only a limited level of emissions , but they also have the advantages of a pollution tax because the...
Environmental Side Effects of Trade
Now let's add an externality to our trade model and see how that might alter our analysis. The effects will depend on whether environmental damage is associated with trade in exports or imports, and it will also depend on whether there are domestic policies in place to correct the externalities. A full discussion of the kinds of policies that might accomplish this is found in later chapters. Some readers may want to skip ahead to look at chapters in part 2 and then come back to this chapter....
Economic Incentive Policies
An alternative to the regulatory, or CAC, approach is an economic incentive, or EI, policy. Unlike the more rigid CAC approach, EI instruments discourage pollution with monetary incentives penalties and rewards such as taxes, user fees, or subsidies. Firms and households are not told how much they can pollute or what technology they must use, but their choices will have financial consequences and this will influence the choices they make. Let's begin with a simple example of a pollution charge...
TradeOffs Efficiency and Demand
We can live without diamonds, yet they have a very high price. We cannot live without water, yet it typically has a very low price. Does this suggest something is terribly wrong Economic reasoning says no. Understanding this diamond-water paradox is just one of the goals of this chapter and the next one, where the essential building blocks for economic analysis are developed step by step. Central to this economic reasoning is marginal analysis the evaluation of trade-offs between marginal...
Regulatory Standards and Controls
The most commonly used type of policy instrument continues to be direct control or regulation by government of the actions of firms or individuals. In some cases these CAC regulations limit the quantity of emissions but leave the method of control up to the firm or household in other cases these regulations require the use of a particular or best available technology. Many land use regulations such as zoning are examples of CAC controls to limit externalities. In order to compare and contrast...
Deferred Consumption and Capital Accumulation
Let's consider the story of Robinson Crusoe, or at least a version of it. We find Monsieur Crusoe all alone on his island where he is able to live without too many complaints because he can hunt, fish, and gather food from the forest. These tasks take up most of each day, however, leaving almost no time for leisure, to relax and enjoy his paradise. If he wanted to, he could continue this routine indefinitely, and sustainably. Crusoe, however, might want to make his daily tasks easier, faster,...
Irreversibility and Substitution
At this point, you might want to throw up your hands in despair. We appear to have no clear basis for choosing from an infinite number of sustainable arrangements for a given set of resources. One approach would be to base these choices, or trade-offs, on the marginal value of each stock and flow which is the economics approach described in chapters 2 and 3. When somebody advocates sustainability, which stocks or flows do they mean What, in particular, is being promoted with sustainability What...
From Efficiency to Market Distortions
The main attraction of markets in economics is that they can achieve significant, even dramatic, net benefits through voluntary exchange between buyers and sellers, producers and consumers. If these markets exhibit what economists call perfect competition, they will maximize net benefits and be Pareto optimal. For perfect competition, however, there must be a many small suppliers so that they cannot influence price , b many consumers also so that they cannot influence price , c producers able...
The Coase Theorem
Key Concept Reciprocal externalities The Coase Theorem refers to an important point made by Nobel laureate Ronald Coase in a 1960 paper called The Problem of Social Cost. The most important point Coase made is not particularly controversial. Coase points out that from an economic perspective, externalities are reciprocal they can go either way from A to B or from B to A depending on how the property right or liability is defined. He uses an example of a doctor's office located next to a...
Green Labeling
Consumers can have enormous influence over what firms produce, how firms produce it, and even on government policy. Increasingly, consumers are basing market decisions on what a product contains, how or where the product was produced, on the basis of sustainability, or other social implications. So even without regulations, without Pigouvian taxes, consumers have the potential to influence not only the goods that come to market, but also the social and environmental setting in which they are...
Policy Distortions and Derived Externalities
incentives for farmers to produce food rather than export cash crops , and food production fell, actually making it more difficult to feed the poor. In another example, policies to encourage food production have sometimes included subsidies on fertilizer and chemicals, which in turn has led to overuse and worsened water pollution problems. Cheap coal in China and below-cost timber sales in the United States and many other countries are examples that show that one policy goal can be promoted at...
Travel Cost Method
The travel cost method looks at how far people are willing to travel to enjoy an environmental nonmarket good such as a beach, lake, river, or wilderness area. Travel is costly in terms of time, fuel, and other expenses. We expect people who live closer to a pristine lake to visit it more often, on average, than people who live far away, just as we expect people to buy more pizza when the price is low than when the price is high. So, if we can estimate a demand curve for pizza using its price,...
Production Possibilities
Up to now we've looked at consumers choosing among goods and producers choosing among inputs. The third and final category of choice we need to consider is how much of each good to produce. These choices aren't generally made by one individual, as is the case for a consumer's choices or a firm's choices. Instead, the interactions of consumer choices, producer choices, and market prices determine a set of outputs for all goods and services. Overall efficiency would involve efficient allocation...
Indirect Policy Instruments
Now it might occur to you that a tax on pollution has some very practical obstacles to overcome. Aren't there millions of automobile tailpipes in the United States, and hundreds of thousands of stove chimneys in Beijing, and thousands of miles of farm boundaries where nonpoint pollution can drain off toward a stream How in the world can government possibly monitor, measure, and charge for each unit of pollution from each of these locations Wouldn't the administrative costs be prohibitive Key...
Tragedy of the Commons Reciprocal Externalities
One type of market failure is sometimes referred to as a tragedy of the commons, a term ecologist Garrett Hardin popularized in a famous article of the same name in 1968. Many economists and other social scientists no longer like the term tragedy of the commons because it implies that all commons problems necessarily end in tragedy overexploited and degraded resources .1 They don't always end in tragedy as we will see later when discussing common property institutions in chapter 9. Common pool...