Chapter 4 Flashcards
(40 cards)
First welfare theorem?
a competitive equilibrium is pareto optimum.
Pareto Optimum?
if there’s no additional exchange that satisfies all parties involved.
Exception to pareto optimum?
presence of externalities makes intervention welfare improving
Economically efficient allocation?
not possible to make one or more persons better off without negatively affecting another.
Externality?
actions of one agent have an unintentional positive/negative impact on another.
Conditions for efficient outcome in competitive equilibrium?
- Markets for all goods and services produced
- No externalities
- All markets perfect comp
- Perfect information
- Property rights fully assigned
- No public goods
- All agents are maximisers
Pigou approach?
When MSC doesn’t = MPC, charge a Pigouvian tax equal to the difference.
(polluter pays -> externality internalized)
Coase approach?
grant property rights to one party and one compensating the other.
Issues with Coase?
Marginal analysis doesn’t always lead to right conclusion.
May not be equitable
Assumes low transaction costs, doesn’t hold if many actors involved.
Command & control?
prescribes aspects of the production process. Inputs, production or outputs.
Issues with command & control?
Requires substantial knowledge by regulator.
Requires relatively homogenous products.
Market based policy instruments?
imposing price on goods = the marginal cost of their use.
Strengths of economic instruments?
Cover costs of environmental damage
Provide incentive
Raise revenue
investment in alternatives
Weaknesses of market based policy instruments?
Uncertainty in damage & abatement costs means hard to set price.
Asymmetric information.
Distributional inequity.
Taxes?
charge for every unit consumed, produced or emitted.
Subsidy?
receive a premium for every unit not consumed, produced or emitted.
Taxes & subsidies have same…
effects in the SR, but different distributional effects (transfers)
In the long run taxes…
increase cost of doing business, reducing investment, shrinking sector.
In long run subsidies…
reduce cost of doing business, increasing investment, expanding industry.
If permit market is perfect…
All producers pay same price, MC’s of production increase uniformly
Taxes & tradeable permits are equivalent provided…
regulator knows all marginal abatement costs.
Grandfathering?
Permits given to current emitters
- politically easy
- starts without price
Auctioning?
sell permits to highest bidder.
- generates revenue
- cap & trade like a tax, except price variable
Coase theorem?
separates efficiency & equity.
regardless of initial allocation, market will find the same allocation.
