Lecture 2: Regulatory instruments used in environmental policy - Part 1

Question 1

Two Regulatory Theories of Environmental Economics

Answer 1

1. Public interest theory (Normative) - maxxing social welfare so regulate if assumptions don’t hold (e.g. an externality)
2. Interest Group Theory (Descriptive/Positive) - regulation is made so that economic agents can make more profit

Question 2

Two competing marginal curves for environmental/emission regulations

Answer 2

Marginal Damages of Emissions [To Victims]
v.
Marginal Savings of Emissions [To Firms]

Question 3

How to add two MS curves from two different emitters

Answer 3

First convert into e1 and e2, then add e1 and e2 to get MS(market)

Question 4

Environmental Regulatory Instruments:

Answer 4

• Emission fees/taxes
• Pigouvian Taxes
• Command and Control (not economic instrument)
• Tradeable Quantity Instruments
• Liability
• Voluntary measures (not economic instrument)

Question 5

Emission fees/taxes

Answer 5

Economic Instrument,Cost-Effective, NOT efficient.
- Price paid by emitter per unit of emissions
- Emitters required to abte and pay for residual emissions.

Question 6

Piouvian Taxes

Answer 6

Economic Instrument, Cost-Effective, and Efficient.
- Special form of emission fees that equates the emission fee rate to aggregate (market) marginal damages.

Basically MS(market) = MD(market).
- The aim is to max savings from emissions net of related damages.

For multiple emitters, the damages from emissions is summed vertically and the savings from emititng is summed horizontal because rival.

BUT rarely implemented because of monetary impliciations.
- Competitiveness: would shift production to national firms or non-regulatory countries
- Revenue: Would decrease over time if they’re working
- Problematic to estimate MD (non-linearity, exaggeration, etc.)

Question 7

Command & Control Regulatory Methods

Answer 7

Not economic instrument, cost-effective, or efficient.
- Prescriptive instrument
- Most commonly used instrument because easier to control & monitor and certainty of end result and costs on emitters
- Cons: Not cost-effective because doesn’t equal MC across emitters and implies granted rights to pollute to emitters. Also not dynamic
- Could restrict choices to emitters through: Technological standards, behavioral stanards, performance standards, or banning products

Question 8

Tradeable Quantity Regulatory Instruments

Answer 8

Economic instruments, Cost-Effective, and Efficient IF fixed at the Pigouvian tax level.
- Permits: Quantity-Based instruments consisting in a license to emit.
(More in Lecture 3)

Question 9

Liability Regulatory Instruments

Answer 9

Economic instruments, Cost-Effective, and Efficient IF fixed at the Pigouvian tax level.
- Holding polluters liable for damage they may cause
- Requires victims to be compensated legally or economically.

Question 10

Total Emissions Costs (For emission fees; formula)

Answer 10

TEC = C(x) + p*e
Where TEC = Total Emissions Costs
C(x) = abatement costs
p = price of emissions
e = actual emissions

Question 11

Equimarginal Principle

Answer 11

When controlling emissions across several emitters, all emititng same pollutant, efficiency requires that the MC of abatement is the same for all emitters.
i.e. Firms should reduce pollution until the cost of reducing one more unit is the same for all.

Equimarginal is required for efficiency but not always efficient. However it is both required and always cost-efficient.

Question 12

Coase Theorem

Answer 12

If property rights are defined and transation costs are v. low then private parties can negotiate to reach socially efficient outcomes, regardless of who initially had property rights, without government intervention.
- Will end up at MS = MD without intervention

Question 13

To make Market Marginal Savings

Answer 13

Add horizontally because of rivallry

Question 14

To Make Market Marignal Damages

Answer 14

Add vertically because of non-rivalry

Question 15

How to compute level of emissions from Producer 1 and Producer 2 at Piguovian tax level

Answer 15

Apply equimarginal principle which just means assume that the p(tax level) = MS for both emitters and then calculate the corresponding e from each MS=e equation.

Question 16

Computer Cost of Abatement for MS curve for Emitter from a regulation

Answer 16

Calculate the area of the triangle to the RHS of the emissions level

Question 17

Compute Net Benefit of a Regulation with MS and MD curves

Answer 17

Find the area of the shape under each MS curves at that emissions level (to the left of the e level). This will likely be trapezoid area. Add them both up. This is total MS.
Then find the area of the triangle under the MD curve at that emissions level and that is total MD.
Then take MS - MD to get NB.

Question 18

Trapezoid Area Formula

Answer 18

1/2 (a+b) * h
Where a = top base; b = bottom base; h = height of the trapezoid (so difference between bases)