W2 - Property Rights and the Coase Theorem Flashcards
(19 cards)
Set up the market failure of clean air, use a steel production factory as an example
Factory only considers private costs of production, not external cost to environment due to pollution.
Social benefit of steel = Benefit of steel - full social cost of production
Factory only considered private costs so market oversupplied with steel at a lower than optimal price and overconsumes clean air as its a public good (The root cause of the inefficiency) causing a DWL so regulation needed
Why are property rights important as an Institutional approach to Market Failure? What 3 characteristics must hold for property rights to be well defined?
Absence/ineffectiveness of PR’s main cause of market failure. Internalising the externality would need an institution to establish PR’s to make goods/ bads excludable and allow a market to operate
1) Exclusivity - all benefits/costs must accrue to only the owner
2) Transferability - PR’s must be voluntary transferable in full
3) Enforceability - PR’s should be secure from encroachment from others
Describe what Coase said about the reciprocal nature of externalities - the efficiency thesis
Both parties cause the externality as they are using their rights in a conflicting way - A Steel factory wouldn’t matter if there weren’t people nearby who are effected. i.e.. It takes two
Said rights over resources could be traded, with any initial allocation of rights will lead to a socially efficient outcome assuming certain conditions are met. But allocation matters for fairness as it will determine how the benefits are shared.
What are the 5 conditions that must be met for in any initial allocation of rights to lead to a socially efficient outcome? Give example
- Property rights well defined
- Perfect information
- Atomistic demand and supply sides - large number
- Rights enforceable at zero cost
- No transaction costs
Snow leopard example in the env risk slides - farmers own the livestock and ecotourism owns the rights to ecotourism for their profit
What is the Invariance thesis part of the Coase theorem?
Stronger version of Coase efficiency theorem
Generally how much externality is produced depends on initial allocation of rights UNLESS all agents preferences are quasi-linear in money (willingness to pay for a change in externality is the same i.e.. doesn’t matter how much money they have). Then the exact same efficient amount of externalities are produced
Draw the quasi linear preferences graph
x (money), y (externality)
IC’s are horizontal translates
Contact curve at level of emissions agreed (pareto efficient)
What wealth effect does the initial allocation of rights have? show it graphically using MB and MEC costs in the steel mill example and define areas a and d
Whoever is assigned the property rights gets wealthier as it determines who pays who - obviously unfair to assign them to the polluter so the residents have to pay them.
Will still end up on the pareto frontier but the point varies depending on allocation
b - what polluter pays victim, d vice versa
a - net social benefit from pollution
If properly defined rights can in theory bring
about efficient allocation, why do externalities
persist?
Allocation is based on efficiency, government is not solely concerned with efficiency but fairness
Transaction costs are actually high
What are the implications of high transaction costs to the Coase theorem?
Could the theorem ever hold for large numbers?
Initial allocation matters and try to reduce transaction costs
Status quo prevails
What is zoning and how does it relate to Coase?
Introduced when transaction costs are high, physically separates the two parties.
Zoning eliminates the pollution, but Coase is all about the optimal amount of pollution. So Zoning only makes sense when social welfare is maximised.
What are the 2 causes of biodiversity loss, what does it lead to, and what is the Coaseian solution to this?
1) Badly defined PR’s
2) Competing resource uses
Leads to insufficient incentives to invest in conservation and sub optimal benefit sharing
Solution:
Give PR’s over the environmental resources
Develop market of goods/services that give the environment economic value
Align profits with conservation
What are some of the requirements to set up a biodiversity market?
- Information instruments eg. government standards and labels (organic food labels)
- Infrastructure
- Start up subsidies (infant industry logic)
- Financial instruments such as micro-credit
- Top/Bottom up approach depending on context
What are the 4 main types of biodiversity markets?
Direct - beneficiaries directly pays the provider of the resource they benefit from
Indirect - beneficiaries support conservation by buying the resulting goods eg. sustainable coffee
Polluter pays - The polluter pays for emission rights (needs regulation)
Beneficiary pays - beneficiaries of healthy environment pay for its protection (may need regulation as beneficiaries/asset owners find it hard to strike a bargain)
What are Integrated Conservation and development projects (ICDP’s)? What are the 3 channels of conservation?
Combine environmental conservation and social development
1) Promote sustainable activities eg. Ecotourism
2) Provide alternatives - jobs in other industries
3) Payment for Ecosystem services (PES) - Pay people in exchange for them being restricted in resource use eg. paying people to not cut down trees (Coase)
What are the 4 main characteristics of PES contracts? Give a common example
1) Voluntary
2) Conditionality
3) Additionality
4) Time delimited
Example of Carbon sequestration: Preserving forests to absorb carbon dioxide from the atmosphere.
What are some difficulties in setting up PES markets?
Identifying key beneficiaries and sellers
Transaction costs
Monitoring and enforcement
Free riding issues
What are the 2 main ways of financing PES schemes, who do they benefit and give an example of each.
Taxation - Public provision as benefits are broad eg. Grain for Green programme in China to prevent floods
Firms, industry, private NGO - Private provision, benefits may be local or broad eg. Carbon offset projects
What is REDD+ ? What are the two carbon markets? What are the main and secondary aims?
Reducing Emissions from Deforestation and Forest Degradation - a PES contract
Can operate on a national or local level
Resulting carbon emission reduction sold as a carbon credit- can be traded in a carbon market 1) compliance markets - legally required to reduce emissions 2) voluntary market - buy carbon credits to offset their own emissions
Main aim: provide carbon offsets
Secondary aim: aid development and conserve biodiversity
