Flashcards in Week 5- Government Intervention to Correct Market Failure Deck (26):
draw: socially efficient level of environmental quality
- Marginal abatement cost curve (downward sloping). continues to zero and high pollution because there is so many damages that the site is better left degraded
- Marginal damages curve (upward sloping). e.g sediment pollution in river from logging makes it unsafe to swim in and biodiversity decreases.
Draw: Social costs when pollution is greater than optimal
- deadweight loss on right hand side of graph
-costs society more in form of environmental degradation than benefits of greater pollution (production).
Draw: Social costs when pollution is lower than optimal
- costs society more to clean up then the benefits of lower pollution.
- deadweight loss on left
Draw: optimal level of pollution with technological innovation
- MAC (abatement cost) curve lowered.
- new level of optimal pollution as it costs less for society to clean up or less damages from production
Pigouvian approach to market failure
- use taxes to remove divergence between MSC and MPC, and MSB and MPB
Pigouvian tax on timber production (negative externality)
-increase MPC of production to where MSC intersects MSB curve with tax
- tax to remove deadweight loss from over harvesting
Pigouvian approach on positive externalities
Problem with pigouvian approach of levying taxes on production of timber when externality is water quality
doesn't encourage development of technology that minimises impacts on water quality
solution to pigouvian tax problem
- externality should be taxed (e.g sediment levels in water, not volume of timber harvested
public good eg
air, national defence, knowledge
why market failure for public goods
private market will not supply the good since no one would pay for it because they cannot be excluded from benefits ("free rider")
externalities associated with public goods are...
the social value of public goods are substantially greater than the private value because
because benefits are non-rivalrous and non-excludable
free market quntity of public good is ___ than sociall efficient quantity
less... because private producers cannot avoid free riders.
socially efficient price
Coase's approach to correction of market externalities
-gov intervention not neccesary
- market for externality will automatically develop
-bargaining between generator and victims of externality will lead to socially efficient level of an externality.
- Whoever has the property right will receive payments. The party without the property rights will pay a bribe to the party with the property rights
Coase: initial distribution of property rights ____ ___ affect reaching the efficient level of the externality
Coase: The initial distribution of property rights ___ affect costs and benefits for polluters and people affected by the externality
Conditions for Coases theorm to hold:
(1) absence of transaction costs;
(2) well defined property rights;
(3) perfect competition in the abatement market;
(4) no income effects;
(5) no effects on entry or exit of firms; and
(6) no free riders.
people more willing to pay for an improvment in envm quality than they are to recieve compensation for a reduction as they are happy where they are
Public policy and instituional appraoches to correct market failure
-Moral suasion (convince public + > -)
- direct public production (bioversity conservation)
- Command and control
Property rights and creating markets
- Economic incentives (tax&subsidies + Marketable pollution permits)
Command and control
-government restrictions on inputs and outputs
- e.g never exceed a level for some air pollutant
- not always a set-quanity e.g technology standards - seat belts in cars
does command and control provide abatement incentives?
For command and contorl policies to allocate pollution abatement efficiently between firms:
-frims must have identical MAC or
- gov know MAC of each polluter
MPPs VS C&C
MPPs minimise total abatement costs and provide incentives while achieving target level of pollution with a high degree of certainty