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EEP101_lecture6 - EEP 101/Econ 125 lecture 7 lecture...

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Unformatted text preview: EEP 101/Econ 125 lecture 7 lecture Property rights David Zilberman Outline Outline Property rights and the Coase Theorem The economics of clean up and restoration Limited information Limited Political economy models Capture Rent seeking Property right define entitlement that can not be Property taken away taken Polluter may have rights to pollutePolluter Property right and the environment environment precedent establishes right in many cases A chemical plant got the right to pollute when a chemical plant is established plant Victims( pollutees) may have rights for Victims( protection from pollutions Downstream users have rights to clean water The Coase theorem The Assumptions property rights are clear and enfrocable Full information Zero transaction costs No need for intervention in cases of externalities Pareto optimality Regardless of initial distribution of rights Then Clear property rights lead to Pareto efficient Clear outcomes outcomes The exact distribution of surplus gain depend The on negotiation on We assumed the parties are splitting the We benefits benefits In case of polluter rights the pollutee pay the In polluters not to pollute polluters In case of pollutee rights the polluter pays the In pollution to pollute Negotiations and the Coase outcomes outcomes Initial outcome B Pollutee pays CEBD,gains CEF CEBD,gains CEF Final outcome C Polluter gains BCE Social gains FCB Polluter FCB $ Gain to polluters D Polluter marginal benefits Marginal pollutee benefits F $ C E A Pollution D CASE OF POLLUTER RIGHTS B Initial outcome A Polluter pays GCDA,gains DCG GCDA,gains DCG Final outcome C Polluter gains GCA Social gain DCA Polluter DCA $ Gain to polluters D Polluter marginal benefits Marginal pollutee benefits F $ C G A Pollution E D CASE OF POLLUTEE RIGHTS B A functioning legal system is key for functioning environmental policy environmental Externalities-caused by Externalities-caused Implications and limitations of Coase theorem Coase Missing markets Undefined property rights Market failure Small number of actor-low transaction costs The Coase theorem works when It does not work when there are many parties It and negotiation and collaboration are costly Liability rules Liability Allow violation of property rights but imposes penalties Polluter has to pay damages for accidental water Polluter contamination.Has to pay a penalty for intentional contamination.Has Pollution tax is a liability payment Negligence Rules: Penalize individuals for not exercising sufficient care in action. Due care standards-set basis for liability A farmer may not be liable for run off damages if she performed due care. Part of policy is establishing these Part Inalienability : Inalienable rights are rights which cannot be sold or transferred, for example, rights to freedom and to life itself. Reasons for inalienablerights: Cognitive Dissonance: people tend to think nothing bad will happen to them. May cause p eople to work against their selfinterest; for example: 1) 2) 3) Refusal to wear seatbelts or Helmets Farm workers may not wearing safety gear Alcoholics and drug addicts may refuse to accept tre Examples Suicide & selling yourself for slavery arel illega Full Restoration May Be Suboptimal Suboptimal P r i c e MC of Restoration MB of Restoration Q* Q Q* = Optimal Restoration Quantity Q = Full Restoration Waste management Waste Liability may be retroactive- New owners are Liability liable for pollution of old ones. liable It leads to care in purchases of new properties It and prevent people from polluting and selling and In cases of ex Soviet Union may prevent In development-many sites are worth to buyer less than clean up costGovernment may pay if public gain from clean Government up and development is greater than private gain gain When pollution can be assigned to pollution we When have polluters we have source point source Point vs. non point source pollution pollution Example-when each smoke stack is monitored When individual pollution can not be assigned When we have non point source non Pollution at point source can be taxed In case of non point pollution of individuals can In not be observed- other action related to pollution can be regulated or taxed pollution Contamination by firms-point vs non point non Suppose that there are N firms, each firm is Suppose index by n who assume values from 1 to N Pollution of the nth farmer is Zn.It is produced .It by the input of this farmer Xn.This input is by .This generating output Yn. n. generating The production function of the nth producer is The Yn=Fn(Xn). The pollution function of the nth ). producer is Zn=Gn(Xn) producer Suppose output price is P, input price is W and Suppose pollution damage per unit is V. If the policy maker can observe Zn, he will charge the If nth firm VZ. It will lead to optimal outcome. nth The optimal choice of the firm will be MX A P n (X ) −Ω ν −ς Γν(Ξ ) F Ξ n ν X n Case of point source Case The optimality is At optimal outcome At P ∂Φ(Ξν ) ∂Γ ν ( Ξν ) ν − Ων − ς =0 ∂Ξ ∂Ξ value of marginal benefit of production is equal to input price plus input marginal pollution damage cost marginal Example Example F (X ) = α Ξν − β Ξ 2 ⊇ ν(Ξν ν) = χ Ξν2 Γ If n n ν νν⊇ ν Optimality condition Implying Implying If P a n − 2 Π βν Ξ ν − Ω − 2 χνς Ξ ν = 0 X n = .5 ( Π αν − Ω ) / ( Π β ν + ς χν ) a n = 2 ⊇⊇βν = . 1 ⊇χ ν = 1 , ⊇⊇Π = 1 0 ⊇ = 2 , ⊇ς = 2 Ω τη ε ν ⊇⊇⊇⊇⊇⊇⊇Ξ ν = . 5 ( 2 0 − 2 ) / (1 + 2 ) = 3 A tax of $2 will lead to optimality if Zn is observable. If Zn is not observables but Xn is a tax on input 2VcnXn.It will also be optimal.In our case the input tax 2V Xn.It is $12. Heterogeneity Heterogeneity Suppose all firms have the same production Suppose function, but vary pollution function. 50% have cn=1and the other 50% have cn=0 and 50% If the policy maker observes Zn Firms with cn=1 pay tax of $2 per unit of pollution and Firms produce 3 units making produce 10( 2 * 3 − .1 ∗ 32 ) − 2 ∗ 3 − 9 ∗ 2 = ∃27 The clean firms have Xn=.5(20-2)=9 and make 10(2 * 9 − .1∗ 92 ) − 2 ∗ 9 = ∃81 Average income is $54 per firm Average Non point source Non If only Xn is not observable the policy maker will optimize average behavior optimize So the tax will be based $2 per unit of output resulting So in output of Xn=.5(20-2)/(1+1)=6 in The profit per firm will be The social welfare will be $72 for clean firms and 01 for* 6 The 0(2 dirty ones. Since the cost fo their pollution is 2*36. dirty Average welfare is $ 36 per firm Information will generate welfare gain of $9 per firm. The Gain From Information The MB High Tax Avg. Tax Low Tax MEC A C E B D H Avg. MEC MEC L The area ABC is loss of pollution generated by dirty firms. The area CDE is loss of insufficient pollution by cleaner firms. Investment in Monitoring Investment Monitoring of pollution allows discrimination Monitoring among polluters and non-polluters and increases welfare. welfare. If monitoring cost is greater than the gain from If information, do not invest. information, Government can induce monitoring by assuming Government that everyone is a heavy polluter and is being taxed accordingly. Refunds will be issued to firms that prove to be clean. firms This leads to an industry of monitoring and This environmental auditors. environmental ...
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