BASD505 Course Notes 4

BASD505 Course Notes 4 - Decentralized Policies...

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Unformatted text preview: Decentralized Policies Decentralized environmental policies are policies that basically establish some ground rules and the allow the parties involved (the polluters and pollutees) to work things out for themselves With such policies, role of government is limited to providing the institutional struc- ture that allows the a ected parties to independently resolve the environmental con- ict; ie, the government establishes and enforces property rights provides a court system to hear complaints and determine remedies The a ected parties may resolve the environmental con ict through either (i) infor- mal negotiations or (ii) formal negotiations involving a court of law We'll consider two types of decentralized policies 1. liability laws 2. property rights We will use the following hypothetical example of an environmental con ict: A lake used by only two rms industrial plant uses the lake to dispose of production residuals (the rm bene ts from pollution) a shing operation harvests sh from the lake (this rm is harmed by pollution) In the diagram below MAC IP shows the marginal abatement costs of the industrial plant MD F shows the marginal damage done to the shery We will consider the ability of di erent decentralized policies to achieve the e cient level of emissions E * $/unit E U E T MAC IP MD F emissions E * Liability Laws Liability laws are intended to ensure those harmed by some action are properly compensated people consider the full consequences of their actions; ie, provide incentives for make people take the right level of care in their activities Making polluters liable for the harm they cause can e ectively internalize the ex- ternality; ie, liability can transform pollution damage from an external cost into a private cost There are two main types of liability strict liability: people are responsible for damages regardless of circumstances negligence: people are responsible for damages only if they failed to take ade- quate care to avoid damage BASD 505 Lecture 4: page 2 s QUICK QUIZ: In general, under what conditions might a regime of strict liability be a better choice than regime of negligence? When the behaviour of potential polluters is di cult to monitor Strict Liability Under a strict liability regime polluters are forced to internalize the full costs they impose on others (ie, they will have to fully compensate those harmed) In our example, if the industrial plant is required to compensate the shery for the damage it causes, what level of emissions would it choose under strict liability rule? $/unit E U E E * E T MAC IP MD F emissions Starting at the unregulated level of emissions, E U , would the plant reduce emissions to say E ? bene t to the plant is that it avoids paying area A + B to the shery cost to plant is its abatement costs, area B Since the payment the industrial plant avoids is greater than the abatement cost it incurs, it would be willing to reduce its emissions to E BASD 505 Lecture 4: page 3 $/unit E U E E * E T MAC IP...
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This note was uploaded on 04/21/2010 for the course BUSINESS basd505 taught by Professor Clive during the Spring '10 term at UBC.

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BASD505 Course Notes 4 - Decentralized Policies...

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