EEP101_07 - EEP 101/Econ 125 lecture 7 Property rights...

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Unformatted text preview: EEP 101/Econ 125 lecture 7 Property rights David Zilberman Outline Property rights and the Coase Theorem The economics of clean up and restoration Limited information Political economy models Capture Rent seeking Property right define entitlement that can not eb taken away Polluter may have rights to pollute Property right and the environment precedent establishes right in many cases A chemical plant got the right to pollute when a plant is established Victims( pollutees) may have rights for protection from pollutions Downstream users have rights to clean water The Coase theorem 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 outcomes The exact distribution of surplus gain depend on negotiation We assumed the parties are splitting the benefits In case of polluter rights the pollutee pay the polluters not to pollute In case of pollutee rights the polluter pays the pollution to pollute Negotiations and the Coase outcomes Initial outcome B Pollutee pays CEBD,gains CEF Final outcome C Polluter gains BCE Social gains FCB Gain to polluters D $ Polluter marginal benefits C Marginal pollutee benefits F $ E A Pollution D CASE OF POLLUTER RIGHTS B Initial outcome A Polluter pays GCDA,gains DCG Final outcome C Polluter gains GCA Social gain DCA Gain to polluters D $ Polluter marginal benefits G C Marginal pollutee benefits F $ E A Pollution D CASE OF POLLUTEE RIGHTS B A functioning legal system is key for environmental policy Externalities-caused by Implications and limitations of Coase theorem 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 and negotiation and collaboration are costly Liability rules Allow violation of property rights but imposes penalties Polluter has to pay damages for accidental water contamination.Has to pay a penalty for intentional 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 Inalienability: Inalienable rights are rights which cannot be sold or transferred, for example, rights to freedom and to life itself. Reasons for inalienable rights: 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 are illega l Full Restoration May Be Suboptimal P r i c e MC of Restoration MB of Restoration Q* Q* = Full Restoration Q Quantity Q = Optimal Restoration Waste management Liability may be retroactive- New owners are liable for pollution of old ones. It leads to care in purchases of new properties and prevent people from polluting and selling In cases of ex Soviet Union may prevent development-many sites are worth to buyer less than clean up costGovernment may pay if public gain from clean up and development is greater than private gain When pollution can be assigned to pollution we have polluters we have source point Point vs. non point source pollution Example-when each smoke stack is monitored When individual pollution can not be assigned we have non point source Pollution at point source can be taxed In case of non point pollution of individuals can not be observed- other action related to pollution can be regulated or taxed Contamination by firms-point vs non point Suppose that there are N firms, each firm is index by n who assume values from 1 to N Pollution of the nth farmer is Zn.It is produced by the input of this farmer Xn.This input is generating output Yn. The production function of the nth producer is Yn=Fn(Xn). The pollution function of the nth producer is Zn=Gn(Xn) Suppose output price is P, input price is W and pollution damage per unit is V. If the policy maker can observe Zn, he will charge the nth firm VZ. It will lead to optimal outcome. The optimal choice of the firm will be MAX PFn ( X n ) - - ( ) Xn ( ) ( ) The optimality is P - - =0 At optimal outcome Case of point source value of marginal benefit of production is equal to input price plus marginal pollution damage cost Example Fn ( X n ) = - 2 ( ) = 2 If Optimality condition Implying If Pan - 2 - - 2 = 0 Xn = .5( - ) / ( + ) = .5(20 - 2) / (1+ 2) = 3 an = 2 = .1 = 1, = 10 = 2, = 2 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 is $12. Heterogeneity Suppose all firms have the same production function, but vary pollution function. 50% have cn=1and the other 50% have cn=0 If the policy maker observes Zn Firms with cn=1 pay tax of $2 per unit of pollution and produce 3 units making 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 9 2 ) - 2 9 = 81 Average income is $54 per firm Non point source If only Xn is not observable the policy maker will optimize average behavior So the tax will be based $2 per unit of output resulting in output of Xn=.5(20-2)/(1+1)=6 The profit per firm will be The social welfare will be $72 for clean firms and 010(2 *6 for dirty ones. Since the cost fo their pollution is 2*36. Average welfare is $ 36 per firm Information will generate welfare gain of $9 per firm. The Gain From Information MECH MB High Tax Avg. Tax Low Tax Avg. MEC A C E B D MECL 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 Monitoring of pollution allows discrimination among polluters and non-polluters and increases welfare. If monitoring cost is greater than the gain from information, do not invest. Government can induce monitoring by assuming that everyone is a heavy polluter and is being taxed accordingly. Refunds will be issued to firms that prove to be clean. This leads to an industry of monitoring and environmental auditors. ...
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