ECON 548 Spring 2011 Lecture 7

ECON 548 Spring 2011 Lecture 7 - ECON/ENVR 548 Spring 2011...

Info iconThis preview shows pages 1–17. Sign up to view the full content.

View Full Document Right Arrow Icon
ECON/ENVR548 Spring 2011 Lecture 7 Jason H Murray
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Optimal level of pollution Should pollution be zero? Emissions, M , have benefits and costs. What are the benefits of pollution? The output we get from making it, avoided costs of capturing or cleaning it. For example, the benefit of Carbon emissions is the energy supply. If marginal damages are increasing and marginal benefits are decreasing, optimal pollution level will be where MB =MD:
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Or. . Equivalently, we can look at the optimal level of the associated output on a standard Supply and Demand picture.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 firms might have different costs of abatement One firm is older, etc If we want to minimize the total cost of abatement then we may want to put more of the burden on firms with lower costs.
Background image of page 6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 8
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Policy Instruments Institutional: social norms etc Bargaining Solutions (Coase Theorem) Liability : sue over damages Social Responsibility: choose to internalize external costs
Background image of page 10
Policy Instruments: Command and Control – Mandate ambient M, eg: original clean air act – Non-transferable emissions licences – Technology requirements, eg: install sulfur, Mercury scrubbers on coal stacks – Zoning, certain sites for dumping trash or nuclear waste
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Quasi-Market Based Instruments: minimize costs: Price Instruments Emissions taxes (abatement subsidies) Subsidies (think green technologies or Ethanol – not that these are implemented well) – Quantity Instruments Cap and Trade In a certain world these are equivalent
Background image of page 12
How does cap and trade work (just like ITQ’s) Mandate ambient M (or Z ) Auction or allocate initial numbers of permits to individual emitters Allow trading: high cost of abatement firms will purchase permits from lower cost emitters
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Group Problem: My Uncle Willard’s chicken farm/processing plant produces chicken meat and a bad external smell. Uncle Carol does the same next door. The community has voted that Willard and Carol must abate by 10 units. Abatement is expensive for both plants: Carol’s costs: MC C (Z) = 2Z Willard’s Costs: MC W (Z) = 3Z
Background image of page 14
Questions: Question 1: What is the optimal distribution of abatement burdens if we want to minimize the costs of abatement? Question 2: What is the optimal tax on emissions? Question 3: What happens if tradable permits are allocated: 3 to Willard and 7 to Carol. What can you say about the price for any trades?
Background image of page 15

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
1: ZW = 4, ZC = 6 , 2: tax = MC C (Z) = MC W (Z) = 12 3: By reducing by 1 unit of Z, Carol would save: 6*1 + .5*(1)(14-12) = $13 Willard would incur extra: 3*1 + .5*(1)(12-9) = $10.5 Trade would take place anywhere between $10.5 and $13 . Note that we don’t need to know firms costs to get
Background image of page 16
Image of page 17
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 45

ECON 548 Spring 2011 Lecture 7 - ECON/ENVR 548 Spring 2011...

This preview shows document pages 1 - 17. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online