EEP101_lecture6 - EEP 101/ECON 125 Lecture 6 Lecture...

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Unformatted text preview: EEP 101/ECON 125 Lecture 6 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 Rights and the Environment Environment Property rights define entitlement that cannot Property be taken away be Polluters may have rights to pollute Precedent establishes rights in many cases A chemical plant gets the right to pollute when a chemical plant is established plant Victims (pollutees) may have protection rights Victims from pollutions Downstream users have rights to clean water The Coase Theorem The Assumptions Property rights are clear and enforceable Full information Zero transaction costs Then No need for intervention in cases of externalities Pareto optimality Regardless of initial distribution of rights Negotiations and the Coase Outcomes Outcomes Clear property rights lead to Pareto-efficient Clear outcomes outcomes The exact distribution of surplus gain depends The on negotiation on We assumed the parties are splitting the We benefits benefits In case of polluter rights, the pollutees pay the In polluters not to pollute polluters In case of pollutee rights, the polluter pays the In pollutee to pollute Initial outcome B: Pollutee pays CEBD, gains CEF CEBD, CEF Final outcome C: Polluter gains BCE, the social gain is Polluter the social FCB Gain to polluters D F $ $ Polluter marginal benefits A Pollution Marginal pollutee benefits C D CASE OF POLLUTER RIGHTS E B Initial outcome A: Polluter pays GCDA, gains DCG GCDA gains DCG A: Final outcome C: Polluter gains GCA, the social gain is C: Polluter the DCA DCA Gain to polluters D F $ $ Polluter marginal benefits C Marginal pollutee benefits G A Pollution D CASE OF POLLUTEE RIGHTS E B Implications and Limitations of Coase Theorem Coase A functioning legal system is key for functioning environmental policy environmental Externalities are caused by Externalities The Coase Theorem works when Missing markets Undefined property rights Market failure Small number of actors and low transaction costs 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 impose penalties Polluters have to pay damages for accidental water Polluters contamination and pay a penalty for intentional actions contamination 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 standards standards Inalienability: Inalienable rights are rights which cannot b e sold or transferred, for example, rights to freedom and to life itself. Reasons for inalienable rights: Cognitive Disson ance: People tend to think nothing bad will happen to them. May cause people to work against their sel f-interest; for example: 1) Refusal to w ear s eatbelts or h el m ets 2) Farm w orkers m a y not w ea r safet y ge ar 3) Alcoholics and d rug addicts m a y refu s e to accept trea tm ent Examples: Suic ide & selli n g y o urself for slavery are illegal Full Restoration May Be Suboptimal Suboptimal P r i c e MC of Restoration MB of Restoration Q* Q* = Full Restoration Q = Optimal Restoration Q Quantity 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 prevents people from polluting and selling. and In cases of ex-Soviet Union may prevent In development. To buyers many sites are worth less than the clean-up cost. less Governments may pay if the public gains from Governments clean up and development is greater than the private gain. private Point vs. Nonpoint Source Pollution Pollution When pollution can be assigned to polluters, When we we have source point source For example, when each smokestack is monitored When individual pollution cannot be assigned, When we have nonpoint source nonpoint Pollution at point source can be taxed In case of nonpoint pollution of individuals who In cannot be observed, other actions related to pollution can be regulated or taxed pollution Contamination by Firms: Point vs. Nonpoint Point Suppose that there are N firms, each firm is Suppose indexed by n who assume values from 1 to N Pollution of the nth farmer is Zn. It is produced Pollution th It by the input of this farmer Xn.This input is .This generating output Yn. The production function of the nth producer is The th Yn = Fn(Xn). The pollution function of the nth ). th producer is Zn = Gn(Xn) Gn Suppose output price is P, iinput price is W, and nput Suppose and pollution damage per unit is V. Case of Point Source Case If the policymaker can observe Zn, he will charge the If Zn he nth firm VZ. It will lead to optimal outcome. th VZ The optimal choice of the firm will be MAX PFn ( X n ) − Ω Ξν − ς Γ ν ( Ξν ) Xn The optimality is At optimal outcome At ∂Φ ( Ξν ) ∂Γ ν ( Ξν ) ν P − Ων − ς =0 ∂Ξ ∂Ξ Value of marginal benefit of production is equal to - input price plus - marginal pollution damage cost Example Example Fn ( X n ) = αν Ξν − βν Ξν 2 ⊇ ν ( Ξ ν ν ) = χν Ξν 2 ⊇ Γ If Optimality condition Implying Implying Pan − 2 Πβν Ξν − Ω − 2χνς Ξν = 0 Xn = .5(Παν − Ω ) / (Πβν + ς χν ) If an = 2 ⊇βν = .1⊇ν = 1,⊇Π = 10 ⊇ = 2,⊇ = 2 ⊇ χ ⊇ Ω ς τηεν⊇⊇⊇⊇ ν = .5(20 − 2) / (1 + 2) = 3 ⊇⊇⊇Ξ A tax of $2 will lead to optimality if Zn is observable. tax If Zn is not observable but Xn is a tax on input 2VcnXn, If Zn it will also be optimal. In our case the input tax is $12. Heterogeneity Heterogeneity Suppose all firms have the same production Suppose function, but vary in pollution function. 50% have cn = 1, and the other 50% have cn = 0. 0. 50% If the policymaker observes Zn, If Zn, -Firms with cn = 1 pay a tax of $2 per unit of pollution and Firms cn 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 The Xn 10(2 * 9 − .1 ∗ 9 2 ) − 2 ∗ 9 = ∃81 -Average income is $54 per firm Nonpoint Source Nonpoint If only Xn is not observable, the policymaker will If optimize average behavior. optimize Thus, the tax will be based on $2 per unit of output Thus, resulting in output of Xn = .5(20 - 2)/(1 + 1) = 6. Xn The profit per firm will be 10(2 * 6 − .1 ∗ 6 2 ) − 2 ∗ 6 = ∃72. The social welfare will be $72 for clean firms and 0 for The dirty ones since the cost of 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 MECH Avg. MEC MB High Tax A C Avg. Tax MECL E Low Tax B D 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. increases If monitoring cost is greater than the gain from If information, do not invest. information, Governments can induce monitoring by Governments assuming that everyone is a heavy polluter and is being taxed accordingly. Refunds will be issued to firms that prove to be clean. issued This leads to an industry of monitoring and This environmental auditors. environmental ...
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