Unformatted text preview: Chapter 10
Environment 10.1 ENVIRONMENTAL
PROBLEMS Reasons for Reluctance because of benefit, it is difficult to demand that
people in developing countries should give up
economic opportunities for the sake of the
environment. because of individual freedom, governments are
reluctant to tell consumers what to buy and
producers how to produce.
producers disagreement about the level of environmental
damage and disagreement about the best way to
limit or prevent it.
limit Environmental Debates
Environmental Views about Environmental Issues Intergenerational equity the goal of trying to make sure that future
generations have access to resources and
the natural would to at least an equal extent
to that of current generations.
to environmental capital sustainable development 10.2 MARKET FAILURE AND
EXTERNALITIES Market failure the situation that arises when the actions of
some people adversely and significantly
affect others in one or more ways.
affect The inability of some unregulated markets to
allocate resources efficiently.
Externalities Externality something that result from the actions of a person or persons,
that affect others who are not parties to the original action.
that one party undertaking an action to gain a benefit, while
another party has to bear some cost associated with that
action. Negative externality the cost that the other people have to carry. Positive externality without some form of intervention or market adjustment, the
producers in each cases do not pay that cost.
producers Summarize: the government can internalize the externality by taxing goods
that have negative externalities and subsidizing goods that
have positive externalities.
have 10.3 ENVIRONMENTAL
POLICIES: DEALING WITH
1. Regulation government can remedy an externality by
making certain behaviors either required or
forbidden. a politically, scientifically or economically
optimal level of activity.
optimal 2. Tradeable Rights and
Permits these could be sold at a fixed price to
each of the producers or a more market
orientated approach would be to auction
them to the highest bidder.
them this gives firms time to adjust and gives
them more management freedom.
them 3. Incentives and Disincentives
3. the government could persuade
consumers to change their behavior and
this would then send a market signal to
producers to be environmentally friendly.
producers 4. Green Taxes
4. Pigovian Tax a tax enacted to correct the effects of a
negative Arthur Pigou, 1877-1959 Compare: Regulation: not exceed 18 litres/wk Green Tax: $20 for each ton of paper Preference
3. 4. Tax is just as effective as a regulation in reducing the overall
level of pollution. The higher the tax, the larger the reduction in
Tax reduces pollution more efficiently. It places a price on the
right to pollute, which allocates pollution to those factories that
face the highest cost of reducing it.
Tax is better for the environment. Under the command-andcontrol policy of regulation, the factories have no reason to
reduce emission further. By contrast, tax gives the factories an
incentive to develop cleaner technologies, because it would
reduce the amount of tax the factory has to pay.
Conclusion: Unlike other taxes, e.g. income tax, distort
incentives and move the allocation of resources away from the
social optimum. Tax raises revenue for the government, also
enhance economic efficiency, the bystanders who are affected
are also be cared.
are 5. Negotiation and Private
Bargains Coasian bargains most efficient means of achieving a social optimum
was for the winners to compensate the losers.
was Coase theorem the proposition that if private parties can bargain
without cost over the allocation of resources, they
can solve the problem of externalities on their own.
can The initial distribution of rights does not matter
for the market’s ability to reach the efficient
outcome. 10.4 ENVIRONMENTAL
POLICIES: WORKING WITH
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