61-handout-3

61-handout-3 - 2/21/2010 1 Environmental Market Failure and...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 2/21/2010 1 Environmental Market Failure and Policy Options A2 Economics A recap on market failure • Market failure occurs when the price mechanism fails to Market failure occurs when the price mechanism fails to deliver an efficient or equitable allocation of resources • Allocative efficiency occurs when the price charged for a product equals the marginal social cost of production • If the market does not price an externality correctly there is a loss of allocative efficiency • This leads to a loss of economic and social welfare and can have severe distributional consequences • Poorer people are often those worse affected by the consequences of climate change 2/21/2010 2 Allocative inefficiency due to negative externalities Price Marginal private cost (supply) Marginal social cost (supply) Externalities are costs or benefits inflicted upon a third party outside of a market transaction, caused by either under- or over- allocation of resources to a Quantity Private Optimal Output Marginal private benefit (demand) Social Optimal Output Efficiency Loss resources to a particular product. Lord Stern on Climate Change • “"Climate change is a result of the Climate change is a result of the greatest market failure the world has seen. The evidence on the seriousness of the risks from inaction or delayed action is now overwhelming. We risk damages on a scale larger than the two world wars of the last century. The problem is global and the response must be a collaboration on a global scale." 2/21/2010 3 Some key environmental challenges • Growing municipal and industrial waste Growing municipal and industrial waste • Contribution of EU countries to global warming • Deforestation and other examples of the tragedy of the commons (permanent resource depletion) • Risks to global bio-diversity • Congestion, noise and air pollution • Supplies of drinking water under threat Regarding the environment as a public good • Environmental assets are public goods which are not usually exchanged on markets • No price emerges to signal relative scarcity and change behaviour • There may be big free-rider problems...
View Full Document

This note was uploaded on 02/08/2012 for the course ECO 51844 taught by Professor Sabet during the Spring '11 term at FIU.

Page1 / 13

61-handout-3 - 2/21/2010 1 Environmental Market Failure and...

This preview shows document pages 1 - 4. Sign up to view the full document.

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