Labor with specific skills and therefore suppliers of

This preview shows page 57 - 59 out of 103 pages.

labor with specific skills and therefore suppliers of capital are likely to bear less of the burden than workers. Benefits of scarcity rents The restriction on the output of electricity increases its scarcity and results in scarcity rents. The price of the permits is equal to P C - P F and the total dollar value of the tradable permits is equal to area A + C. If an auction is used to distribute the tradable permits the government will capture the rents but if they are given away the rents will be captured by the firms that received the permits at no cost. Similarly, if a Pigouvian tax had been used instead of tradable permits, the government would obtain
Image of page 57

Subscribe to view the full document.

58 the scarcity rents, whereas if a regulation had been used to restrict output the rents would be captured by the firms. Benefits of environmental improvement The benefits of environmental improvement are equal to the marginal damage per unit times the reduction in emissions, area E + B + D. The distribution of the benefits from environmental benefits is often difficult to determine because of the effects on asset prices discussed in the next section. Effects on asset prices The gains and losses shown in Figure 7.2 are measured annually, but they will also be capitalized into asset prices. For example, scarcity rents are capitalized into stock prices, reduced damages to agriculture are capitalized into land prices, and improvements in local air quality are capitalized into house prices. The gainer from these environmental improvements will be whoever owns the asset at the time the future change is recognized, not who owns them at the time the improvement actually occurs. This makes it even more difficult to determine who gains and who loses from any particular environmental policy. Political economy of instrument choice Gaps between economic theory and political reality Our analysis has shown that “economic incentive” (EI) instruments, such as per unit taxes and tradable permits, are generally more efficient than “command and control” (C&C) instruments, such as regulations that restrict the quantity of pollution. However, in practice C&C instruments have been used much more often. In addition, when C&C instruments are used they are usually much stricter for new facilities than for existing ones, and therefore provide incentives for older, more polluting, facilities, to be kept longer. In the relatively few cases where EI instruments have been used, they have been in the form of tradable permits rather than taxes, even when the choice should have depended on the characteristics of the MB and MD curves. And tradable permits have been given away based on existing levels of pollution (“grandfathered”) rather than sold through auctions, even though auctions would raise revenue for the government and result in a more efficient distribution of permits when markets are imperfect.
Image of page 58
Image of page 59

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern