2.8 Market failure - externalities and common pool resources

What are demerit goods?

- Any good that is overprovided by the free market resulting in negative externalities - Have greater social costs than private costs - Examples fast food, sugary drinks, alcohol

What is funding for clean technology. Evaluate

- government invests in renewable sources of energy. Intervenes in the market and promote the development and use of these technologies. Through subsidizing or giving tax credits to those who invest in them. Problems: -cost to government. But if gov is strongly committed, it is worth it to subsidize. Because use of clean energy will only increase if prices are more affordable.

What are 3 ways to tackle negative externalities of production

- imposing carbon tax on polluting firms. Canada to cut ghg emissions by 30% from 2005 levels by 2030. Start at 10$ in 2018 to rise by $10 yearly to $50 by 2022. Modelled on Canada policy in BC which led to 12.9% decrease in 2013, compared to 2007. - legistlation. laws that firms must comply with in production process (eg specific types of machinery/air filters/disposal methods). Or bans on polluting firms. UK environmental agency posed fines up to 1.5m pounds in 2017 (for breaking environmental laws)that went to help wildlife and environment (30 charities to clean rivers). Eg Heineken UK for pollution incidents. Northumbrian Water for pumping raw sewage into tributary of river Tyne. - tradable emission permits. Like agreed in Kyoto Protocol between countries. Although could also be applied to individual market cases. Individual firms are allocated quotas of emissions that they are allowed to produce. Firms that pollute less can sell their remaining quota to other firms who need to pollute more. Hence 'tradable'

What are 5 challenges faced in international cooperation?

- lack of shared responsibility: not all countries equally responsible for carbon emissions. Yet some countries (who may have not emitted as much) May suffer the worst of it (eg rising sea levels in Tuvalu (50 years gone), Netherlands, BD. Coming to agreement hard, countries most affected will want big international response but countries affecting most will not. -inequality of resources: countries in significant poverty would argue that it would be difficult to choose between climate change prevention or increased electricity prevention. (More than 300 million live without electricity in India) Transition from existing eg coal industries without significant investment would need a lot of investment. -political disagreements: Eg South China Sea, political claim of land halts cooperative strive for sustainability. Different governments have different views (eg taxes or legislate). -enforcement is difficult: eg under Trump Presidency US dropped out of Paris Agreement. -monitoring: supranational orgs like IPCC (international panel for climate change) to provide all govs with info and data to develop climate policies (eg Paris Climate Agreement). Was even awarded Nobel prize in 2007. But whilst improving transparency, criticized for conservative data, not carrying out own research (so may not be as accurate/reliable) and there have been incidents of data misrepresentation.

What are 3 ways to tackle negative externalities of consumption?

1) Banning or regulating the good: making them illegal or introduce legistlation. (Add case study info NOT from essay.) 2) Imposing an indirect tax on the good: these are pigouvian taxes. to increase private costs of the good: In the US, price elasticity of demand for cigarettes is estimated to be around -0.3 to -0.56. This is quite price inelastic and so Pigouvian taxes would not be effective) 3) Negative Advertising: provision of information, nudges. (Brazil is the 2nd country in the world to adopt mandatory warning labels and images on cigarette packaging (which also led to a lot of media coverage). Since 2001, 100% of all cigarette packaging in Brazil has had these warnings and surveys suggest that 67% of consumers said that they were now more willing to quit smoking. But studies suggest that desire was almost never translated into action.

What are 4 possible government responses to threats to sustainability? Remember this is a negative externality of production?

1) Carbon Taxes (as discussed before). Can tax coal to encourage producers to substitute energy sources. Eg is nuclear worse? Waste. 2) Cap and Trade (Tradable emission permits as discussed before) = gov sets emission reduction targets and encourages firms to meet them by creating economic incentives. 3) funding for Clean technologies 4) Collective self governance.

What are 4 ways to tackle positive externalities of consumption?

1) Subsidizing firms, like healthcare 2) direct gov provision of goods that have externalities of consumption and usually free of charge to all customers. 3) Positive advertisement, nudges 4) Legistlation, May pass laws to make consumption of goods compulsory

What are 2 ways to tackle positive externalities of production?

1) subsidize firms - to provide training/research. Or eg producers of beekeeping. Around half the budget (2017-2019) was allocated to each country according to the number of beehives in each country. 2) Direct government provision. - fund research into new technologies (eg beekeeping technologies), or can directly provide those goods like flood defenses.

What is a rivalrous good?

A good/service that its consumption prevents someone else from consuming it.

Tradable pollution permits adv and disadv.

Adv: 1) monetary incentive to reduce pollution. (Eg clean energy investing or make more efficient). Infact, can make a profit by selling permits. 2) social optimum reached and allocative efficiency. Increases welfare. (If Q1 can be Q* set by gov) 3) market based solution. Not too much government intervention. So naturally allocates resources. 4) Equitable for firms. No firm will be overly disadvantaged as they have many choices. Prices won't skyrocket. And if the product is so desirable, then firms can just buy permits (if they can't reduce pollution) Disadvantage: 1) if gets socially optimum level of pollution decided wrong. Could make things worse innit. 2) difficult to enforce (is it strict enough, fine bad enough), high admin costs (eg distributing permits) 3) needs international cooperation. Though this does promote it.

Why do common access resources cause market failure?

Because the individual benefits of consuming it are much greater than the private costs of doing so. This poses a threat in sustainability.

What are the benefits and problems of imposing carbon taxes?

Benefit: - much easier to apply than other measures (like tradable emission permits) - tax revenues collected can be invested in promoting innovation and new tech, like renewable sources of producing energy. Problems: -difficult to measure pollution created and put a value on it to establish amount of tax. -difficult to identify which firms are polluting and to what extent each firm is responsible for the pollution. -make firms pay for the pollution but may not actually stop it from taking place. Costs may be low for them relative to their revenue? (Although hopefully provides incentives to)

What are the benefits and problems of subsidizing firms? Externalities of production)

Benefits: - firms costs of production reduced and more produced, so society gains from positive external benefits. Problems -difficult to estimate level of subsidy deserved by each firm -uses up government funds and so brings forth oppurtunity cost. (Cut back on other expenditures that may be important (eg healthcare)).

What are problems and benefits of legistlation? (Externalities of consumption)

Benefits: -May fully realize potential welfare gain as consumption compulsory. Problems: -less likely to be successful unless government provides goods or service free of charge. - ^people might resent this type of law if it forces them to pay or seen as infringement of civil liberties. -additional cost of enforcing the law.

What are the benefits and problems of legistlation?

Benefits: -Might have more impact as bans mean pollution will definitely decrease. -Cannot pay their way out, inevitably more eco-friendly. Problems: -Ban/Restriction May lead to unemployment in the corresponding industry cuz jobs would be lost if firms are closed/market reduced. -Banning a firm will lead to the non-consumption of the good (which may have been a necessary or desirable good for customers) -cost of setting and enforcing policy standards may be difficult to the extent, and/or have a cost greater than the pollution itself. (But can we even quantify that?)

What are benefits and problems with positive advertisement (externalities of consumption)?

Benefits: -awareness, education Problems: -costs may be high? But relatively cheaper than others -May be considered ineffective

What are benefits and problems of pigouvian taxes?

Benefits: -consuming the good is more expensive, people will consume less of the good due to law of demand. -government will gain some revenue from tax which can be used to mitigate some of the negative effects caused by the consumption of the good Problems with this solution: -addictive goods, demand tends to be price inelastic and so increase in price will not reduce the quantity consumed as much. -if taxes raised too much, could look for illegal sources of supply, causing black markets to appear. -???taxes pay for external cost they create but may not stop negative effect from taking place as people will still consume the good??? But less people would consume it no??? So less effect no???

What are the benefits and problems with subsidizing firms? (Externalities of consumption)

Benefits: -firms costs of production reduced so would be willing to sell at a lower price, more people can afford it, society would benefit. Problems: - cost for government, creates opportunity cost on other possibly important expenditures. - May create inefficiency during production as part of their revenue is guaranteed by government.

What are the benefits and problems of direct government provision? (Externalities of production)

Benefits: -reduces firms costs of production Problems: -cost for gov might be high, opportunity cost. -gov might lack expertise found in firms who are specialized in their area of knowledge. -private firms may be dissuaded from investing in these areas themselves because of this gov policy.

What are benefits and problems of banning/regulating?

Benefits: -van would completely make the externality disappear (unless black market tho) Problems: -large effect of shareholders/employment of corresponding industry -effect on gov revenue as they would receive fewer/no taxes from this market -negative reaction form consumers if it seems the ban restricts their liberties. Effect of future gov election prospects lol. So gov may not choose this option. (But China no election tho...) -May impose additional cost to gov as this will need to be enforced. -black market? Depending on nature of good.

Benefits and problems of negative advertising?

Benefits: -relatively inexpensive (for consumers mainly) -more awareness creation that may be sustainable throughout generations in the long term Problems: -considered ineffective in reducing demand especially for addictive goods and certain age groups. (Eg teenagers reducing cigarette consumption. -could it be expensive to provide ads?

What is collective self governance? Give case study example.

Collective self governance is defined as the participation of industries in the measures planned and taken to resolve environmental sustainable issues. Example: the cruise industry. Hard to manage activities of ships due to transient nature of cruises? Tourists are increasingly concerned about env issues, so cruise companies market themselves for their sustainability policies Svalbard Environmental Protection Act allows companies to visit the Svalbard archipelago of islands as long as they promise to look after the area. AECO (association of Arctic Expedition Cruise Operators) exists to balance needs of environment with needs of tourist industry. All interested parties works together to promote sustainability in a self-governing way.

What is market failure?

Failure of the market to achieve allocative efficiency, resulting in an over-allocation of resources or u dear-allocation of resources.

What is a merit good?

Goods or services considered to be beneficial for people that would be under provided by the market and so under-consumed.

(Slide 36) Draw a diagram to show effect of carbon taxes, tradable emission permits or legistlation.

Hard to estimate exactly so externality won't be corrected completely.

What are more effective responses for sustainability?

International cooperation, monitoring and enforcement.

What is MPB?

Marginal Private Benefit is the benefit to consumers of consuming one more unit of a good.

What is the MPC?

Marginal private cost is the cost for firms to produce one more unit of a good.

What is MSC?

Marginal social cost is the cost for society when one more unit of a good is produced. INCLUDES MPC.

(Slide 35) Draw a diagram for the negative externalities of consumption. Show welfare loss.

Market over-allocates resources to the consumption of the food.

(Slide 34) Draw a diagram for negative externalities of production. Show welfare loss.

Market overallocates resources to the production of good.

(Slide 41) How can we show tragedy of common in a diagram?

Negative externalities of production. Quantity produced is more than socially optimum, means lower price, encouraging even more consumption and so even more production. Making the issue of resource depletion even worse. Different diagram on slide to add.

What are the benefits and problems with direct government provision? (Externalities of consumption)

Note: private provision (eg private schools) raise questions about fairness/equality. Benefits: -similar to tax Problems: -cost to government high, opportunity cost. -gov might be less efficient than private firms who specialize so good/service may not be as good. -private firms may be dissuaded from investing in these areas because gov will provide these goods/services anyways.

What are some examples of positive externalities of production and consumption?

Production: research by private firms leads to development of new technologies that benefit whole society. Bee-keeping, bees are famous pollinators, lead to more harvest for farmers so more produce for consumers. Consumption: Education benefits whole society cuz lower crime rates, lower unemployment, more economic growth. Healthcare: vaccine reduces spread of illness so others won't get sick.

What are some examples of negative externalities of production and consumption.

Production: using fossil fuels to produce = global warming, negative health effects, environmental pollution. Consumption: cigarettes affect non-smokers; car driving pollutes air for everyone, global warming; someone listening to loud music, may cause discomfort to others around.

What are common access resources?

Resources over which there is no established private ownership. They are non-excludable but rivalrous.

What is MSB?

The marginal social benefit is the total social benefit when one more unit of a good is consumed. INCLUDES MPB.

What is a non-excludable good?

When it is not possible to exclude anyone from using a good. (Most goods are excludable because they have a price), it is often very inefficient and expensive to make a common access good excludable.

(Slide 42) Draw a diagram to show cap and trade for the market for pollution permits.

Yup

What is an externality?

a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service (a third party).

What is the tragedy of the commons?

the tendency of a shared, limited resource (common access resource) to become depleted because people exploit it due to self-interest for short-term gain. For each private producer, their self-interest is to keep exploiting natural resource. If they stop, only their loss cuz other firms come in and take it. Resource depletion takes place.