Environmental Economics, UNIGE 22/23

What happens to the Hotelling graph when the demand for oil increases

**Backstop price and total size oil stock does not change - Demand curve shifts UP, anchored by backstop price on vertical axis - Net price curve shifts left to represent price increase - Time of extraction becomes shorter -> this is reflected in a change of shape of the oil stock triangle (time moves up on the vertical axis)

What happens to the Hotelling graph when the social discount rate (rate of price growth) increases?

**Backstop price, demand, and oil stock do not change - Slope of net price curve becomes steeper so that backstop price is reached faster - Time of depletion gets shorter to match increased rate of extraction

What happens to the Hotelling graph when the oil stock increases?

**Demand and backstop price does not change - Area of oil stock triangle expands, shifts to the left - Net price curve shifts downward to match expanded time of depletion

What happens to the Hotelling graph when the backstop price falls?

**Demand curve does not change, but this signifies that demand for oil overall is decreasing and people are willing to pay less - Price curve shifts right (net price decreases) - Decrease in price induces greater extraction of oil which shortens the time of extraction

Climate change adaptation

- Any action to make the negative impacts of climate change less bad, and the positive impacts better - Efforts to transform negative impacts of climate change into positive ones, and finding ways to live with at least some climate change

Characteristics of property rights

- Comprehensive: all resources are either privately or collectively owned - Exclusive: the owner absorbs all benefits and costs from the resources - Transferable: property can be transferred between owners - Secure: property should be secure from involuntary seizure

Examples of revealed preference methods of valuation

- Cost/expenditure methods - Travel cost method - Hedonic price method

Why are voluntary climate agreements not sustainable?

- Countries have incentives to defect from the agreement and not fulfill their promises - There is no external enforcement actor to ensure compliance - Countries will continue to get the highest benefit from polluting (as in the prisoners' dilemma)

Benefits of climate clubs

- Easy to implement with a large coalition - Costs of non-joining can be higher than the benefits of free-riding - Prevents carbon leakage with lower information burden - Game theoretic equilibrium is stable in every period --> no variability in outcomes over time

Benefits of Paris Agreement

- Established cooperation in green R&D among the private sector - Actively engaged developing and emerging economies in the reduction of emissions

Why are taxes considered a market-based instrument?

- Firms are free to produce at any level, but the imposition of a tax represents a gain for firms in the form of a tax avoided - Firms still behave in terms of profit maximization because it will be profitable for them to pollute so long as their marginal abatement costs are less than the value of the tax

Benefits of stated preference valuation methods

- Full information exists on the environmental good - Can identify and measure both use value and non-use value

Cap and trade system

- Government establishes a cap for emissions of uniformly mixing pollutants (i.e. GHGs) and establishes a set number of emissions permits to not exceed that cap - Firms may freely trade permits at whatever prices they individually negotiate, but they may not exceed the total level of emissions set by the government

How is economic growth measured?

- Gross National Product (income accruing to all residents of a country) - Gross Domestic Product (income created within the borders of a country) - Absolute Real Economic Growth (increase in real GDP from one period to the next) - Per Capita Real Economic Growth (increase in per capita real GDP)

Kyoto Protocol (1990)

- High-income countries agreed to reduce emissions by an average of 20% by 2012 - Developing countries were not included to give them time to develop and for developed countries to bear the costs of reducing emissions - Lack of agreement and implementation from powerful countries such as the U.S., Australia, and Canada

How do markets deal with externalities?

- Internalizing externalities (taxation/subsidies) - Defining property rights

Drawbacks of Paris Agreement

- Lack of enforcement mechanism - Asymmetric incentives between developing and developed countries - Perceived risk of free riding is higher in terms of threats from global competitiveness

Which factors can affect the determination of the efficient emissions level?

- Marginal abatement cost for firms - Total damage to society inflicted by pollution - Marginal benefit of pollution for firms - The type of pollution (ex. if pollutant is a harmful toxin, efficient emissions level may be different from the cost-minimizing model) When looking at efficient emissions and free trade: - The demand for pollution (marginal benefit of pollution) under autarky and under free trade - The marginal damage of emissions both under autarky and under free trade - The willingness of regulators to regulate emissions - The influence of domestic interest groups vs. producers on the decisions of the government

Limitations of revealed preference method

- Participants in the market may not always be well informed of the environmental link in their transactions - Very difficult to determine non-use values

Stated preference valuation method

- Survey-based methods that rely on primary data sources to collect information - Based on hypothetical data gathered from surveys - Requires the construction of a virtual market with hypothetical economic transactions, replicating real life

What is the result of the chicken game for pollution and abatement when played sequentially?

- The sum of total payoffs is maximized through both countries abating - Both countries still have initiatives to defect, but shows potential for a solution via the leadership of a single country

Bioeconomic model of fisheries

- Total fish catch is presented in the form of total revenue obtained from fishing, follows the same logistic curve --> Revenue = price of fish x harvest amount - Revenue curve is intersected by the total cost of fishing curve --> Total cost is a function of total fishing effort

Limitations of the Coase Theorem

- Transaction costs are equal to all costs associated with negotiations; if they exceed gains, the theorem will not succeed - Presents an opportunity for the government to play a role in controlling pollution

What is the result of the chicken game for pollution and abatement when played simultaneously?

- Two equilibria where one player abates and the other pollutes; the costs of polluting bilaterally are too high so players must take risks

Revealed preference valuation method

- Uses individuals' behavior in actual markets to infer the use value of an environmental good or service - Requires the collection of real market data in order to make a valuation - There must be a market with real economic transactions for a good whose value is affected by the environment

How does the social discount rate affect how we view climate change?

--> Higher discount rates prioritize delayed climate action because the value of climate change damages in the future is less --> Lower discount rates imply more significant future impacts and prioritize immediate climate action to preserve the planet for future generations

How do discount rates work?

--> Higher social discount rate = future costs and benefits are less significant and depreciate in value faster = greater use of resources in the present day --> Lower social discount rate = future costs and benefits are more significantly valued = slower rate of use of future resources

How does the social cost of carbon vary across developed and developing countries?

--> SCC is lower in developed countries, as they are less likely to see the immediate and drastic effects of climate change -> will delay climate action to the future --> SCC is higher in developing countries (especially those located at lower latitudes and hotter climates) as they are already seeing effects of climate change and will prioritize immediate climate action

Causes of market failure

-Externalities -Market structure -Information asymmetry -Monopolistic or monopsonistic market structure -Weak property rights

Examples of tradeable emissions permits systems

1) Cap and trade 2) Emissions reduction credits (ERCs)

Policy instruments for global decarbonization

1) Carbon tax on producers 2) Permit system (buying a permit to emit) 3) Feed-in tariffs (taxes on consumers using resources that are high-carbon)

Hedonic Pricing Method mechanism

1) Collect data on residential property sales in a region for a specific time period 2) Create a model that attributes a portion of the property price to various characteristics of the property 3) Regression of the model gives us implicit prices for each characteristic of the house, which can be used to infer the value that we place on certain environmental qualities in a house

Problems of border carbon adjustments

1) Difficult to estimate the exact carbon content of a product 2) Risk of retaliation by countries if this is not accepted by the WTO as an official rule

Criticisms of GDP as a measurement device

1) Effects on environment are not captured 2) Changes in natural resource stocks and externalities are not measured 3) No accommodation for distribution of incomes or income inequality --> just because the country is doing well does not mean that all citizens are 4) No impacts on health/literacy or wellbeing factors are captured

Three components of the bioeconomic model of fisheries:

1) Efficient fishing level (EFF) 2) Maximum Sustainable Yield (MSY) 3) Maximum Economic Yield (MEY)

Why is environmental valuation important?

1) For policymakers to make decisions about how much to invest in protecting the environment 2) In the case of value loss after natural disasters/oil spills 3) In cases of renewable resources where the environment affects the availability of market goods

Tradeable emissions permits mechanism

1) Government sets total allowable quantity of emissions 2) Firms are assigned initial permits/rights to pollute based on the total allowable quantity (property rights approach) 3) Permits can be traded between firms (market-based approach)

Types of command and control instruments

1) Imposition of standards on firms 2) Non-transferable emissions licenses 3) Uniform technology standards 4) Location (reducing human exposure to pollutants) -> ex ante (preventative) or ex post (reactive)

Why do economies grow?

1) Increased inputs 2) Increased productivity

What do we need to know to determine the life cycle of oil reserves (bottom left quadrant of Hotelling graph)

1) Initial stock of oil (shown as triangle in bottom right of graph) 2) Price at which demand falls to zero (backstop price)

Types of policy instruments for pollution control

1) Institutional/voluntary approaches 2) Command and control instruments 3) Economic incentives/quasi-market instruments

Limitations of the biological model of fisheries:

1) MSY disregards prices and costs of fishing - Harvest prices will be impacted by supply/demand economics 2) MSY disregards discounting (the transformation of resources into monetary assets)

Process of stated preference valuation

1) Map out the valuation approach 2) Design a survey instrument and sampling plan 3) Administer the survey 4) Clean and analyze the survey

How to find the efficient level of pollution?

1) Maximize the net benefits of pollution by setting marginal benefit = marginal damage OR 2) Minimize total costs of abatement and damage by setting marginal cost of abatement (private) = total cost of damage (social)

Benefits of border carbon adjustments

1) Prevents carbon leakage/polluting industries are disincentivized from relocating to pollution havens because they still have to pay the adjustment on import

What are the four main categories of nature's contribution to people (NCP)?

1) Provisioning services 2) Regulating services 3) Supporting services 4) Cultural services

Command and control policy framework for fisheries

1) Reduce fishing effort 2) Controlling the qualitative nature of the catch (i.e. regulating gear used) 3) Spatial/geographic restrictions on harvesting 4) Restrictions on fleet size 5) Impose quantity restrictions on catches

Approaches to economic valuation of the environment

1) Revealed preference method 2) Stated preference method 3) Production function method 4) Benefit transfer

How are tradeable permits allocated?

1) Sold by auction at the equilibrium permit price 2) Allocated at no charge based on a set distribution rule

How does the government distribute individual transferable quotas for fishing?

1) Sold by auction, price of the quotas is set to the shadow price of the efficient fishing level (similar to paying a tax to be able to fish) 2) If the government freely distributes quotas, fishers can trade between themselves; limits entry into the market because new entrants need to buy quotas

Functions of the environment

1) Supplier of resources 2) Waste assimilation 3) Direct source of utility

Climate club

A coalition of countries implementing an ambitious carbon tax and using external sanctions to induce uncooperative parties/non-members to join --> assumes that it will be adopted as a key principle of the WTO to avoid retaliation

Individual transferable quota (ITQ)

A fishery management program in which individual fishers are given a total allowable catch of fish in a season that they can either catch or sell

GDP per capita

A key indicator of economic development; represents GDP divided by the population --> shows income accruing to the average citizen in a country

Economic development

A measure of the welfare of society

Property rights

A set of entitlements that define an owner's privileges and obligations for use of a resources or asset

Pareto inferiority

A situation under which one's welfare can be improved without making anyone else worse off; can be considered a market failure

Non-rivalry

A situation where the use of a resource by one individual does not impact others' ability to also use the resource

Economic growth

A subset of economic development; increase in the amount of goods and services produced by the economy

Density-dependent growth model

A subset of the biological model where growth rates are higher with a lower overall stock of fish, and growth rates are lower with higher stock

Carbon tax/emissions tax

A tax on firms that emit greenhouse gases based on each unit of emissions; uses market forces to incentivize firms to reduce production and subsequently reduce pollution to its efficient level

The Paris Agreement (2015)

A voluntary agreement to implement climate policy on a nation-by-nation basis, with the only obligation being to clear plans by the UN

Pareto optimality/market efficiency

An allocation of resources where it is impossible to make one person better off without making another worse off Does not imply an equitable redistribution of resources, simply one where no one can be made worse off

What causes a decrease in the backstop price of oil?

An increase in the technological progress of the society's alternative to oil (the backstop technology)

Montreal Protocol (1989)

An international agreement which created a gradual ban on ozone-depleting gases; its main incentive was a trade restriction which imposed a trade ban on ozone-depleting substances and products --> this prevented certain countries from gaining a comparative advantage by producing these products

Travel Cost Method

As distance increases between an individual and a recreational site, they will visit that site less often --> Implies a downward sloping demand curve for visiting the site --> Shows how demand for use of an environmental good shifts with the quality and quantity of that good (i.e. how much does society value the change in quality of that good?)

The Circular Economy

Based on the first law of thermodynamics which states that matter cannot be created or destroyed; depicts the interaction between the environment and the economy; states that the environment is the final repository of waste generated by society

How do emissions taxes internalize the externality of pollution?

By forcing polluters to act as if the social cost of pollution enters their private cost functions; marginal benefit of abatement curve is a horizontal line at the "equilibrium price" of pollution (determined by setting marginal benefit = marginal damage)

Product taxes

Carbon taxes levied on consumers in order for governments to cover the costs of subsidies to firms; can be imposed directly on consumers' energy consumption, or indirectly on products that are carbon-intensive (i.e. gasoline, plastic bags)

Open-access model of fisheries

Combines an economic model with a biological model by placing optimal fish harvest in equilibrium with the natural regeneration rate of fish

What is the most important criterion that governments consider when choosing instruments for pollution control?

Cost-efficiency -> the ability of an instrument to achieve a set target at a lower real cost than any other instrument, and by allocating the smallest amount of resources to pollution control

What is the resource curse?

Countries with high reserves of natural resources face slower economic development than countries with higher reserves because economic activity is not diversified and focuses solely on resource extraction

Border carbon adjustment

Countries with higher carbon pricing mechanisms can impose an additional tariff on imports in order to level the playing field and make other countries accountable for reducing the carbon-intensivity of their production

Biological model of fisheries

Depicts natural growth and regeneration processes of the fishery; posits that fish stocks grow according to a logistic growth curve (inverted U shape)

Dynamic notion of efficiency

Each asset/resource earns the same rate of return which is the same at all points in time and is equal to the social rate of discount; efficiency declines over time

Equilibrium price for tradeable permits

Equal to the equilibrium price set by the efficient level of pollution (also known as the shadow price of pollution) Equilibrium = marginal cost of abatement in the industry = target level of abatement set by the government (M*)

Tragedy of the commons

Example: - Fishers acting individually to maximize profit results in the stock level of the fishery being driven down to biologically unsustainable levels - Potential solution requires cooperation to set property rights on an individual level rather than on the group level, or state intervention using an external enforcement body to monitor fishing

Pollution damages are...

Externalities. Their costs are not borne by the emitter, but by society at large.

How do firms valuate permits under the cap and trade system?

Firm's desired level of pollution = marginal benefit of the permit = marginal cost of abatement - Firms that have higher marginal abatement costs will pay higher prices for permits - Firms that have lower marginal abatement costs will value their permits lower and sell them

Why do emissions taxes align with the least-cost theorem?

Firms minimize costs by only abating up to the efficient level of pollution in order to avoid paying an extra cost in the form of tax

Tradeable emissions permits

Function the same as non-transferable permits, but after the government sets a limit on the total quantity of emissions allowed, it does not attempt to determine how the total quantity of permits for that target is allocated among individual firms

GDP at purchasing power parity (PPP)

GDP adjusted for differences in the cost of living across different countries (assumes that a dollar can buy the same thing across all countries)

Pareto improvement

Gains by one or more people without making anyone else worse off

Congestion goods/club goods

Goods that are exclusive and non-rivalrous but become rivalrous as the number of users increases Example: - National parks - Museums - Highways with tolls

Semi-public goods

Goods that are non-rivalrous and non-exclusive with zero marginal cost, but consumers can choose not to consume them Example: - TV/Radio broadcasts

Common property goods

Goods that are rivalrous but exclusive to a group of people Example: - Grazing land that is exclusive to a group of farmers

Open-access goods

Goods that are rivalrous in consumption (one user's enjoyment can impact the enjoyment of others), but non-excludable, non-transferable, and non-enforceable Examples: - Fisheries and migratory wildlife; oceans; clean air

Biological growth process formula

Gt = St - (St -1) G = growth rate S = stock T = time

Hedonic Pricing Method example

House prices increase on average with every additional kilometer from the waste disposal center; shows people's willingness to pay more for a house that is in a location with better environmental quality

Coase Theorem

If no property rights are assigned, two parties can privately negotiate to achieve an efficient allocation of rights based on their opportunity costs ** Assumes no transaction costs ** Assumes that the establishment of property rights is enough to achieve economic efficiency in the long-run, regardless of how rights are allocated

Economic argument for Pigouvian taxation

If the tax was not levied, the costs of the externality would continue to be borne by the society, and taxes redistribute these costs back to the producer

Pigouvian tax

Imposition of a tax on the creator of a negative externality in order for them to internalize the cost of the externality by paying the tax; taxes are set at the cost of the externality

Does the government prefer imposing taxes or subsidies for pollution?

In terms of least-cost, it is less costly for the government to impose a subsidy, than for firms to pay a tax.

What are favorable policy choices for controlling overfishing in open-access fisheries?

Incentive-based instruments: 1) Establishment of property rights 2) Transferable harvesting quotas

What happens to the marginal benefit of pollution after a tax or subsidy is imposed?

It shifts downward and lies between the equilibrium "price" of pollution and the efficient level of pollution

Why is taxation a good policy instrument for the government?

Less information access burden; the government only needs to know the aggregate marginal emissions abatement cost function (which is the sum of private marginal abatement costs of all firms)

Climate change mitigation

Limiting the temperature increase of global warming to just 2 degrees Celsius --> 4 main priorities: 1) Reduction of CO2 emissions 2) Reduction of deforestation rate 3) Reduction of methane emissions from agricultural and non-agricultural sources 4) Reduction of N2O

How can we induce more oil extraction when the oil stock increases?

Lower the net price of oil

The UN Human Development Index

Main way to measure economic development; presents weighted averages of: 1) Life expectancy 2) Educational attainment 3) GDP per capita, adjusted for PPP

Static notion of efficiency

Marginal net benefit to society of a resource should be the same regardless of possible uses

Efficient level of pollution

Net benefits of pollution = marginal benefit to society = marginal damage to society -OR- Total costs = marginal damage to society = marginal abatement cost of pollution to firms

Is zero pollution optimal?

No - there must be a degree of pollution in the environment because zero pollution implies zero economic activity This must however be balanced with the environment's assimilative capacity by reaching an efficient level of pollution

Will fishing at the level of MEY result in a sustainable fish harvest?

No, the MEY is beyond the MSY, which means that the number of fish being extracted is over the rate of natural regeneration

Pure public goods

Non-excludable and non-rivalrous goods; marginal cost = zero; frequently defined by a lack of property rights Examples: - Scenic views/landscapes - Biodiversity - National defense - Clean air

What kind of market is the oil market?

Oligopoly

How does the penalty structure work in the climate club system?

Penalties are only imposed when importing countries participate in the club, and exporting countries are non-members --> importing countries can impose sanctions to make trade more expensive for non-participating countries

Why is command and control inefficient in policymaking surrounding fisheries?

Policies result in decreased harvest efficiency and increased costs to fishing operators; not cost-efficient because it imposes economic inefficiency on the industry through regulation

Stock-damage pollution

Pollution where damage arises from the concentration/stock of the pollutant in the environmental system; exceeds the environment's assimilative capacity Example: - Toxic waste/chemical leaks into water - Oil spills - Greenhouse gas emissions

Flow-damage pollution

Pollution where damage arises from the rate at which the pollutant is entering the environmental system; damage becomes zero when the pollution source stops; considered a negative externality where once the damage is done, no one can be excluded from suffering adverse effects Example: - Noise/light pollution

Which property rights structure do most environmental goods fall under?

Pure public goods or open-access/common property goods

How can we induce oil extraction when demand for oil decreases?

Reduce the net price

What is a renewable resource?

Resources that are replaced by natural processes at a rate comparable or faster than its consumption by humans

What happens when oil reaches its backstop price?

Society switches to another (renewable) resource

How to find equilibrium on the logistic curve of biological growth?

The MSY represents equilibrium between growth amount and harvest amount; equilibrium occurs when the resource stock is constant through time

Non-excludability

The ability for users of a good to use the good without having to pay for it

Subsidies

The government issues these to polluting firms in order to induce pollution abatement or adopt cleaner technologies; costs are not borne by firms but rather by consumers

Pollution

The introduction of waste and harmful products into an environment; classified as undesirable

Efficient fishing level (EFF)

The largest distance between total revenue and total costs; where the resource rent is being maximized (i.e. point of maximum profit) -> under MSY so it is suboptimal

Least-cost theorem of pollution control

The marginal cost of abatement should be equalized over all polluting firms; all polluting firms internalize an equal amount of the damage caused by pollution, but put in varying levels of effort in order to abate that pollution

Social Cost of Carbon (SCC)

The net present value of future climate change damages caused caused by emitting 1 extra ton of CO2 today --> Represents our willingness to act today in order to preserve our planet for future generations --> Can also be framed as the monetary amount of damages avoided from abating 1 additional ton of CO2

Hotelling rule

The net price of a resource rises at a rate equal to the social discount rate over time; equilibrium occurs when the producer is indifferent between selling the last unit of the resource in the current period or the next period

Polluter pays principle

The party that pollutes is held responsible for covering the costs of its impacts in the form of a fixed price on each unit of emissions (i.e. taxation)

Maximum Sustainable Yield (MSY)

The point of highest regeneration in a fishery, also equal to exactly half of the total population; after this point, regeneration rates decrease until the maximum population is reached -> This is the amount of fish that can sustainably be harvested without negatively impacting the future fish population

Hedonic Pricing Method

The price difference between houses with different levels of environmental quality (keeping all other characteristics constant) reflects the willingness to pay for a higher/better level of environmental quality

Backstop price

The price of oil at which demand falls to zero; lies on the vertical axis between demand and net price on the Hotelling graph

Shadow price of pollution

The price that firms would hypothetically pay if they needed to buy the rights to pollute; also the equilibrium price under the tradeable emissions permit system

Key advantage of tradeable permits system as a pollution control instrument

The total level of emissions to abate is known upfront

Framing

The way an issue is posed or presented to a survey respondent Example: --> Emotional appeal --> Loss aversion: appealing to people's wish to avoid loss by presenting environmental goods as losses vs. gains --> Willingness to accept-style questions: elicits a bigger response by allowing respondents to feel like they have agency over their response/actions (even in a hypothetical scenario)

Maximum Economic Yield (MEY)

The yield above which the revenue generated by a marginal increase in effort is less than the cost of that increase; the point at which revenue needed to cover all fishing costs is maximized; point of maximum effort -> represents equilibrium in the bioeconomic model, resource rent = 0

Why does the market misallocate resources such as clean air and clean water?

They are considered open-access resources

What is the main limitation of using command and control instruments for pollution control?

They are cost-inefficient due to the massive information burden of acquiring private marginal abatement costs of firms by the government, and no attempt to equalize marginal abatement costs across firms

How do uniform technology standards limit innovation?

They assume a "one size fits all" approach to technology; firms must comply with the technology standards and they are unable to choose technologies that are better for them, or better for the environment as a result.

What is an adverse long-term effect of subsidies?

They can increase pollution by increasing profits to industry and incentivizing new firms to join the market, thus potentially raising emissions in the long-run

How do governments select instruments for pollution control?

They select specific legal levels of pollution based on another criterion that bases itself on margins of safety for human or ecological health. The types of pollutants can also influence this decision (ex. if a pollutant is a harmful toxin, governments will prioritize long-term impacts of the solution)

Social discount rate

Used to put a present value on costs and benefits that will occur at a later date; or the rate of impatience for future consumption Example: - Higher SDR = greater impatience for future consumption, implies present-day extraction - Lower SDR = less impatience for future consumption, extraction is delayed

Contingent valuation method

Uses surveys to ask people questions designed to identify what they are willing to pay to protect a resource if a tradeable market for environmental goods existed

How is the social cost of carbon calculated?

Using a social discount rate to convert future damages of CO2 emissions into present-day value (similar to what happens under the Hotelling rule)

Economic use value

Value that is derived from the direct use of a good

Economic non-use value

Value that people assign to an economic good even if they never have and never will use it

When does equilibrium occur in the bioeconomic model of fisheries?

When the amount of fishing effort is constant over time; where there is no longer incentive for new fishers to enter or exit the market; or when total revenue intersects total cost at the Maximum Economic Yield

When do renewable resources become exhaustible resources?

When the assimilative capacity (the ability to absorb pollution/waste) of the environment is exceeded

When is efficiency achieved in the market for pollution control?

When the marginal cost of controlling pollution = the marginal damage caused by pollution

Externalities

When the utility of an economic agent is affected by the actions of another; can be positive (gain in utility) or negative (loss in utility for affected party)

When are command and control policies used for pollution control?

When we are unable to observe marginal abatement cost and marginal damage functions for firms

Is the MSY efficient under the biological model?

Yes, because the harvest at MSY will be naturally regenerated through biological processes

Opportunity cost under Pareto optimality

Zero

At the MEY, what are profits equal to?

Zero profits

Marginal abatement costs for firms...

are equal to the marginal benefits lost by firms when they abate pollution (this is why the marginal abatement cost curve is downward sloping)

Hotelling rule equation

p2 - p1 / p1 = r R = social discount rate Implies that the rate of change in oil prices is equal to the social discount rate under the Hotelling rule