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Where can market failure occur in the use of our environment?

1. Source of resource inputs - No private property rights in flow resources. Stock of renewable resources are in some cases not subject to private property rights while deposits of non renewable natural resources are generally subject to private property rights

2. Source of amenity services - Nobody owns a view of a landscape however someone could own the land from which it is viewed and restrict access thereby making that particular service a private property right

3. Receptacle for waste - Historically the environment as a waste sink has not been subject to private property rights and is an open access resource

4. Source of life support services - Not subject to private property rights, for example the global atmosphere


What is rivalry and excludability?

A way to classify the services our environment provides to us. Rivalry means that one agent's consumption occur's at the expense of another's consumption. Excludability means that agents can be prevented from consuming a given good/service.


Classify goods according to their excludability and rivalry.

a) Private goods are exhibit rivalry and excludability
b) Public goods are non rivalrous and non excludable
c) Open access resources are rivalrous but non excludable
d) Congestible resources are non rivalrous but excludable


What is the economic rationale for government intervention in the provision of public goods?

To prevent the under-prevention of public goods. While markets may allocate private goods efficiently this is because they have an incentive to since they are excludable. Public goods will be supplied at a level lower than the efficient level since there are no private property rights.

Intervention consists of policies to limit pollution, restrict resource exploitation and create the right incentives to promote or protect environmental quality.


What is an externality?

A source of market failure. When the production or consumption decisions of one agent has an impact on another agent's utility or profit in an unintended way and when no compensation is made by the generator of the impact to the affected party. Externalities can be positive or negative. Non intenetionality and lack of compensation are related, hence the name external(ity).


What pollution based externalities are there?

i) Consumption-consumption externality
ii) Production-consumption externality
iii)Production-production externality


What is the efficient level of pollution?

The level of emissions at which net benefits are maximised is equivalent to the outcome that would prevail if the pollution externality were fully internalised.

It is the point at which the sume of total abatement costs and total damage costs is minimised, i.e. when marginal abatement is equal to marginal damage.


Give some examples of departures from convexity or concavity in abatement cost functions

1) In the case of acidic pollution of lakes and oceans there is a threshold point at which the lake becomes biologically dead and no further damage can be done past that point when pollution levels rise.

2) A factory emitting particulate matter causes external damage to an individual living in the vicinity of the factory until they can no longer tolerate living there and choose to move away where the damage to the individual becomes zero.

The above cases give an example of a departure from convexity or concavity when there exists a saturation point.


Why does non convexity matter?

1. "Practical matter" - because calculating the efficient level of emissions is likely to be more complicated than when all functions are convex. Information required to identify non convex functions may be costly to obtain

2. If non convexity is ignored then appraisal of projects could be wrong

3. Non convexity affects pollution target and choice of pollution instrument


Define a no regrets policy

A policy which achieves environmental objectives at no cost (or negative cost).

Reasons that no regrets policies may arise are the elimination of a technical or economic inefficiency (for example a new production techniques), induced technical change from regulatory constraints or additional ancillary benefits such as improved health.


Explain the double dividend hypothesis

The double dividend hypothesis suggests that increased taxes on polluting activities can provide two kind of benefits. The first is an improvement in the environment, and the second is an improvement in economic efficiency from the use of environmental tax revenues to reduce other distortionary taxes such as income tax. This results in benefits and efficiency gains to the economy as a whole.


State the Coase theorem

In the prescence of externalities under full information and negligible transaction costs, the assignment of clear and enforceable property rights facilitate bargaining that would lead to efficient market outcomes.

Further the ability of economic agents to reach an efficient outcome does not depend on which economic agent is given the property rights.