University:
Massachusetts Institute of Technology
Course:
15.501/516 | Accounting
Academic year:

2023
Views:

336

Pages:

19
Author:

obrasselectasker

Economics of the Global Commons Questions from Last Week? • (we’ll cover discounting and marginal abatement curves again this week) Discount Rate • Composed of: – Rate of Time preference – Marginal productivity of capital * marginal utility of money • Discount Rate is not Inflation: we use “constant” dollars • Usual expression: Bt = (1 + r ) −t • Net Present Value = sum of all time periods, appropriately discounted. • Value judgment? Revealed preference? Long time horizon? Market Imperfections • Externalities • Incomplete Property Rights – Non-exclusive/non-rival, eg. Public goods – Tragedy of the Commons • Imperfect Competition • Imperfect Information • Transaction Costs Tragedy of the Commons • Original Point: Population Growth. • Original comparison: A “Commons” (or pasture): – Private benefit of grazing – Social cost of grazing (degradation of resource) – Even if PB0! • Solution? – “Mutual Coercion” (eg, regulation) – Or Privatization • Other examples: – Free Christmas parking. – Fishing – ? Supply and Demand P S An ideal market maximizes societal surplus. D QM Externalities in the Market An externality is an impact outside the transaction. Example: For every unit produced, particulates are emitted causing $5 of health damage We can “internalize” the externality by using a tax or a quota system. This achieves optimal Q, but there are still distribution questions… P MSC MPC(S) $5 MPB(D) Market Q Optimal Q MPC/MPB: marginal private cost/benefit MSC: marginal social cost Q Marginal Abatement Cost • “MAC curve” Price • Include all options for emission reduction, ordered by price, with quantity available at that price Double Pane Windows CFL Lightbulbs Solar Panels CO2 reduction Marginal Costs/Benefits P MAC Quantity Reduced 200 180 160 TC 140 120 Price • The marginal cost is the cost of the next unit produced (or next ton of emission reduced). It is equal to the slope of the total cost. TC 100 80 60 MAC 40 20 0 0 5 10 Quantity Reduced 15 Marginal Costs/Benefits • The advantage of using the marginal cost is that decisions are “made at the margin”: – So comparing marginal benefit with marginal cost will tell you what decision to make – Difference between “private” marginal cost/benefit and “social” marginal cost/benefit Taxes and MAC Curves A tax (as opposed to “command and control”) ensures “efficient” abatement allocation P MAC B MAC A Tax Q reduced Cap and Trade and MAC curves P 100 Units of Reduction, 2 companies: MAC (A) MAC (B) 0 (A) 100 (B) Pollution Reduction 100 (A) 0 (B) Terms to Learn • Externalities (positive and negative) – Uncompensated (non-market) interaction • Tragedy of the Commons (Harding) • Marginal Cost/Benefit Instruments to Correct Externalities • Command and Control (Quantity and/or tech)) – eg install scrubbers, catalytic converters, etc. – either specific technology, emissions rate, or emissions level for each emitter. • Tax (price) – Price per quantity emitted • Cap and Trade (market) – Total quota: participants allowed to sell allowances back and forth Other Topics • How do you choose an instrument (monitoring, enforcement, etc.)? • Upstream vs. Downstream instruments • Social justice movement • Polluter Pays Principle • Discount Rate • Pareto Efficient Improvements • Free Rider • Coase Theorem Public vs. Private Goods Excludable Rival Private Goods Club Goods Non-rival (cable TV shows) Non-excludable Common-pool resources (jogging path) Pure Public Good (clean air, national defense) Important: Free markets only optimize production of private goods Marginal Abatement Curves Tax vs. Cap+Trade Tax P New MAC Cap and Trade Old MAC Q Original Plan Constant Cost or Constant Quantity? More on Cap and Trade • Safety Valves • Intertemporal Trading – SO2 market, early reduction credits • Initial Allocations – Grandfathering – Auctions Setting the Target • Cost/Benefit Analysis (MAC = Marginal Damage) • Valuation – Non-material goods and Public Goods have no property rights: Therefore there exists a need to determine “WTP”: Willingness to Pay • • • • “Contingent Valuation” Surveys Surrogate Markets (travel costs to parks, noise impact on price) Experimental economics Replacement Costs – “Existence value”