Transcript H Market Failure externalities

Market Failure
Fixing inefficiency without creating
more
One Idea
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The budget also includes revenue from a national
cap-and-trade systemfor greenhouse gas
emissions, which would come from auctioning off
emissions permits to industries. The climate
program would generate nearly $650 billion
between 2012 and 2019, according to Obama's
proposal.
About $80 billion of the climate revenues would go
toward Obama's proposed middle-class tax cut
each year beginning in 2012, the draft says, and the
government would spend $15 billion per year on
"clean" energy technologies. In his address to
Congress on Tuesday, Obama said those
technologies would include wind power, solar
power, advanced biofuels, "clean coal" and more
efficient cars and trucks.
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February 26, 2009 Obama's draft budget projects
cap-and-trade revenue
Efficient Allocation
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Marginal Benefit
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Marginal Cost
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A measure of the benefits of the
next unit of the activity
A measure of the costs of the next
unit of the activity
MB=MC
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efficiency
Marginal Benefits
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Who gains from some allocation
of resources?
How much do they gain?
What are the various
dimensions of that gain?
Marginal Costs
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Who pays for some allocation of
resources?
How much do they give up?
What are the various
dimensions of the costs?
The Concept is Simple
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Find the level of activity where
MB=MC
Zero profits drive resources
Marginal Revenue Products
allocate revenues
Adding Dimensions
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When we talk of the consumer’s
location in a spatial sense, we can
equally talk of the country in which
the consumer is located, the time of
day, month or year at which the
consumer would prefer to purchase
the commodity, or the consumer’s
most preferred product variety in the
sense of Lancaster.
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Greenhut, Norman and Hung (1987)
Private Property?
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Trespass
Nuisance
Are individuals islands?
Externalities
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An externality is an effect of a
purchase or use decision by one
set of parties on others who did
not have a choice and whose
interests were not taken into
account.
Classic example of a negative
externality
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Pollution, generated by some
productive enterprise, and
affecting others who had no
choice and were probably not
taken into account.
An example of a positive
externality
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The effect of a well-educated
labor force on the productivity of
a company
The result is public education –
or that is the argument.
Graph Time
Coase (1960),
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The spawn of which lead in two distinct
directions.
The so-called Coase Theorem, based on
the assumption of zero transaction costs,
led directly and indirectly to the private
property rights school of thought: individual
actions can lead to efficient allocations as
long as property rights are designated.
Stigler first coined the term “Coase
Theorem” to explain the theory of
internalizing externalities.
Coase’s real purpose was quite
the opposite.
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“The world of zero transaction
costs has often been described
as a Coasian world. Nothing
could be further from the truth. It
is the world of modern economic
theory, one which I was hoping
to persuade economists to
leave.” (Coase, 1988, 174,
emphasis added.).
He realized the importance of
transaction costs.
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When transaction costs are relevant,
as is the case in most of the
currently appropriate areas of
discussion, Coase argued against
the private solution.
The recognition of transaction costs
not only alters consumption
behavior, but also changes our way
of knowing and forms of social
organization by requiring non-market
institutions to intercede in the
decision processes.
Internalizing the Externalities
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Graph again
System benefits
APS January 2010
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Cost of net electricity
Basic service charge
Delivery service charge
Environmental benefits surcharge
Federal environmental improvement surcharge
Competition rules compliance charge
System benefits charge
Power supply adjustment
Metering
Meter reading
Billing
Generation of electricity
Transmission and ancillary services
Transmission cost adjustment
Interim rate surcharge
$1.82
$3.35
$0.86
$0.02
$0.03
$0.19
-$0.10
$2.60
$1.79
$2.02
$4.46
$0.49
$0.21
$0.07
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Cost of electricity you used
17.81
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Literally Nickel and Diming
Taxes and fees
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Regulatory assessment
State sales tax
County sales tax
City sales tax
Franchise fee
$0.05
$1.00
$0.21
$0.00
$0.00
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Cost of electricity with taxes and fees
$19.07
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Total charges for electricity services
$19.07
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Amount of electricity from APS
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Meter reading on Jan 20
Meter reading on Dec 21
Total electricity from APS, in kWh
7794
7484
310
Amount of electricity credited
Meter reading on Jan 20
Meter reading on Dec 21
Total electricity credited, in kWh
Last month's kWh credit
8629
8413
216
0
Net electricity
Electricity from APS, in kWh
Minus electricity credited, in kWh
Minus last month's kWh credit
Net electricity, in kWh
310
216
0
94
A Simple Idea
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Collect: We must use mechanisms to establish a
price for emissions and collect this pollution-based
revenue to help fund a smart transition to a lowemission economy.
Use elasticities to estimate the variation between
the private market price and the social equilibrium
price.
Forecasting tools
Cap, Collect, and Invest
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“Invest: We must invest this revenue to
accelerate research, widespread
commercialization, and adoption of new
clean energy and efficiency technologies;
ensure that American workers and
communities are buffered against nearterm price increases; and invest in
measures to prepare for and adapt to the
effects of global warming that are already
locked into the system, both here in the
United States and in vulnerable,
developing countries.”
http://www.americanprogress.org/issues/20
08/06/pdf/auction_revenue.pdf
Cap and Trade
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The goal: To steadily reduce carbon
dioxide and other greenhouse gas
emissions from economic activity as part of
a larger plan for curbing global warming.
The cap:
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Each large-scale emitter, or company, will
have a limit on the amount of greenhouse
gas that it can emit. The firm must have an
“emissions permit” for every ton of carbon
dioxide it releases into the atmosphere.
These permits set an enforceable limit, or
cap, on the amount of greenhouse gas
pollution that is released. Over time, the
limits become stricter, allowing less and
less pollution, until the ultimate reduction
goal is met.
The trade:
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It will be relatively cheaper or easier for
some companies to reduce their emissions
below their required limit than others.
These more efficient companies, who emit
less than their allowance, can sell their
extra permits to companies that are not
able to make reductions as easily. This
creates a system that guarantees a set
level of overall reductions, while rewarding
the most efficient companies and ensuring
that the cap can be met at the lowest
possible cost to the economy.
The profits:
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If the federal government auctions the
emissions permits to the companies
required to reduce their emissions, it would
create a large and dependable revenue
stream. These financial resources could be
used to achieve critical public policy
objectives related to climate change
mitigation and economic development. The
federal government can also choose to
“grandfather” allowances to the polluting
firms by handing them out free based on
historic or projected emissions. This would
give the most benefits to those companies
with higher baseline emissions that have
historically done the least to reduce their
pollution.
From:
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Investing in a Green Economy;
Using Cap-and-Trade Auction
Revenue to Help American
Families and Spur Clean Energy
Innovation)
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http://www.americanprogress.or
g/issues/2008/06/pdf/auction_re
venue.pdf
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http://www.state.mn.us/mn/exter
nalDocs/Commerce/Governanc
e_Options_for_Carbon_Cap__T
rade_Revenue_022009040546_
GovernanceOptions_CapAndTr
ade.pdf