Transcript public goods

Problems related to the
market mechanism
dr Magdalena Klimczuk-Kochańska
Problems related to the market
mechanism
 Market failure
 Frequent government interventions
 Legal regulations and international commitments (e.g. Montreal Protocol,
pledges to reduce CO2 emissions)
 Lack of market motivation for some risky investments (not everything is
economically feasible)
Problems related to
the market mechanism
 Taking actions which are inprofitable from economic point of view but
socially important
 Charity, pro-social activities, prosumption, crows-sourcing and open
innovations
 The ease of manipulating prices of scarce resources from a monopolist’s
position (comp. rare earths minerals)
Problems related to
the market mechanism
 Non-market valuation of certain resources
 Seemingly free resources – involving social costs (e.g. water, forest)
 Problems with using resources, available at attractive prices – rebound
effect
Public goods
Public goods
 Non-excludable – everybody can use them
 Non-rivalrous – many people can use it at the same time, and the use does
not decrease its value
 E.g. city park, Christmas streetlights, street music, GPS
Problems with public goods
 Who will pay for their supply/maintenance?
 Non-exclusion makes it difficult to force people to pay
 Problems with excessive uses of the good (free-riders)
 Value of a public good cannot be estimated based on the willingness to
pay of an individual – but by the sum of benefits derived by all users
Free-rideship
 Recognition by a rational consumer that the benefits of consumption are
accessible without paying for them.
Common-pool resources (CPR)
 Non-excludable – everybody can use them
 Rivalrous – users compete for the good, and using it decreases the value
 E.g. clean air, clean water, beauty of a landscape, river fish, coal, birds,
irrigation channels, grassland
Problems with common-pool resources
 Over-exploitation
 For plants and animals – endangers biodiversity
 may cause the extinction of species
 may induce further consequences in ecosystems, e.g. extintion of species other
than the exploited ones
 In an analogous manner: desertification, migrations, soil erosion, ozone
layer depletion, emission of greenhouse gases, fossil fuels depletion
Club goods
 Goods „almost public” – but with limited access
 Excludable but non-rivalrous
 Artificially scarce goods
 E.g. entrance tickets to a natural reserve, limited numbers of visitors, water
rationing, hunting and camping rights, paid television, clubs, theatres, religions,
membership in international organisations
 Dissatisfaction of people excluded from the use
Externality theory
 Externality theory – approach that specifies the relevant market as the
good whose production / consumption generates environmental damage
outside the market transaction. Any such effect that is external to the
market is aptly termed an externality.
 Externalities – consequences of market transactions, which are beneficial or
detrimental for entities, which do not directly participate in these
transactions.
 Any
 Externalisation of costs and benefits of market transactions
 Linked to market inefficiencies / market failure
 E.g. environmental pollution, education, public health
 If the external effect generates costs to a third party – it is a negative
externality.
 If the external effect generats benefit to a third party – it is a positive
externality.
Positive externalities
 Positive external effects
 E.g. public education – helps not only the persons learning, but also benefits the
entire society
 Market demand seems insufficient – government intervention in order to increase
the demand and supply
price
Positive externalities
actual market demand
POSITIVE
EXTERNALITIES
P2
P1
demand supporting externalities
Q1
Q2
SHORTAGE
quantity
•
•
•
•
Public education
Public vaccination programs
Subsidised city transport
Green areas in cities
Examples of negative externalities
 By-products of activities by one agent – factory and nearby gardens –
reduction of the value of nerby resudental properties, environmental
pollution, consequences of GMO introduction,
 Excessive exploitation of public goods (shared resources) – e.g. traffic
congestion, congestion in Internet network
 Tragedy of commons, distributive justice, social responsibility of business
 Sustainable development takes into account externalities as limitations to
the economic development
Tragedy of the commons
 An economic problem in which every individual tries to reap the greatest
benefit from a given resource. As the demand for the resource overwhelms the
supply, every individual who consumes an additional unit directly harms others
who can no longer enjoy the benefits.
 Generally, the resource of interest is easily available to all individuals; the
tragedy of the commons occurs when individuals neglect the well-being of
society in the pursuit of personal gain.
 Three Tragedies:
 Climate Change
 Resource Depletion
 Environmental Degradation
http://study.com/academy/lesson/tragedy-of-the-commons-theory-definitionexamples.html
How should the Tragedy of the
commons be mitigated?
 Continue Globalization but Divide the Commons: Privatization (Liberal
solution): Apply the Coase Theorem
 Communitarian solution: revert to small groups
 Liberal solution: green growth
 Embedded liberal solution: central authority - create a central authority to
control access
Negative externalities
 External costs, negative external effects
 E.g. environmental pollution – buyers and users of polluting products might not
care, but consequences concern other members of society
 Government intervention reduces the supply and limits the negative externalities
price
Negative
externalities
supply
eliminating externalities
actual market supply
NEGATIVE
EXTERNALITIES
P2
P1
Q2
Q1
OVERSUPPLY
quantity
• Petrol and use of cars
• Production influencing the environment
• Tobacco and alcohol products
price
Negative externalities (2)
marginal public cost
NEGATIVE
EXTERNALITIES
demand as
marginal
public
positive
externality
marginal private cost
Q2
Q1
OVERSUPPLY
quantity
• Petrol and use of cars
• Production influencing the environment
• Tobacco and alcohol products
Intervention on the
market
For and against interventionism
 Different scale of externalities and importance of their consequences for
the society
 Problems with estimating the scale of externalities
 Interventions are costly and induce inefficient consequences, which might
exceed the market inefficiencies
 Interventions might generate new externalities
 Interventions restrict property rights and economic freedom
Intervention methods
 Information and promotion campaigns
 Assigning property rights to resources which so far were shared,
valuation through lawsuits
 Direct economic activity of the government
 Corrective taxes (so-called Pigou taxes)
 Subsidies, subventions (remuneration for compliance)
 Introduction of market mechanism for rights / tradable allowances
different effectiveness,
introduction costs, errors
 Ordinances, standards and quality norms
Cost and benefit analysis
Localisation of a waste incineration
plant
 NIMBY („not in my back yard”)
 Cost and benefit calculation
 Benefits for the society: A
 Damage to the nearby residents, suffering from the nuisances: B
 If A < B -> the investment should be cancelled
 If A > B -> the investment can be pursued, as the society will achieve net benefit
= B-A, and the residents should be paid compensation = B
Efifciency of a wastewater treatment
plants
 Decision about technical parameters – impact on the water quality, but
also costs of the plant
 Economic analysis – choice of the optimal variant based on costs and
benefits
 „let’s protect the environment – but not at any price”
 Optimal level of environmental protection –marginal benefits (MB) equal to
marginal costs (MC)
Optimal level of environmental
protection
P
MSC = MB
(optimum)
MSC – marginal social cost
optimal
level of
expenditures
MB - marginal benefit
optimal level
of protection
Q
sub-optimal level, insufficient sub-optimal level, which is
protection ignoring the risks
not rational due to the
and social problems
excessive costs incurred
Intervention to protect
the environment
 Intervention may concern:
 enforcing the quantity (Q) – technical norms, contingents, rationing, emission
permits
 enforcing the price/expenditures (P) – Pigou tax
 Problem: lack of information about
the details of MSC i MB
 Optimal level – may not be
P
MSC
interpreted as fair
MB
Q
Coase theorem
 1960 – criticism of the government intervention when negative externalities
occur – conflicted parties may solve the conflict by an agreement
 Negative externalities may be eliminated by negotiations and
compensation
 Rational agents will negotiate the amount of negative and positive
externalities (compensation) and the solution will be optimal
 Ronald Coase Institute: www.coase.org
Example
 My neighbour wants to organize a night party – and I appreciate my
silence
 I estimate the value of a silent evening to be 100 USD [my losses]
 The neighbout estimates the value of his party to be 200 USD [his benefits]
 We will come to an agreement, and my compensation will be an amount
between [100 USD, 200 USD]
 Problem: when my neighbour values the party at less than 100 USD – no
possibility of negotiations
Hypothesis by Michael Porter and
Claas van der Linde
 Tightening requirements concerning the environmental protection will not
reduce the profits of business enterprises – on the opposite, is helps increase
the profits
 linked to the effect of innovations
 Justification:
 pioneer’s advantage
 economies of scale
 learning curve effect
 Patenting inventions and monopoly gains
 Example: wind turbine manufacturers in Denmark, unilateral pledges to
reduce CO2 in EU, REACH regulation in the EU
REACH
 Registration, Evaluation, Authorisation and Restriction of Chemicals - 2006 –
one of the most extensive legal regulations in the EU history (over 800
pages)
 Chemical substances imported or manufactured in the EU need to be
registered with ECHA (European Chemicals Agency)
 List of SVHCs (substances of very high concern) – substances, which require
separate permits, and its users are obliged to search for substitutes
Individual assignment
 Describe and critically evaluate the EU Emissions Trading System, ETS by
using to the concepts and models introduced by previous classes. Refer to
the up-to-date data and discuss the shortcomings of the ETS and their
possible reasons.
Individual assignment
 Assignment to be prepared invidually (essay)
 Deadline: before the beginning of the class on 11/29/2016 – electronic
document in doc and PDF versions; on email: [email protected]
 Failure to submit the assignment results in no points, and the missed points
cannot be recovered
 The essay should refer to at least 20 references, including scientific articles,
use citations
 All quoted text excerpts should be put into parenthesis – plagiarism = failing
the entire course
Individual assignment
 Critical presentation of ETS
 Use of economic terminology
 Use of economic models
 Use of up-to-date quantitative data
 Identification of ETS shortcomings
 Explanation of possible reasons for these shortcomings
 Structure of an essay with introduction, main arguments and conclusions
 Using consistent argumentation not merely compiling information
 Correct language (spelling, punctuation, sentence structure)
 Correct use of referencing style
Referencing style
 In the text:
 The research demonstrated problems with externalities (Smith, 2000:
203).
 The problems were indicated by Smith (2000: 203).
 Multiple researchers referred to the problem (Smith, 2000; Meyer, 2001).
 In the „Bibliography” section:
 Smith, R. (2000) Externalities in the national economy. Journal of
Environmental Economics, 20, 3, pp. 200-234
 Meyer, A. (2001) Environmental economics. New York: The Free Press
 Brown, L. (2006) Save the environment. Discussion paper. UNEP.
www.unep.org/afdgdtrvcv.pdf, access date: 20 October 2013
Electronic library
 www.buw.uw.edu.pl
 Electronic holdings (E-zasoby) -> Databases
 Science Direct
 Business source complete (EBSCO)
 Search for articles which are „full text” and „scholarly (peer-reviewed)”
 Use keywords and thesaurus terms