EC4101 Week 07 Lecture 02 PDF
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Uploaded by Business Student123_
University of Limerick
David Begg
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Summary
This document discusses property rights, externalities, and the Coase theorem. It analyzes negative and positive externalities and strategies for managing pollution externalities, including carbon taxes. It also mentions the role of voluntary agreements in reducing negative impacts. A summary of economic concepts from a lecture notes perspective.
Full Transcript
EC4101 Wk.07 Lec.02 Property Rights: The power of residual control, including the right to be compensated for externalities. They internalise the externality. The relationship between property rights, efficiency and externalities is known as the Coase Theorem. When there are no transaction...
EC4101 Wk.07 Lec.02 Property Rights: The power of residual control, including the right to be compensated for externalities. They internalise the externality. The relationship between property rights, efficiency and externalities is known as the Coase Theorem. When there are no transaction costs and trading externalities is possible, then the trading mechanism will lead to an efficient outcome independent of the initial allocation of property rights. There are two reasons that the market for externalities doesn’t exist. o It's expensive o Free rider effect Negative externalities lead markets to produce a larger quantity than socially desirable. The socially optimum quantity should be less than the equilibrium quantity, and the socially optimum price should be more than the equilibrium price. How to reduce pollution externalities: Tax (e.g. carbon tax (a Pigouvian tax)) Regulate Quantity Produced by cap-and-trade permits or bans (E.g. smokey coal ban) or regulate location in which the pollution is produced (E.g. UK’s ULEZ system for emissions) Inducing a Market for pollution by assigning property rights Voluntary Agreements While quantity limits directly control the issue, they are less popular than taxes, as taxes punish those who pollute most more. Pollution externalities have both an intergenerational dimension and an international dimension. OECD: Organisation for Economic Co-operation and Development Issues with Carbon Taxes: Politically unfavourable for re-election They are often regressive, effecting the poor more than the wealthy They only tax carbon, not other greenhouse gases like methane Positive externalities lead to markets producing a smaller quantity than socially desirable. With positive externalities, the socially optimum quantity should be more than the equilibrium quantity, and the socially optimum price should be less than the equilibrium price. Solutions for this include subsidising the service providing the positive externality. References: Notes based on EC4101 Lecture Slides and the relevant readings from Economics (12th Ed.) David Begg.
