Economics and the Environment

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Economics and the Environment

• Chapter 4 The Efficiency Standard

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Efficiency Defined

• Efficiency what does it mean?
• Pareto Efficient is usually what economists mean
  when they say efficient. This is defined as a
  situation in which it is impossible to make one
  person better off without making anyone else
  worse off.
• Advantages of Efficiency
• Makes economic pie as big as possible
• Maximizes the net monetary benefits

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Point about Efficiency

• The first point about efficiency is that it is
  not always fair
• Example of efficiency California and the use of
  its limited water supply
• Pareto-improving situation makes everyone
  better off
• More often than usual, Pareto-improving
  situations are not always created and people do
  not always benefit

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Efficient Pollution Levels
What are you willing to pay to stop pollution?
Consider the situation with Brittany and Tyler
Table 4.2 Marginal and Total Benefits of Cleanup
Table 4.1 Marginal and Total Costs of Cleanup
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Marginal Costs and Benefits of Cleanup
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The Coase Theorem Introduced

• Think for a minute about a situation in which
  Brittany is granted the right to ban smoking
• In this case, Tyler would have to pay Brittany
  for the right to smoke each cigarette
• Thus, they negotiate

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Coase Theorem

• It does not matter who has to pay for the
  pollution victim or polluter
• Negotiations will arrive at the same outcome,
  which is Pareto efficient
• Reality, does not allow Coase theorem to work due
  to free riders and transaction costs.
• In the real world, we are better served by
  following the polluters pay principal.

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Relating the Cigarette Example to Utility and
Social Welfare Functions

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• SW Utyler(Cigst, t) UBrit(Cigst,B)