Agricultural Business 450 Natural Resource Economics

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Agricultural Business 450 Natural Resource
Economics

• Chapter 3
• Theory of
• Environmental
  Externalities
• Dr. Susan Watson

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Goals for Chapter 3

• Understand External Costs Benefits
• Describe Positive Externalities
• Utilize Welfare Analysis of Externalities
• Apply Coase Theorem to Property Rights
• Understand the Limitations of the Coase Theorem

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External Costs Benefits Economic Theory

• Marginal Benefits Marginal Costs of producing
  or consuming one more unit
• Market supply schedule shows how many units
  producers will place on market
• Market demand schedule how many goods you are
  willing and able to purchase
• Market Equilibrium indicates the price and
  quantity traded

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Externalities

• An effect of a market transaction on individuals
  or firms other than those involved in the
  transaction
• Example -- automobile pollution has negative
  externalities to peoples health and the
  environment
• Example Planting flowers in your yard has
  positive externalities to people who drive by

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Accounting for Environmental Costs

• Internalizing Externalities
• Bringing environmental and/or other social costs
  into our market analysis

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Figure 3-1 Automobile Market with External Costs
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Internalizing Environmental Costs

• Pollution Tax
• Internalizing externalities caused by production
  and consumption of vehicles of pollution

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Figure 3-2 Automobile Market with Pollution Tax
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Social Optimum

• A truly efficient equilibrium of supply and
  demand that takes into account all of the
  external costs of production and consumption
• Example Automobiles which cause pollution
  environment and traffic congestion social

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Issues Automobile Externalities

• What if the tax is too high or too low?
• Will the same tax apply to compact cars and gas
  guzzlers?
• Would it be better to tax emissions directly
  instead of automobile sales?
• Complementary Goods ? Autos Gasoline ? Can tax
• Cars, Gasoline, or Emissions

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Positive Externalities

• Also need to internalize the social benefits of
  activities that generate POSITIVE externalities
• Example Many suburban and rural towns have
  instituted open land preservation programs ?
• They seek to maintain or increase the amount of
  open and rural land

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Figure 3-3 A Positive Externality
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Figure 3-4 A Subsidy for Open and Rural Land Use
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Welfare Analysis of Externalities

• Indicates why it is socially preferable to
  internalize externalities
• Economists call market equilibrium efficient
  because it maximizes net social benefit

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Figure 3-5 Welfare Analysis of the Automobile
Market
A
F
D
E
B
C
H
G
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Figure 3-6 Welfare Analysisof the Automobile
Market with Pollution Costs
S
P
S
A
J
B
C
D
G
E
F
I
H
D
Q
Qo
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Property Rights Coase Theorem

• Do I have a right to drive my automobile even
  though it pollutes?
• Do others have a right to be protected from the
  effects of my vehicles waste products?

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Pigovian Tax

• Imposing a tax equal to the damage caused by the
  externality
• Example A tax on a factory operating in a rural
  area that emits pollutants from its stacks that
  damage crops of neighboring farms

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More on the Coase Theorem

• States that if property rights are well defined,
  and no significant transactions costs exist, an
  efficient allocation of resources will result
  even with externalities
• Also called right to pollute
• In effect, this system turns pollution reduction
  into marketable goods.

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Figure 3-7 Application of the Coase Theorem
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Limitations of Coase Theorem

• Free Rider Effect
• Holdout Effect
• Public Choice versus Private Choice
• The Coase Theorem Equity

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Questions?