Negative externalities – administrative command or Pigouvian tax (or
tradable permits)?
Summary last week
- environmental scarcity as problem of substitution
- e.g. peak oil and other non-renewable resources
- economics of non-renewable resource exploitation
- the "green paradox"
Your comments and questions to the central text
In most economic analysis of policy instruments a cost-effectiveness measure
of static efficiency is used, command and control frameworks are compared
with some market-based system and potential gains from trade in permits or
from charges are simulated. ….. Asides the static efficiency, alternative
policy systems provide dynamic incentives, which constitute a suitable
criterion for policy evaluation. It is claimed, that market-based approaches
will also supply dynamic incentives for the progress and adjustment to
ameliorated pollution-control technologies. ….. Thereby the question arises
whether the implementation of corrective taxes or markets in pollution rights
can cause the “green paradox”.
The argument of choosing between an incentive approach or a command and
control approach seems to be odd, as one could combine the two. The
command and control base for outlawing certain technologies can be seen
as an incentive for future products. If the European Union would outlaw
fossil fuel powered cars by 2050 it is both a command and control
mechanism as well it is a market incentive as car manufactures can’t sell
their current products 30 years down the road. If regulators set high
standards and high punishments for not playing by the rules, markets
would follow as suppliers want to stay in business. Therefore in my
opinion the problem to establish environmental friendly markets is not an
incentive issue but rather if a command and control mechanism (meaning
regulators) are willing enough to change the current framework.
What is the situation like after 24 years? Did environmental economics
develop in the direction wished by the two authors? If so, did it facilitate
the policy making? Did it prove to be successful? What can be said of the
Kyoto protocol and of the Paris accords? How will they be implemented?
What are externalities?
Positive externalities / public goods.
Negative externalities / public bads.
What is the “optimal level of pollution”?
How to reach it?
administrative command
or Pigouvian tax
(or tradable permits)?
Economics of the Pigouvian tax
Administrative measures
- pollution thresholds on emissions
- prohibitions
What are the problems ?
Comparison
target
Administrative Command
Pigouvian tax
activity (restriction)
quantity (threshold)
price
cost-benefit - efficiency low: no market, no efficiency
(textbook model)
middle: exact equilibrium not easy
to reach// different costs for
different firms
cost-benefit – efficiency not so bad
(empirical evaluation)
quite good (not optimal), but in
open markets green paradox,
tax income for the government
information
requirements
high
private costs and social costs are not
easily measurable
monitoring and
enforcement capability
depends from the technology /
industry
depends from the technology /
industry
distributional
equity/fairness
high
low
predictability for firms
high (announced thresholds)
high
measures when new
lower thresholds
abatement technologies
arrive
examples
dangerous chemicals, drugs, alcohol, tobacco
emissions from firms
gazoline, electricity
emission thresholds for cars
co2 emissions world wide
higher tax
Cost-benefit analysis versus politics
Pareto optimum as technical (=technocratic) device to substitute for political
decisions
Social costs – public bads definition depends on politics, not on economics
Private costs of cleaner technologies often overstated / may fall with
standardisation and increasing returns to scale
Politicians often prefer regulations with obvious benefits and hidden costs to
regulations with hidden benefits and obvious costs
clean models versus dirty reality.