Announcements
Solutions to Problem Set 1 posted & Problem set 2
posted
Survey results (partially)
Links to sites that may be of interest:
www.stanford.edu/class/econ155/coursework/CourseMaterials/Links.html
Which countries are the largest emitters of carbon
dioxide (from all sources)?
1st
2nd
3rd
Environmental Economics in the News
“Palm oil is a driving force behind the
destruction of tropical peatlands by
deforestation, soil degradation and fires”
Wetlands International
Questions from last time?
Pecuniary Externalities vs. Externalities
An externality exists when
• the consumption or production choices of A enters
the utility or production function of B
• A’s choices are made without B’s permission or
compensation
A unified theory in which
externalities, common-pool resources,
and public goods are explained
Some subtleties of externalities:
“…without permission or compensation”
• Assuming I don’t like smoke, am I
suffering from an externality when…
• A. I’m eating in a smoky restaurant?
• B. I’m working in a smoky restaurant
• C. I’m sitting on a park bench and
someone sits beside me and lights a
cigarette
Some semantics of externalities:
is there externality at the optimum?
• When we set a tax equal to MEC, we are
getting firms to “internalize” the externality
• So, is there still externality when there is
the optimum amount of pollution?
Negative externality:
free/open access to a sink
•
•
•
•
Sink: receptacle for waste
Atmosphere
Water bodies
Earth, in some places
The Common-pool problem
open access to a resource
• Common-pool resource aka open-access
resource
– Fishing from a common pool
– Hunting on a common plain
• Buffalo example (p. 73)
– Common printers
– Email lists: “Tragedy of the Listserv
Commons”
• This is the book’s
version of the
bison harvesting
graph (p. 73). One
way making the
• This is the book’s
version of the
bison harvesting
graph (p. 73). To
make it more
intuitive, think of
“Harvest effort” as
“# of hunters” and
“Total benefits” as
“# of bison
harvested.” Bison
harvested initially
increases with the
# of hunters, but at
a decreasing rate,
as the more that
bison are
•
•
Suppose that the current number
of hunters is Q1. Will a new
hunter want to join the hunt?
Yes, because that hunter would
expect a harvest equal to the
total bison being caught divided
by the number of hunters. That
is, from the perspective of an
extra hunter, the benefits equal
the average benefit per hunter
and the costs equal the average
cost; since the average cost is
less than the average benefit,
the extra hunter would joint the
hunt. This same logic prompts
more hunters to join until
benefits for all hunters equal
cost for all hunters.
The problem is that, from the
perspective of society, the
benefits of an extra hunter are
less than the average benefit,
because an extra hunter
decreases the productivity of
other hunters. As a result of this
externality, the marginal benefit
of hunting effort from the
perspective of society is less
than the marginal benefit from
the perspective of one hunter, so
the societal optimal level of
hunting effort is Q1, not Q2
“Tragedy of the Commons”
• Garrett Hardin: Benefits and costs to an
individual of adding another cow to a common
meadow
• “Since the herder receives all the proceeds from
the sale of the additional animal, the positive
utility is nearly +1.”
• “Since, however, the effects of overgrazing are
shared by all the herdsmen, the negative utility
for any particular decision-making herdsman is
only a fraction of 1.”
Scarcity rent
•
•
•
•
•
•
Producer surplus
= profit + fixed cost
= 0, usually, in long-run with competition
If PS > 0 in long-run with competition
PS = scarcity rent
Aka resource rent and similar to economic rent:
returns over and above opportunity cost
• Contrast with monopoly rent
Dissipation of rent
• Open-access
• Rent-seeking
– trying to secure a transfer of a portion of the
economic pie vs. to trying to expand the
economic pie by producing a good or service
• Special interests: benefits concentrated, costs
diffuse
• Rent seeking ends up diminishing the pie
– Government failure
Public goods
• A common-pool resource
• Non-excludable: you can’t exclude me
from using it
• Rival (divisible): my use diminishes your
use
• A public good (Distinguish from the “public
good)
• Non-excludable
• Non-rival
Demand for public goods
• Private good: add horizontally
• Public good: add vertically
Public goods
& Free-rider problem
• Formulated as the Prisonner’s Dilemma
• Choices: contribute or don’t contribute
• If there are enough “other people”, best
response is to not contribute
• More generally, best response is to
contribute less than socially optimal
amount
• Bear all the costs of contributing but only
share in the gains from your contribution
Private Provision of Public goods
• Donations
– To charities, generally
– To environmental charities, in particular
• Bundling of Private & Public Goods
Geoffrey Heal, Columbia University economist
(and one of Gretchen Daily’s co-authors)
– Central Park in New York?
– Habitat on Spring Island, South Carolina
– Game ranching in southern Africa
Common pool
vs. Common property
•
•
•
•
•
•
•
Examples:
Swiss alpine meadows
Sri Lankan fishing grounds
Maine lobster fishery
Tropical forests
Water supplies
Internet communities?
Excludability & Rivalry:
Externalities
• Many negative externalities result from
• non-excludable access to a
• rival good
• Many negative externalities result in a
• non-excludable
• non-rival bad
Coase Theorem
Basic insights:
• externalities due to lack of property rights
• reciprocal nature of harm
The basic idea
Under certain assumptions, in the presence of
externalities, the affected parties will work out a deal
on their own and thereby reach an efficient outcome
Coase’s Example
Coase’s Example, Equationized
Comparing Outcomes
Under Different Property Rights
Case I: Initial Property Rights Favor Rancher
Numerically:
No Deal
Cows (n) YR
YF
YT
10
10
160
Cows (n) BR
CF
NBT
q=10
BCD
A-D
150
Deal
Diagramatically:
No Deal
Deal
ABC
Comparing Outcomes
Under Different Property Rights
Case I: Initial Property Rights Favor Rancher
Numerically:
Cows (n) YR
YF
YT
No Deal
10
150
10
160
Deal
6
142+8
26-8
168
Cows (n) BR
CF
NBT
No Deal
q=10
ABC
BCD
A-D
Deal
q=6
AB+8
B+8
A
Diagramatically: