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ECON 202, Week 5

by: cescobar7 Notetaker

ECON 202, Week 5 Econ 202 (Pakhotina, Microeconomics)

cescobar7 Notetaker
Texas A&M
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About this Document

This talks about types of goods, as well as cap-and-trade.
Class Notes
cap-and-trade, Economics




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This 3 page Class Notes was uploaded by cescobar7 Notetaker on Saturday October 1, 2016. The Class Notes belongs to Econ 202 (Pakhotina, Microeconomics) at Texas A&M University taught by Pakhotina in Fall 2016. Since its upload, it has received 6 views. For similar materials see Microeconomics in Economics at Texas A&M University.

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Date Created: 10/01/16
Week 5: Chapter 5, continued What causes externalities? Externalities and market failures result from: Incomplete property rights (No one has property rights to the air, for example) Difficulty of enforcing property rights in certain situations Property rights: The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it. Think about the market for pollution reduction. So that pollution reduction is the good that is demanded and supplied at this market. Supply shows marginal cost (MC) of pollution reduction. Demand shows marginal benefit (MB) of pollution reduction.  We do not try to reduce pollution to zero, because it would cost too much and heavily outweigh  the benefits, it is not economically efficient. The optimal quantity of pollution reduction is where MB=MC. Transactions costs: The costs in time and other resources that parties incur in the process of  agreeing to and carrying out an exchange of goods or services. Private bargaining is most likely to reach an efficient outcome if the number of parties  bargaining is small. Less conflicting agendas.   In practice, private solutions to the problem of externalities will occur only if all parties to the  agreement have full info about the costs and benefits associated with the externality, and they are willing to accept a reasonable agreement.   Command­And­Control Approach—An approach that involves the government imposing  quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to  install specific pollution control devices. One government policy to reduce negative externalities is cap­and­trade, designed to reduce  pollution. If government wants to reduce the level of pollution from 30 tons to 10 tons, they  should issue 10 permits (if one permit allows for emission of 1 ton of pollution). Ex: There are two firms­polluters. Costs of pollution reduction are $10 per ton for Firm 1 and  $12 per ton for Firm 2. Government uses cap­and­trade approach to cut pollution from current  level of 30 tons to 10 tons. Which of the following trading terms would be acceptable for both  firms?  Firm 1 will sell and Firm 2 will buy permits if price=$11 Ex 2: There are two firms­polluters. Costs of pollution reduction are $10 per ton for Firm 1 and  $12 per ton for Firm 2. Government would use cap­and­trade approach to reduce pollution by 20  tons. Calculate the total costs of pollution reduction. In this scenario, Firm 1 will sell all the  permits, so the second firm will have purchased all the permits, and be allowed to pollute. The  first firm will do the entire pollution reduction, and Firm 2 will do the polluting. The entire  pollution reduction will therefore cost 20*10 dollars, or $200. Coase Theorem: Assuming the market for pollution reduction exists, there are no transaction  costs, and property rights are assigned either to polluters or to victims of pollution, the Coase  Theorem says that under these assumptions market will achieve economically efficient outcome. One example in real life is the 1990 Clean Air Act, which reduced air pollution and required  overall sulfur emissions to be cut in half to prevent acid rain. Each company was given the right  to decide how to reduce, so there was not a government mandate on technology. Some people  argued against it, claiming that it would hinder the free markets and cost more than the benefits  are worth. Nevertheless, it passed by large margins in both chambers of Congress.  An international example of cap and trade is the Kyoto Protocol, an international agreement that  sets binding targets for 37 industrialized countries for reducing greenhouse gas emissions that  cause global warming. Each country was allowed to decide whether or not to be part of the  agreement. Many countries, like the US and China, however, decided to opt out, and therefore,  the Kyoto Protocol is not working as initially hoped. Public Goods: Four categories. We can categorize public goods into four categories, using  whether or not they are rival, and whether or not they are excludable.  Rivalry: If one person consumes a particular good or service, nobody else can consume it. One example is a hamburger, if one person eats it, it is gone and nobody else can eat the  same burger.  Excludability: To consume an item, you have to pay for it. Example: Again, the  hamburger example is valid. If you want to eat one, you have to buy it. This is illustrated in the chart shown below. The chart above shows what the four types of goods are, and some examples of each. For  example, the court system is something used by everybody, and one does not even have to pay  for it to use it (the government funds it with taxes, and some people, like non­citizens, who don’t pay for it can still use it in some cases). Public goods are those that are both non­rival and nonexcludable in consumption, such as  national defense (funded publicly, used by many people, even those who didn’t contribute to  paying taxes).


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