SOK 2037/3552 Resource Economics/ Fisheries Economics

Transcription

1 SOK 2037/3552 Resource Economics/ Fisheries Economics Lecturer: Claire Armstrong room A312, Department of Economics and Management Spring

2 Lecture 2. Lecture: Pollution cont d (PMMC Ch ) The concept of Resource Rent (Flaaten) 2

3 How ensure M*? Problem: Producer would prefer M f where MC of abatement is 0. 3

4 Figure 6.5 The economically efficient level of pollution minimises the sum of abatement and damage costs. Marginal damage M*: C1+C2 = minimal costs µ* C 3 C 2 C 1 What if pollution=m A? => C1+C2+C3 are total costs => larger than for M* Marginal abatement cost 0 M M A M * M f Quantity of pollution emission per period 4

5 How ensure M*? Problem: Producer would prefer M where f MC of abatement is 0. I.e. must somehow make producer reduce output Instruments 5

6 Selection criteria for instruments Dependability Focus Cost-effectiveness Long-run effects Problem: Dynamic efficiency May be trade-offs between Ancilliary benefits criteria Equity Flexibility Cost of use under uncertainty Information costs 6

7 Cost-efficiency Demands that marginal cost of abatement is equalised over all abaters Example: Firm A: marginal abatement cost=60 Firm B: marginal abatement cost=100 => If A abated one unit more, and B one unit less (same total abatement level), total savings of 40. This should be repeated until marginal abatement costs are equal, i.e. No gains more gains from trade 7

8 Abatement goal=40 Total costs for equal abatement: + B reduces abatement by => Total costs for equal marginal 5 and A increases by 5 abatement: + MC Decreased abatement cost = Q Increased abatement cost = W Q Q>W => reduced cost Equalised marginal MC B = 5Z B abatement costs gives cost efficiency High cost abater MC A = 3Z A Low cost abater W Z Pollution abatement Figure 7.1 Marginal abatement cost functions for the two firms (slightly revised PMMC). 8

9 Note: Cost efficiency does not necessarily imply equal abatement, but rather equal marginal abatement costs (Equity problem?) Where abatement costs differ cost efficiency implies that the relatively lowcost abaters will abate most, but not all. 9

10 Bargaining Let the market sort this out Instruments? Problems: - Many polluters, many affected parties Expencive to bargain - Bargaining between generations? - Nature as a public good Government intervention Instruments - Liability - Development of social responsibility - Command and control instruments - Emissions licences - Minimum technolgy requirements - Location - Economic incentive instruments 10

11 Economic incentive instruments Emission taxes Pollution abatement subsidies Marketable emissions permits Now to look at emission taxes... 11

12 Firms in the economy wish to emit total pollution = Mˆ Optimal emissions = M* => Give firms incentive to reduce emissions: tax µ * 0 Marginal benefit (before tax) Marginal benefit (after tax) tax M * Mˆ Marginal damage u* = optimal tax per unit emissions = marginal damage at M* M; Emissions Figure 7.3 An economically efficient emissions tax (PMMC) 12

13 If 0 tax, the firms abatement equals 0 Introduce abatement tax = u* µ * Marginal abatement cost < unit tax => abate Marginal cost of abatement Marginal abatement cost > unit tax => emit = Marginal benefit of abatement at M* 0 Z * = Mˆ M * Z : Emissions abatement Figure 7.4 The economically efficient level of emissions abatement (PMMC). 13

14 Firms in the economy wish to emit total pollution = Mˆ Optimal emissions = M* => Give firms incentive to reduce emissions: tax µ * 0 Marginal benefit (before tax) Marginal benefit (after tax) tax M * Z* Mˆ Marginal damage u* = optimal tax per unit emissions = marginal damage at M* M; Emissions Figure 7.3 An economically efficient emissions tax (PMMC) 14

15 If 0 tax, the firms abatement equals 0 Introduce abatement tax = u* Marginal cost of abatement µ * = Marginal benefit of abatement at M* 0 Z * = Mˆ M * Z : Emissions abatement => Each firm has same marginal cost of abatement = u* Figure 7.4 The economically efficient level of emissions abatement (PMMC). 15

16 So... The optimal emissions tax Brings about the efficient level of emissions M* (by internalising the externality) in a cost effective way (marginal cost of abatement equal for all firms) 16

17 Problems: If have incomplete information about marginal abatement costs, the tax set may not achieve the optimal level of pollution However, cost efficiency is secured, as marginal cost of abatement is equal for all firms 17

18 Emissions taxes in practise: In at least 20 OECD countries In Norway mainly as product tax; e.g. CO 2 tax on oil. Effluent charges. Ozone depleting substances Air pollutants (now also on NOX) Generally too low, hence do not fully internalise the external costs 18

19 Marketable emissions permits Set total amount of permits issued equalling target level ( the cap ). No firm may emit more than that which the permits they possess allows. Monitoring and penalty system secures this. Initial allocation; historic emissions, auctioned out, or other allocation mechanism... Free trading of emissions 19

20 Figure 7.8: Efficient abatement with two firms and marketable permits (PMMC) Different marginal cost of abatement => inefficient => A sells permits to B until MC are equal => TRADE Marginal abatement cost Equilibrium price = Marginal abatement cost Increased cost from trade MC(B); high cost firm B MC(A); low cost firm A MC(INDUSTRY) Abatement Z Emissions abatement, Z =15+25= Required industry wide abatement Equal allocation of permits to firm A and B Decreased cost from trade Decrease in cost is greater than increase in cost from trade => efficiency 20

21 So... Optimal pollution levels Cost efficiency 21

22 Problems: Initial allocation => Distributional issues Pollution concentrations. Information requirements 22

23 Marketable permits in practice: USA for SO 2, NO X, ozone depleting substances (ODS) and more Australia for saline discharges into rivers Canada for ODS Denmark for CO 2 Poland for volatile organic compounds (VOC) Switzerland for VOC and NO X Kyoto agreement; global CO 2 permits? 23

24 Natural resources Differentiate between; 1) Renewable resources forests, fish (conditionally renewable). air, water (self regenerating) 2) Non-renewable resources minerals oil/gas (very SLOWLY renewable) Optimal sustainable utilisation Now or later? 24

25 Optimal renewable resouce utilisation is like living off the Interest interest of a fortune... Interest from fortune Growth in renewable natural resource Fortune/ Resource stock 25

26 Why study economics in connection with resource utilisation? Understand why there is a decline in resources. Decide how to optimally utilise resoueces. Decide how to weight different resources that interact. 26

27 What should be maximised? Maksimise ground rent (also called resource rent) Ground rent is defined as : Profit in excess of that needed for payment of capital and labour. 27

28 Why does Ground rent emerge? 1) Production costs connected to the utilisation of a resource vary from place to place Rikardian rent 2) Scarcity in the resource availability leads to extra revenue Hotelling rent 3) Few owners of natural resources - Monopoly rent 28

29 P, MC What is to be maximised? Maximise the ground rent (also called resource rent) Ground rent is defined as : Profit in excess of that needed for payment of capital and labour. 1) Ricardian Ground rent Ricardo: Long run marginal costs are increasing for natural resouces MC R ; marginal cost of natural resource P R P 0 D D 1 0 X R X G MC G ; marginal cost of ordinary goods X (use of natural resource) Part of the resouce use that is not affected by scarcity 29

30 2) Hotelling rent P,MC Hotelling rent MC K MC R P H MC K = Marginal cost including loss of future Income due to scarcity E X Ricardian rent X H 30

31 3) Monopoly rent P,MC Monopoly rent MC R Monopolist in the resource market P M D Ricardian rent X M MR X 31