Embed Size (px)
Citation preview
Tragedy of the Commons; Environment; Safety
Today: Three applications of market failure without
government intervention
For the rest of the quarter
We will cover various topics Each topic will be its own “mini-
lecture” Today: Three mini-lectures
Tragedy of the Commons/Property rights
Environmental regulation Safety regulation
Tragedy of the Commons/ Property rights
Property rights are important in order for a person or firm to efficiently use its resources
Classic example Lack of property rights in a grassy
field Total benefit of the grassy field is zero
without property rights
Our example today
Two investment options A safe stock that always sells for $20
in equilibrium Pays $1 per year every year forever
Buy a 1-year-old calf today for $100 Able to sell at two years old The more calves on the grassy field, the
less each will be worth at two years old
What is the return on the safe stock?
Recall from earlier in the quarter The present value of a permanent
annual payment PV = M / r PV = $20 M = 1 This implies that r = 0.05, or 5%
Income from calves:# of
calves on the
commons
Price per 2-year-old cow sold
($)
Income per cow ($ per year)
1 130 30
2 120 20
3 114 14
4 111 11
5 108 8
6 105 5
7 102 2
What will happen w/o property rights?
People will buy calves as long as the return on the commons is at least 5% $5 return for the $100 investment
Income from calves w/o property rights: Rate of return of 5%
# of calves on
the commons
Price per 2-year-old cow sold
($)
Income per cow ($ per year)
1 130 30
2 120 20
3 114 14
4 111 11
5 108 8
6 105 5
7 102 2Equilibrium w/o property rights
What will happen w/o property rights?
People will buy calves as long as the return on the commons is at least 5% $5 return for the $100 investment
This is not efficient, however No gain versus the safe stock investment Similar to the no-toll situation on
congestible routes
What is efficient?
We need marginal analysis Find marginal income of each calf If marginal income is at least $5
invest in another calf If marginal income is less than $5
stop investing
Income from calves with property rights
Invest as long as marginal income is at least $5
# of calves on
the commons
Price per 2-year-old cow sold
($)
Income per cow ($ per year)
Total calf income ($ per year)
Marginal income ($ per year)
30
1 130 30 30
10
2 120 20 40
2
3 114 14 42
2
4 111 11 44
Income from calves with property rights
Invest as long as marginal income is at least $5
>$5 INVEST
<$5 STOP!
# of calves on the
commons
Price per 2-year-old
cow sold ($)
Income per cow ($ per
year)
Total calf income ($ per year)
Marginal income ($ per year)
30
1 130 30 30
10
2 120 20 40
2
3 114 14 42
2
4 111 11 44
>$5 INVEST
What is the commons worth as a private good? An optimal investor (with property
rights) will invest to maximize the value of commons Suppose that someone has $1000 to
invest What is each person’s willingness to
pay for the commons? How much will be invested in:
Stocks? Calves?
Investment analysis A person that owns the commons will buy
2 calves $200 invested $40 return
Could get $10 return on the safe stock instead
$30 extra in return Willing to pay $600 to purchase the commons
Note that the commons can be used every year
Investment decision for the commons owner Investment decision
of the person buying the commons
$600 to buy commons $200 to buy two
calves $200 in safe stocks
Total returns: $50 Commons
$40 for two calves Stock returns
$10 in payments
This is equilibrium, since any person will be indifferent between investing in the commons and in stocks
Summary: Tragedy of the Commons
Without private ownership, use of commons leads to no gain to society, relative to safe investments
With private ownership, the land has a positive value
Environmental regulation
Environmental quality is a good that people want
Problems with providing environmental quality Goods without markets (air quality,
global temperature, rivers) Goods that governments own (parks)
Environmental regulation and externalities Recall externalities chapter
With negative externalities, too much of some goods are produced, relative to efficient outcomes possible
Three ways of reducing pollution Taxes Pollution permits Arbitrary controls (also known as
“command and control” methods)
Environmental regulation and efficiency
Assume we are trying to find efficiency in an air-polluted city
To reach the efficient level of pollution, we need to find firms with the lowest cost to abate pollution
Environmental regulation and efficiency Example with 3 firms
Efficient level of pollution, as determined by the government: 5 tons of smoke per day
One of the two approaches (taxes or permits) is needed to solve for the optimal distribution of pollution We do not spend much time
on “command and control” methods since it is often sub-optimal
Example Three firms produce light bulbs With no abatement technology, each
firm produces 4 tons of smoke per day 12 tons of smoke with no regulation To reach efficient level of 5 tons, 7 tons
need to be abated Some firms can more easily abate
pollution than others If firms with low abatement costs abate the
most, we can get an efficient result
ExampleTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 Notice that marginal abatement costs
increase as more is abated Firm A: $14 MC to abate 1st unit; $16 for the
2nd unit; $20 for the 3rd unit; $25 for the 4th unit
ExampleTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 We need to find the 7 tons with the
lowest abatement MC Let’s start by adding arrows to abatement
MC of $20 per ton or less Not enough: Only 4 tons abated
ExampleTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 Let’s try $30 abatement MC or less
7 green arrows We now have reached the efficient level of 5
tons of emissions
Our two methods to reach an efficient result
Pollution tax Find a tax such that exactly 7 tons of
pollution will be abated Sell pollution permits
Find a price such that exactly 5 tons of pollution permits are demanded
Pollution taxTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 Let’s try a $30 tax
Firm A will abate all 4 tons of smoke, since abatement cost is lower for each ton of smoke removed
Firm B will abate 2 tons and pollute 2 tons Firm C will abate 1 ton and pollute 3 tons
Pollution taxTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 7 tons abated
5 tons polluted We have found a tax that leads to the
efficient pollution level
Pollution permitsTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 What if you need a permit to pollute?
What if we sell permits for $30 each? Firm A will demand no permits (and abate 4 tons) Firm B will demand 2 permits (and abate 2 tons) Firm C will demand 3 permits (and abate 1 ton)
Pollution permitsTons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 7 tons abated
5 tons polluted We have found a price for permits that
leads to the efficient pollution level
Alternative to taxes and permits: Command-and-control methods
An alternate method to control pollution is for the government to dictate that each firm reduce its pollution by a given percentage Example: Each firm must reduce
emissions by 25% Problem: Usually not efficient
Alternative to taxes and permits: Command-and-control methods
Tons of smoke emitted per day
4 3 2 1 0
Total abatement cost, firm A $0 $14 $30 $50 $75
Total abatement cost, firm B $0 $20 $45 $80 $120
Total abatement cost, firm C $0 $25 $60 $100 $150 Example: Each firm must abate 1 ton
Total cost: $59 (see red arrows) Total cost if firm A abates 2 tons and firm
B abates 1 ton: $50 (see green ovals)
Summary: Environmental regulation
Markets with externalities usually require government intervention to have optimal outcomes to occur Taxes: Efficient (with the right tax) Permits: Efficient (if permit price leads
to an efficient amount of pollution) “Command and control” methods:
Almost never efficient
Workplace safety
In a perfectly competitive labor market… Firms will provide the optimal amount
of safety Workers will be hired by a firm
Threat to leave firm will prevent the firm from lowering safety standards
The real world
Many countries have laws dictating a minimum level of safety to workers Why?
Although most labor markets are competitive in the long run, there are frictions in the short run that prevent immediate job movement
What else is going on?
Today’s work affects the company today, but the worker for a lifetime Workers value safety Example: Lose an arm Firm lays you
off; lower worker productivity for a lifetime
Firm does not care about future earnings of the worker
In many countries: Government support needed if the worker is unable to find a job
Unions and workplace safety
Note that unions not only fight for high wages, but also working conditions
Unions can be beneficial in determining the optimal amount of worker safety
Other methods to increase safety Offer financial incentives
Higher safety Bonuses (money, gift certificates, tickets for prize giveaways)
Increased training Shorter work days
Tired people are more likely to be clumsy and inattentive
Workers’ compensation Insurance system for those injured while
working
Safety outside of the workplace Many safety laws exist that are not
related to workplaces These laws often affect children, who
are “unable to fend for themselves” Child seats in cars Crib safety Reduced speeds near schools
Some speed limits near schools are now 15 miles per hour
Summary: Workplace safety
Workplace safety laws try to establish an efficient amount of worker safety
Other attempts to increase workplace safety: Unions, financial incentives, increased training, shorter work days, and workers’ compensation programs
Monday
Health care Information topics Reading
Pages 295-305
Enjoy life,take a deep breath
