3.8 Environmental Economics

• Market failures in environmental management occur when the free market fails to allocate resources efficiently
• Common pool resources are rival but non-excludable
• Environmental economics aims to understand how economic activities impact the environment
• How do taxes address negative externalities in environmental economics?

  Increase the cost of polluting
• What is the primary focus of environmental economics?

  Economy-environment relationship
• Match the market failure with its example:

  Public Goods ↔️ Clean air

  Common Pool Resources ↔️ Fish stocks in the ocean

  Imperfect Information ↔️ Environmental cost of a product
• A carbon tax provides certainty about the price of carbon emissions

  True
• Both carbon tax and cap-and-trade systems make polluters pay for their emissions


  True
• Environmental economics explores economic solutions to environmental problems such as taxes and subsidies.

  True
• Public goods are non-rival and non-excludable, leading to overuse and under-provision.


  True
• Identifying market failures is crucial for designing effective environmental policies.


  True
• Pollution from a factory affecting nearby residents is an example of a negative externality.


  True
• Economic solutions align private incentives with social costs and benefits.

  True
• Externalities occur when costs or benefits are borne by third parties not involved in a transaction


  True
• What is the primary goal of carbon pricing mechanisms?

  Reduce greenhouse gas emissions
• Order the features of carbon tax and cap-and-trade systems based on certainty levels:

  1️⃣ Carbon Tax: Fixed price, uncertain emissions

  2️⃣ Cap-and-Trade: Variable price, fixed emissions
• Policy instruments address environmental degradation by aligning private incentives with social costs and benefits
• Environmental economics studies the relationship between the economy and the environment
• What is an example of an externality in environmental management?

  Pollution from a factory
• What is imperfect information in the context of environmental economics?

  Lack of environmental knowledge
• What is an example of a positive externality in environmental economics?

  Bees pollinating crops
• Subsidies encourage environmentally friendly activities by making them more financially viable
• Market failures in environmental management lead to environmental degradation
• Positive externalities result in benefits for third parties.
• In a cap-and-trade system, businesses trade emission permits
• Match the policy instrument with its example:

  Taxes ↔️ Carbon tax on fossil fuel emissions

  Subsidies ↔️ Incentives for renewable energy

  Regulations ↔️ Restrictions on single-use plastics