4 Depletable Resources Part 2

• A resource is depletable if

  • stock decreases over time being used
  • stock never increases over time; takes millions of years to form
  • rate of stock decrease is a monotonically increasing function of the rate of resource use
  • no use is possible without a positive stock
• Oil and gas

  • Can cross administrative boundaries when there are subterranean vein connections
• Coal

  • Considered depletable because it takes millions of years to form
• Groundwater

  • Transboundary

  • Can refill surface water

  • Can interplay with seawater when nearshore

  • Some are depletable, some are not
• Internalizing (the intertemporal) scarcity cost in present decision-making

  A) Marginal Production Cost

  B) Marginal Scarcity Cost

  C) Marginal Production Cost

  D) (without scarcity)

  E) Demand for Product
• Scarcity cost: marginal net benefits, intertemporal allocation

  A)

  B) equal Allocation of 10 units/period 1 and period 2

  C) Q1>10

  D) Q2<10

  E) Qm>Q*

  F) PM<P*

  
• With positive discounting rate:

  • Production favors present generation over future generation
  • Less depletable resources are left in the ground for future users
  • Sometime in the future the mines will get depleted.
• Scarcity cost countermeasures:

  • Economic rent from mining (net returns above normal profits) should be reinvested in renewable assets to maintain future income streams
• Reducing pollution through cost internalization

  A) Marginal Private Cost

  B) without negative externality

  C) Marginal Private Cost

  D) Marginal Pollution Cost

  E) (with negative externality)

  
• Positive transactions costs associated with pollution

  • Firm perspective:
  • making a transaction, including the cost of planning, deciding, changing plans, resolving disputes, and after-sales
  • the transaction cost is one of the most significant factors in business operation and management.
• Positive transactions costs associated with pollution

  • In the case of intertemporal and intra-temporal pollution costs by mining
  • Information costs – knowing and proving the pollution source
  • Proof of the impacts
  • Change in behavior
  • Enforcing and monitoring change in behavior
• In economics and business, transaction costs are costs we incur when we make economic exchanges. The theory of transaction cost economics, also known as the social cost theory, is based upon the work of two economists: Ronald Coase and Oliver Williamson
• Reducing pollution through cost internalization: positive transactions cost born by polluter

  A) Marginal Private Cost

  B) Marginal Pollution cost (without transactions cost)

  C) Marginal Social Cost

  D) Transaction cost borne by producers

  
• Reducing pollution through cost internalization: positive transactions cost born by affected party

  A) red

  B) increased costs, market signals, substitution effect

  
• Multiple polluters: Cost savings when applying a tax instead of a specified pollution reduction target due to unequal MC

  A) Equal abatement

  B) Efficient abatement

  
• HETEROGENEOUS ABATEMENT COSTS 🡪 MBI

  A) $250

  B) (½ 10*10 + ½ 10*40)

  C) $160

  D) 36%

  E) (½ 16*16 + ½ 4*16)

  F) 16

  
• When are costs heterogeneous? Explain.

  • abatement takes time
  • firms with different scale
  • different businesses emit same pollutant
• Heterogenous Damage

  MBI less relevant: The idea of equalizing MC makes no sense with hot spots (where damages vary per spot)
• Zoning is an appropriate instrument in heterogenous damage
• Aside from Zoning, creation of natural reserves is also appropriate in heterogenous damage
• Note that MBIs can be made to vary geographically (and temporally)

  • The pollution tax can reflect the marginal damage
  • The tax may be different from one site versus the other
• Policy Selection for Internalizing Pollution Externalities

  A) Either policy

  B) Zoning

  C) Individual permits

  D) Charges

  E) Tradable Permits

  F) Differentiated input prices

  
• Criteria

  • Effectiveness
  • Static Efficiency
  • Dynamic Efficiency
  • Fairness (Distribution of costs/benefits)
  • Incentive compatibility
  • Political feasibility
  • Instrument costs and information needs
• Conditions (Ecological, economic)

  • Heterogeneity in abatement costs
  • Heterogeneity in damage
  • Uncertainty/Risk
  • Asymmetric information
  • Synergies or ecological thresholds
  • Non-point pollution
  • Monopoly or oligopoly
• Property Rights are Fundamental

  • Property is a bundle of rights: Access, productive use, management, exclusion, lease, sale, destruction. Extent varies.
  • Rights and Responsibilities
  • ”Real” Property from King 🡪Feudalism
  • Enclosure and Common Property
• Property Rights II

  • Who has rights to water, air, ecosystems
  • Land owner, State, First user/polluter, citizens
  • Water rights: Riparian or Prior Appropriation?
  • The rights of the tiller …and of squatters
  • Ecosystem rights: Erosion; Nuisance
  • The Coasian Perspective and transactions cost
• COASE

  • Who should move ?
  • Traditional farmers making food or new luxury tourist bungalows?
  • Residents or Union Carbide in Bhobal
  • Industrial Pig farming or residential area • Rights = f (Time, tenure, income, productivity)
  • How feasible is it for parties to get together?
  • Buyers of carbon certificates exchanging with numerous smallholder tree farmers or with few, large industrial tree farmers in Indonesia?
• Market Failure I

  A) Nonconvexities

  B) cA + (1-c)B

  
• Market Failure

  • Externalities
  • Indivisibilities/Increasing returns to scale
  • Public Goods, club goods, Common Pool Resources, Congestion
  • Information assymetry, risk/uncertainty
  • REMEMBER POLICY failure too !
• Policy Instruments. List examples from your experience or readings

  
• Externalities

  *Study graph

  A) real

  B) pecuniary

  C) increase

  D) decrease

  E) prices

  F) house prices

  G) market failure

  H) resource scarcity

  
• Public Goods

  A) Samuelson

  B) Poor

  C) provision

  
• Explain the following graph

  A) Asymmetric Info

  B) Risk

  C) Wage

  D) MP

  
• Moral Hazard/Adverse Selectíon

  • The very poor are very risk averse
  • They would need savings or insurance
  • Banks not available due to transaction costs and lack of collateral (🡪tenure issues)
  • Insurance not available: Moral Hazard + Adverse Selection
  • Inequitable contracts and
  • Unsustainable use of resources
• Risk and environmental management

  • Lack of markets for saving (banks) leads to other saving forms.
  • Cattle are one such form that can be counterprod as more cattle 🡪 overgrazing
  • Don’t tax cows. Provide banks!
  • Lack of insurance may make farmers very risk averse.
  • Risk of pests (locust) unacceptable even if average damage small.
  • Don’t provide pesticide spray. Provide insurance!
• The important role of financial institutions

  A) Insurance

  B) Pesticides

  
• Different types of Permit

  • The original add-on to regulation: Make regulations into rights and then let people trade in over-fullfilment (Emission Reduction Credits)
  • Cap and Trade. Decide a maximum (CAP) for pollution and then let the market work on its own. Less transaction costs.
  • Ambient permits, certificate schemes, etc.
• Permits can be allocated in proportion to:

  • Historical pollution: Grandfathering
  • (Historical/)current production: Output allocation or benchmarking.
  • Equally
  • By WTP ie through an auction
  • NB Duration, bankability, updating…
• Weitzman P vs Q

  If there is uncertainty concerning the marginal cost of abatement and the Marginal Damage of pollution is very steep (thresholds)🡪 USE QUANTITY-type instrument.

  A) Quantity
• Weitzman P vs Q

  If there is uncertainty concerning the marginal cost of abatement and the Marginal costs are thought to be steeper (for instance due to risk of bankrupcy) while damage is flat (eg stock pollutants) then USE PRICE-type instrument