UNIB10007 Lecture Notes - Lecture 10: Economic Model, Market Failure, Demand Curve
16 May 2018
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TOPIC 10: GHG EMISSIONS AS A GLOBAL POLLUTION
EXTERNAL COST
• Until 1990: GHG emissions dumped in atmosphere for free
o Realised pollution results in c.c + other costs on society = external costs
• External Costs: globally, + last for generations
• Society has to make choices between:
o Mitigation: choosing less pollution + higher costs on products/production
o Adaptation: change decisions to a cost to accommodate climate change
▪ Difficult trade off
• Economic model solution equates Marginal External Cost (MEC) with Marginal Abatement Cost of
pollution (MAC)
o Set a price or cost on pollution
Economic Model
• Model for the market for products which involve pollution
o Marginal Private Costs: paid by businesses + households – cost of labour, material etc
o Marginal Social Costs: MSC = MPC + MEC
o Marginal External Costs: costs of climate change
• This is done to: explain market failure, show gains to society of reducing pollution + finding a society
benchmark correction for the market failure
Operation of a Market with Pollution
• Buyers + sellers base decisions on market price
• GHG pollution dumped for zero cost in atmosphere – costs of c.c ignored
Operation of a Market with Goods + Services using Energy as an input
• Buyers consider market price of electricity (Example) – price does not include allowance fir GHG
pollution cost
• Sellers, in setting market prices, consider private costs of energy, labour – do not include external costs of
GHG pollution in energy inputs
• Market Price, P, set equal to MPC
Society Efficient Solution
• Market recognises consumption benefits to society wellbeing of electricity, transport – represented by
demand curve of MPB (equal to MSB)
• Costs to society: private costs of labour (MPC), external costs of pollution (MEC)
• Social Efficient Quantity: MSC=MPC + MEC
Market + Society Solutions for GHG Pollution Product
MAC = Marginal Abatement (Mitigation)
Curve
- Little pollution = higher price
- Lot of pollution = lower price
MEC = Marginal External Costs
- Little MEC, not much C.C, not much cost
- Lots pollution, lots c.c, high cost
Society Solution: MAC = MEC
