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Chapter 10

ECON-2086EL Chapter Notes - Chapter 10: Natural Capital, Externality, Invisible Hand

Economics / Science Èconomique
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Chapter Part I Addressig
Eiroetal Proles ith Market-
Based Ieties
The Market System
The arket operates uder the iisile had theory proposed y Ada “ith. Hoeer, soe
regulation is required when it comes to the market failure of externalities such as pollution. In turn, it is
required that any regulation, policy, or penalty must e as arket-like as possile ot to disrupt the
system. It is proposed that individuals (in the market) act on incentives rather than impactful deterrents.
Property Rights
Market mechanisms can include things such as pollution taxes, subsidies, and markets for emission
permits. In order to understand the market you must understand property rights that can be held by
individuals, companies, and the government. In order for property rights to work they must include the
- The owner can exclude others from the property
- The rights of the property must be allowed to be transferred owners this results in the most
valuable allocation of property.
- Should be sanctioned by the society within which they exist and can not be involuntarily seized
or encroached upon.
Some environmental properties such as the air, ocean, and terrestrial ecosystems can not be owned and
have rights. Take the o-zone for instance. Smog is the creation of o-zone pollution and can be dealt with
locally. However, the depletion of o-zone in the poles is not locally dealt with. This calls for agreement
by many to cutback on pollutants causing the damage. Such as the Montreal Protocol but only the
countries in agreeance will successfully help the issue.
Market Mechanisms
Market mechanisms are used to remedy a market failure in this case it is the negative externality of
pollution. Because the atmosphere can not be owned, it is the governments duty to ensure we take care
of it. However, reducing pollutants should be done in a way that does not disrupt the market. In order to
be cost-effective, the government must decide how much less pollutants is required to help society at
the lowest disruption level to the market. Below you will find market mechanisms used by governments:
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Emissions Taxes
- An emission tax is an added cost to the polluter when they emit higher levels of pollutants.
- The issue proposed here is that the tax will be passed on to the consumer and producers will
continue to pollute. Also, if the tax is less expensive than the cost to implement policies,
producers, and procedures that reduce pollution, they polluters will not change anything and
gladly pay the cost.
- A subsidy will be given to polluters for reducing or eliminating the pollutants dispersed.
- The issue here is that the firms may be incentivized to pollute where they would not have
polluted before. This increase would lead to subsidies and greater income. This is called the
baseline problem the government makes things worse off, rather than better off.
An Emissions Cap with a Market for Emissions Permits
- Under this mechanism, the government owns the rights to the environment (same as taxes and
subsidies) but allows for the rights to pollute by setting a cap, giving (or selling) permits to
pollute up until the cap is met.
- This cap, just like a tax, is hard to set. A cap too high will have no incentive for the polluters to
not pollute. However, a cap too low will increase the market price for the traded permits to
Other Market Mechanisms
- Deposit Refund System where a deposit is taken up front, and upon the completion of the
process, if no pollutants have been made, the deposit is given back. This is seen with bottle
deposits (glass and aluminum cans) that are taken back and money is returned.
- Reverse Auctions this is a form of subsidy where the source of pollution is hard to located
(such as water pollution due to farming runoff). The regulator bids on projects that will help
reduce the pollution in the most efficient way.
Innovation and advances technologically will reduce a great amount of pollution. When we innovate and
come up with new technologies that produce the same goods in a more efficient and less-polluting way,
we find the pollution can be limited and removed at a faster rate.
Another Revenue Grab?
Emission taxes and sales of permit does not need to be a money grab by the government. The increase
in revenues can be used to offset other tax revenues in society such as personal and corporate income
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