Announcements

Solutions to Problem Set 1 posted & Problem set 2 posted

Survey results (partially)

Links to sites that may be of interest: www.stanford.edu/class/econ155/coursework/CourseMaterials/Links.html

Which countries are the largest emitters of carbon dioxide (from all sources)? 1st 2nd 3rd Environmental Economics in the News

“Palm oil is a driving force behind the destruction of tropical peatlands by deforestation, soil degradation and fires”

Wetlands International Questions from last time?

Pecuniary Externalities vs. Externalities

An externality exists when • the consumption or production choices of A enters the utility or production function of B • A’s choices are made without B’s permission or compensation A unified theory in which externalities, common-pool resources, and public goods are explained Some subtleties of externalities: “…without permission or compensation” • Assuming I don’t like smoke, am I suffering from an externality when… • A. I’m eating in a smoky restaurant? • B. I’m working in a smoky restaurant • C. I’m sitting on a park bench and someone sits beside me and lights a cigarette Some semantics of externalities: is there externality at the optimum? • When we set a tax equal to MEC, we are getting firms to “internalize” the externality

• So, is there still externality when there is the optimum amount of pollution? Negative externality: free/open access to a sink • Sink: receptacle for waste • Atmosphere • Water bodies • Earth, in some places The Common-pool problem open access to a resource • Common-pool resource aka open-access resource – Fishing from a common pool – Hunting on a common plain • Buffalo example (p. 73) – Common printers – Email lists: “Tragedy of the Listserv Commons” • This is the book’s version of the bison harvesting graph (p. 73). One way making the • This is the book’s version of the bison harvesting graph (p. 73). To make it more intuitive, think of “Harvest effort” as “# of hunters” and “Total benefits” as “# of bison harvested.” Bison harvested initially increases with the # of hunters, but at a decreasing rate, as the more that bison are • Suppose that the current number of hunters is Q1. Will a new hunter want to join the hunt? Yes, because that hunter would expect a harvest equal to the total bison being caught divided by the number of hunters. That is, from the perspective of an extra hunter, the benefits equal the average benefit per hunter and the costs equal the average cost; since the average cost is less than the average benefit, the extra hunter would joint the hunt. This same logic prompts more hunters to join until benefits for all hunters equal cost for all hunters. • The problem is that, from the perspective of society, the benefits of an extra hunter are less than the average benefit, because an extra hunter decreases the productivity of other hunters. As a result of this externality, the marginal benefit of hunting effort from the perspective of society is less than the marginal benefit from the perspective of one hunter, so the societal optimal level of hunting effort is Q1, not Q2 “Tragedy of the Commons”

• Garrett Hardin: Benefits and costs to an individual of adding another cow to a common meadow • “Since the herder receives all the proceeds from the sale of the additional animal, the positive utility is nearly +1.” • “Since, however, the effects of overgrazing are shared by all the herdsmen, the negative utility for any particular decision-making herdsman is only a fraction of 1.” Scarcity rent

• Producer surplus • = profit + fixed cost • = 0, usually, in long-run with competition • If PS > 0 in long-run with competition • PS = scarcity rent • Aka resource rent and similar to economic rent: returns over and above opportunity cost • Contrast with monopoly rent Dissipation of rent

• Open-access • Rent-seeking – trying to secure a transfer of a portion of the economic pie vs. to trying to expand the economic pie by producing a good or service • Special interests: benefits concentrated, costs diffuse • Rent seeking ends up diminishing the pie – Government failure Public goods

• A common-pool resource • Non-excludable: you can’t exclude me from using it • Rival (divisible): my use diminishes your use • A public good (Distinguish from the “public good) • Non-excludable • Non-rival Demand for public goods

• Private good: add horizontally

• Public good: add vertically Public goods & Free-rider problem • Formulated as the Prisonner’s Dilemma • Choices: contribute or don’t contribute • If there are enough “other people”, best response is to not contribute • More generally, best response is to contribute less than socially optimal amount • Bear all the costs of contributing but only share in the gains from your contribution Private Provision of Public goods

• Donations – To charities, generally – To environmental charities, in particular • Bundling of Private & Public Goods Geoffrey Heal, Columbia University economist (and one of Gretchen Daily’s co-authors) – Central Park in New York? – Habitat on Spring Island, South Carolina – Game ranching in southern Africa

Common pool vs. Common property • Examples: • Swiss alpine meadows • Sri Lankan fishing grounds • Maine lobster fishery • Tropical forests • Water supplies • Internet communities? Excludability & Rivalry: Externalities • Many negative externalities result from • non-excludable access to a • rival good

• Many negative externalities result in a • non-excludable • non-rival bad Coase Theorem

Basic insights: • externalities due to lack of property rights • reciprocal nature of harm

The basic idea Under certain assumptions, in the presence of externalities, the affected parties will work out a deal on their own and thereby reach an efficient outcome Coase’s Example Coase’s Example, Equationized Comparing Outcomes Under Different Property Rights

Case I: Initial Property Rights Favor Rancher Numerically:

Cows (n) YR YF YT No Deal 10 150 10 160

Deal Diagramatically:

Cows (n) BR CF NBT No Deal q=10 ABC BCD A-D

Deal Comparing Outcomes Under Different Property Rights

Case I: Initial Property Rights Favor Rancher Numerically:

Cows (n) YR YF YT No Deal 10 150 10 160

Deal 6 142+8 26-8 168 Diagramatically:

Cows (n) BR CF NBT No Deal q=10 ABC BCD A-D

Deal q=6 AB+8 B+8 A