Sustainable Economics

• Cost-effectiveness: if all firms face same charge, cost-effectiveness is achieved 
• Ecological effectiveness : 
  • Given emission target can be met when MAC are known (rare)
  • Iterative process of finding necessary tax rate is time consuming
• Dynamic efficiency
  • Taxes set higher incentives for technological progress than command-and-control approaches 

• Setting an overall emissions cap
• Allocation of permits to emitters
• Trade of permits between emitters via market at permit price 
• Surrender of permits corresponding to actual annual emissions 

• Ecological effectiveness
  • Overall emissions cap ensures that emission target is reached
• Cost effectiveness
  • A firm that can reduce pollution at low cost may prefer to sell its permit to a firm that has high reduction costs
  • Cost-effectiveness is achieved by forces of supply and demand 
• Dynamic efficiency 
  • Permits set higher incentives for technological progress than command-and-control approaches

• Market forces that allocate resources are absent for free goods
• Private markets cannot ensure that good is produced & consumed in proper amounts 
• Government policy can remedy market failure and raise economic wellbeing 

• 2 characteristics 
  • Excludability: a person can be prevented from using it 
  • Rivalry: one person’s use diminishes other person’s use 

• Free-rider: receives benefit from a good but avoids paying for it
  • Enjoy benefit of public goods while others pay for it 
• Free rider problem prevents market from supplying public goods 
• Solving free-rider problem
  • Government can decide to provide public good if total benefits exceed the costs
  • Government can make everyone better off by providing public good and paying for it with tax revenue 

• Study that compares costs and benefits to society of providing public good
• Total benefits of all those who use the good compared to costs of providing and maintaining the public good 
• CB analysis used to estimate the total costs and benefits of a project to society as a whole 

• Difficult because absence of prices needed to estimate benefits and costs 
• Factors like value of life, consumer’s time, aesthetic, or cultural values 
• People tend to overestimate social benefit if they are asked directly to value a social good 

• Not excludable. Available and free of charge to anyone 
• Rival goods: one person’s use reduces other person’s use  

Hardin

• Illustrates why common goods get used more than is desirable from standpoint of society as a whole 
  • Common resources tend to be used excessively when individuals are not charged for their usage
  • Similar to negative externality 

• Difference of social and private incentives
• Community members have no incentives to reduce activity because their contribution to the problem is small
• Avoiding overuse can be achieved by collective action: a community can reduce activities to a level that the commons can support 

• Markets fail to allocate resources efficiently when property rights are not well-established 
  • when item of value doesn’t have owner w legal authority to control it 

1. Allocation of property rights: define rights to emit and limit them to lower emissions 
2. Taxes: pay price for polluting
3. Regulation to restrict access ex. issuing licenses: limit that cannot be exceeded 

• Who issues the rights? 
• Need ambitious limits 
• Power relations: actors will fight for higher quotas or rights 
• Distributional issues: licenses can lead to social injustice and can be traded on secondary market at unfair price 

Ostrom 

• Community can self-organize and govern use of commons by rules and norms 
  • Depends on coherence of community, size, available information, leadership and legitimacy
  • Works better for small groups because individual contribution is bigger 
  • Works better with local resources because consequences can be grasped 

• how to use resources to satisfy different needs (tradeoff)
• shifts upwards if more resources / technology / skills 

• allocative efficiency: absence of wasted resources
• optimality: achieve objective under given constraints at least cost
• sustainability: concenr for posterity 

• adam smith
• dismal science: environment sets limits to expansion of economic activity 
• absolute scarcity 
• malthus: poor prospects of improving living standards in long run

• relative scarcity: depends on cost more than availability of resources
• resources replaced by human inputs
• growth is possible and dominant objective 
• 1970s
  • environment economics (focus on output)
  • natural economics (focus on input)

• economy as independent system
• aim social justice, fairness 

• neoclassical
  • study of economy-environment interaction is an optional extra
  • prioritize individual preferences and consumer sovereignty
  • efficiency is central
• ecological
  • study of economy-environment interaction is fundamental
  • proritize individual and social health
  • sustainability is central 
• both assume rationality and are anthropogenic, aim to maximize utility of homo oeconomicus 

• perfect: products are homogenous,
  • Buyers and sellers are numerous
  • Have no influence on price,
  • Perfect information
  • Adjust quickly
• monopoolies: one seller controls price 
• oligopoly: few sellers 

amount of a good that buyers are able and willing to buy 

demand goes up if price goes down

demand goes down if price goes up

negative slope 

• saturation quantity: intercept with x axis
  • quantity demanded stops increasing bc additional utility of getting more of product decreases 
• reservation price: intercept with y axis 
  • price is too high so that no one has willingness or ability to pay 

• income
• prices of related goods
• tastes
• expectations
• number of buyers 

• normal good: increases w increase of income 
  • shift right
• inferior good: decreases w increase of income 
  • shift left 

• substitutes: fall of price of good 1 = decrease in demand of good 2
• complements: fall of price of good 1 = increase in demand of good 2

• measures how quantity demanded responds to a change in price 
• equation: % change in quantity demanded ÷ % change in price 
• determinants
  • availability of substitutes
  • definition of the market
  • necessities vs luxuries 
  • time horizon