Sustainable Economics

• moral values prevail in low-cost situations 
• ethical behavior can result of 
  • external factors (costs and benefits)
  • intrinsic motivation 
• intrinsic motivation prevails depending on costs and benefits of moral behavior 
  • intrinsic motivation can be canceled out by monetary incentives and rules 
• vs REMM hypothesis 

1. evironmental policies need support by electorate 
2. legal rules for which monitoring and enforcement are incomplete 
3. absence of legally binding rules 

• focus on the individual although our choices are limited by socio-technical system
• based on various approaches, regions and motivations (no consensus)
• need time to change moral values 

• uncompensated impact of a person's actions on the well being of a by stander 
  • causes market inefficiency (vs mximizing total surplus)
  • bystander neither pays nor gets compensated for effect of the action
• internalizing externality = altering incentives so people consider external effects of their actions 

• negative externality: impact on bystander is adverse 
  • ex cigarette smoke, noise  
• positive externality: impact on bystander is beneficial
  • ex. immunization, beekeeping 
• can be considered positive or negative depending on who has the property rights / responsibility 

• marginal social cost = private costs of producers + exernal costs of bystanders affected 
  • MSC = MPC + MEC 
  • higher external costs = steeper social costs curve 
• social optimum: shifts equilibrium to the left 

• moral codes and social sanctions
• charitable organizations
• integrating different types of businesses
• contracting btw parties 

• private parties can solve externality problem on their own if they can bargain without cost over allocation of resources 
• depends on property rights: who owns the resources and who compensates 

• factory has rights to emit
  • installs filter only if the fishers compensate the costs 
  • fishers compensate the cost if it is less than their loss of production
• fisher farm owns rights to clean water
  • firm would have to compensate loss of production of fishers -> buys filter if less costly 
  • no compensation for firm 

• need defined property rights
• power relations btw 2 parties 
• assumes ability to pay of all parties
• assumes low transaction costs 
  • only works w small nb of parties 
• risk of free riding reduces willingness to pay 

• in case of free riding or coordinating many people's actions 
• government can solve externalities problem through 
  • command and control policies: exclude an option 
  • market based policies: change relative price of 2 options 

• ecological effectuveness: is target achieved? 
• cost effectiveness: are we achieving target at minimum cost?
• dynamic efficiency: are there incentives for environmentally friendly innovations or abatement cost reductions over time? 

• trade off between 
  • marginal abatement costs (cost of technologies or lower production): increasingly expensive to reduce emissions 
  • marginal damage costs: increasing damage w bigger pollution (feedbacks, tresholds) 
• intersection of both curves on graph = efficient pollution 
  • abatement costs should not be above avoided damage 

• Optimal individual emissions = levels where MAC are equal for all 
  • Chose level for which marginal abatement costs are same for both firms

• efficiency
  • optimal emission level
  • optimal allocation of emissions
• cost effectiveness 
  • politically set emission level
  • otpimal allocation of emissions 

• Ecological effectiveness: 
  • Aggregate emission targets can only be achieved if total number of firms (absolute emission standards) / level of output (relative emission standards) remain constant
  • Zero emission targets can be achieved 
• Cost effectiveness: government doesn’t have sufficient information for cost-effective allocation of pollution 
  • Standards set uniform levels of emission abatement, which do not take MAC of individual firms into account
• dynamic efficiency 
  • once standards are fulfilled, firms have no incentive for further reduction and technical progress

market based policy to align private incentives with social incentives 

• enacted to correct effects of a negative externality 
  • Profit-maximizing firm reduces emissions until marginal cost of reduction is equal to the charge
• No knowledge about MAC is required, easy to implement 

• 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