Climate Change Climate Change Externalities

Climate Change Climate Change Externalities - Transcript

EC11002 Global Economic Perspectives
Case Study 2 Climate Change
Lecture 6 Climate Change Externalities
The last lecture examined the significance of equilibrium for market clearing and the automatic correction mechanism within free markets It ended with a discussion on the importance of defining private property rights and permitting markets to match demand and supply as a mechanism for the managing of precious limited resources such as fisheries or rain forests
The difficulty with this approach is the problem of assessing what prices should be How much is a rain forest worth Given we already now know that individuals place different utility values on goods why do we think that indigenous peoples will place the same value on a rain forest as say a logging company Our gains from trade evidence suggests that prices are not independent of other social economic and political factors and institutions
As a result governments have looked to other forms of market intervention to alter market outcomes What other ways are there to use our knowledge of demand supply and equilibrium to address climate change
One approach is to impose a charge on the consumption of a good consumer pays approach
Can the demand schedule be shifted in some way to restrict the consumption of a good
In London congestion charging has been introduced which imposes a flat rate charge on vehicles coming into the city centre
Congestion charging is a way of ensuring that those using valuable and congested road space make a financial contribution It encourages the use of other modes of transport and is also intended to ensure that for those who have to use the roads journey times are quicker and more reliable
The London scheme requires drivers to pay 8 per day if they wish to continue driving in central London during the scheme s hours of operation
Some of the reasons for introducing congestion charging in central London were
London suffers the worst traffic congestion in the UK and amongst the worst in Europe
Drivers in central London spend 50 of their time in queues
Every weekday morning the equivalent of 25 busy motorway lanes of traffic tries to enter central London
It has been estimated that London loses between 2 4 million every week in terms of lost time caused by congestion
So congestion charging introduces a minimum price for a resource and our demand schedule becomes truncated at the price set by the government
Figure 8 1
A minimum price of 60 is set and demand falls to zero after this point
Alternatively suggestions for green taxation examine the degree to which the supplier of the good may be charged for the costs of pollution and climate change polluter pays principle
So for example debates over the impact of airline travel has given rise to the suggestion that taxation of airlines should be increased Either their fuel should be taxed at the same level as other fuels or air passengers should face a tax
Figure 8 2 Shifting the supply schedule
Another way might be to physically restrict supply So should government refuse permission for airport expansion
All of the ideas above suggest that markets may not be as automatic as we think in moving towards an equilibrium solution Why might this be so
Our market price assumes that all the costs of consumption and production are known and are privately incurred Our property rights discussion assumes all property rights are clearly defined
So we assume that when a producer supplies a good the producer can calculate all of the costs of production However is that a valid assumption When a plane takes off who pays the cost for the noise pollution When an airplane takes off who pays the price for increased air pollution if it gives rise to an increase in asthma And when carbon is burnt who pays the cost of climate change
Similarly if a consumer wishes to drive their car who is it that pays the associated costs of noise and air pollution or for climate change
If we cannot truly allocate costs of consumption or production to demand and supply our assessment of equilibrium and prices becomes problematic
We use the phrase externalities to suggest that there may be other publicly incurred costs or even benefits to consumption and production These costs are borne by society rather than individuals and are therefore not factored into either the costs of consumption or supply
Pollution and climate change are suggested to be negative externalities whereby the costs of climate change are not directly incurred either by the consumer or the producer but they produce additional costs on society as a whole
Education can be suggested to provide a positive externality to society if we believe that educated people are less likely to commit crime or be socially disruptive So should students incur the cost of their education if the result is that all of society benefits
Can we truly assess prices when we consider climate change If we cannot then there is a problem with utilising market mechanisms for resolving the issues
Suppose that including the impact of climate change moved the supply curve so far that there is now no point where demand and supply could create an equilibrium
Figure 8 3
Under these circumstances we would say that the supply curve has moved inwards that there is no point at which supply and demand reach equilibrium as the costs of production are so high once the polluter incurs the actual costs of the negative externalities As a result production would cease
As a result of these types of problems some environmentalists look towards solutions which suggest that rather than use prices as a mechanism for value we use approaches such as carbon rationing or allocating quantities to individuals and then trading in carbon rations becomes possible