08. applied microecomics

AppliedAppliedMicroeconomicsMicroeconomics

Applied MicroeconomicsApplied Microeconomics

Economics of the Environment

Economics of the Environment

The environmental problem

use of the environment as:

an amenity

a source of primary products

a dump for waste



an amenity


a dump for waste

ECONOMICS OF THE ENVIRONMENTECONOMICS OF THE ENVIRONMENT

(Clipart for the environment: e.g. countryside scene)

Goods and services

Factor services

Waste

The economy and the environmentThe economy and the environment

Resources Amenity value



an amenity


a dump for waste

conflicts between these uses



an amenity


a dump for waste





an amenity


a dump for waste


population pressures and limited resources



an amenity


a dump for waste




O W1

Env

ironm

enta

l dam

age

Waste

Totaldamage

Accelerating environmental damageAccelerating environmental damage

The environmental problem use of the environment as:

an amenity


a dump for waste



case for optimism

The environmental problem use of the environment as:

an amenity


a dump for waste



case for optimism



An optimum use of the environment different approaches to sustainability

free-market approach social efficiency approach conservationist approach Gaia approach

making optimum decisions




O Q1 MB MCQ3 Q4Q2

P3

MC pollution

P2

P4

Output of good

Cos

ts a

nd b

enef

its (

£)Optimum level of an activity that involves pollutionOptimum level of an activity that involves pollution





Market failures




Market failures





Market failures environment as a public good




Market failures environment as a public good





Market failures environment as a public good externalities




Market failures environment as a public good externalities

O Q1 MB MCQ3 Q4

P3

MC pollution

P4

Output of good

Cos

ts a

nd b

enef

its (

£)Optimum level of an activity that involves pollutionOptimum level of an activity that involves pollution




making optimum decisions Market failures

environment as a public good externalities ignorance




environment as a public good externalities ignorance





environment as a public good externalities ignorance inter-generational problems




environment as a public good externalities ignorance inter-generational problems

Market-based policies

extending private property rights

charging for use of the environment





MB = MSB

L2 L1

P2

MSC

Level of emission

Cos

ts a

nd b

enef

its (

£)

P1 = 0

An emissions chargeAn emissions charge




environmental ('green') taxes




environmental ('green') taxes


O

MC pollution

MB MCQ1

P1

Output of good

Cos

ts a

nd b

enef

its (

£)

Q2

A socially efficient green taxA socially efficient green tax

Socially efficientgreen tax

Green tax revenues as a % of GDPGreen tax revenues as a % of GDP

Green tax revenues as a % of GDPGreen tax revenues as a % of GDP

Non-market-based policies

command-and-control systems

technology-based standards

ambient-based standards

social-impact standards

voluntary agreements

education

Non-market-based policies

command-and-control systems

technology-based standards

ambient-based standards

social-impact standards

voluntary agreements

education


Tradable permits

how they work

assessment of the system

Can we rely on governments?

game theory and international agreements

Tradable permits

how they work

assessment of the system

Can we rely on governments?

game theory and international agreements


Outcomes for countries from strategiesOutcomes for countries from strategiesof pollution reductionof pollution reduction

Outcomes for countries from strategiesOutcomes for countries from strategiesof pollution reductionof pollution reduction

All cutpollutionAll cut

pollutionSome cutpollutionSome cutpollution

Cut pollutionCut pollution

Don’t cutpollutionDon’t cutpollution

Other countries’ strategyOther countries’ strategy

USA’sstrategyUSA’s

strategy

E

Moderatenet gain for all

Moderatenet gain for all

High gainfor USA

Small gain forother countries

High gainfor USA

Small gain forother countries

Small lossfor USAGain for

countries notcutting pollution

Small lossfor USAGain for

countries notcutting pollution

FNo gainfor anycountry

No gainfor anycountry

Large lossfor USA

Slight gain forother countries

Large lossfor USA

Slight gain forother countries

None cutpollutionNone cutpollution

Fairly highgain for USA

Loss for othercountries

Fairly highgain for USA

Loss for othercountries

A B

D

C


Traffic Congestion and Transport Policies

Traffic Congestion and Transport Policies

The allocation of road space

demand for road space

a derived demand

determinants of demand



a derived demand


TRAFFIC CONGESTION AND TRANSPORT POLICIESTRAFFIC CONGESTION AND TRANSPORT POLICIES

UK

Car

s pe

r th

ousa

nd p

opul

atio

n

Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm

Increase in car ownershipIncrease in car ownership

USA

UK

Car

s pe

r th

ousa

nd p

opul

atio

n



USA

BelgiumSweden

UK

Car

s pe

r th

ousa

nd p

opul

atio

n



USAGermany

BelgiumSweden

UK

Car

s pe

r th

ousa

nd p

opul

atio

n

W Germany



USAGermany

BelgiumSweden

UK Spain

Car

s pe

r th

ousa

nd p

opul

atio

n

W Germany





a derived demand


the price and income elasticities of demand



a derived demand




Motoring costs as % ofUK household expenditure: 2000/1

Motoring costs as % ofUK household expenditure: 2000/1

Quintile groups of household income

Mo

torin

g c

ost

s a

s %

of

hou

seh

old

exp

end

iture

Passenger transport in Great Britain(percentage of passenger kilometres by road)Passenger transport in Great Britain(percentage of passenger kilometres by road)







a derived demand



supply of road space



a derived demand







a derived demand




short run



a derived demand




short run




a derived demand




short run

long run



a derived demand




short run

long run


Social optimum level of road usage

marginal social benefit

marginal social cost

congestion costs: time






Time taken to travel between two points along a given roadTime taken to travel between two points along a given road








congestion costs: monetary












environmental costs






environmental costs







environmental costs

socially efficient level of road usage






environmental costs

socially efficient level of road usage


Actual and optimum road usageActual and optimum road usage

O

Co

sts

and

be

nef

its (

£)

MSB

Cars per minute

O

Co

sts

and

be

nef

its (

£)

MSB

Cars per minute

MC (private)


a

O

Co

sts

and

be

nef

its (

£)

MSB

Cars per minute

Q1

e


MC (private)

a

b

O

Co

sts

and

be

nef

its (

£)

MSB

Cars per minute

Q1

e

MSC


MC (private)

a

a

b d

O

Co

sts

and

be

nef

its (

£)

MSB

Cars per minute

Q1

e

Q2

c

Optimumcharge

MSC


MC (private)

Policy 1: direct provision the road solution

public transport

Policy 2: regulation and legislation restricting car access

bus and cycle lanes

no entry to side streets

pedestrian-only areas

parking restrictions

Policy 1: direct provision the road solution

public transport

Policy 2: regulation and legislation restricting car access

bus and cycle lanes

no entry to side streets

pedestrian-only areas

parking restrictions


Policy 3: changing market signals

extending existing taxes

road pricing

variable tolls

supplementary licences

electronic road pricing

subsidising alternative means of transport

Policy 3: changing market signals

extending existing taxes

road pricing

variable tolls

supplementary licences

electronic road pricing

subsidising alternative means of transport



Competition PolicyCompetition Policy

Competition, monopoly and the public interest

The targets of policy abuse of monopoly power


The targets of policy abuse of monopoly power

COMPETITION POLICYCOMPETITION POLICY

AR = D

MC

MR

£

Q O Q1

P1

Monopoly

Equilibrium of industry under perfect competition and monopoly: with the same MC curve


£

Q O

MC ( = supply under perfect competition)

Q1

MR

P1

P2

Q2

AR = D

Comparison withPerfect competition



£

Q O Q1

MR

P1

MCmonopoly

AR = D

Equilibrium of industry under perfect competition and monopoly: with different MC curves


£

Q O

MC ( = supply)perfect competition

Q1

MR

P1

P2

Q2

MCmonopoly

AR = D

x

Q3

P3

ACmonopoly

Q4

P4




The targets of policy abuse of monopoly power mergers


The targets of policy abuse of monopoly power mergers



The targets of policy abuse of monopoly power mergers oligopolistic collusion: restrictive practices


The targets of policy abuse of monopoly power mergers oligopolistic collusion: restrictive practices


EU legislation

Article 81: restrictive practices

Article 82: monopolies and mergers

merger control measures

assessing EU policy

EU legislation

Article 81: restrictive practices

Article 82: monopolies and mergers

merger control measures

assessing EU policy


UK competition policy the OFT and the Competition Commission restrictive practices policy

Chapter 1 prohibition types of anti-competitive behaviour powers of the OFT

monopoly policy Chapter 2 prohibition market-share criterion market contestability anti-competitive practices

UK competition policy the OFT and the Competition Commission restrictive practices policy

Chapter 1 prohibition types of anti-competitive behaviour powers of the OFT

monopoly policy Chapter 2 prohibition market-share criterion market contestability anti-competitive practices


UK competition policy (cont.) merger policy

role of OFT and Competition Commission

criteria for judgement

features of the 2002 Enterprise Act

UK competition policy (cont.) merger policy

role of OFT and Competition Commission

criteria for judgement

features of the 2002 Enterprise Act


UK competition legislationUK competition legislation

Assessment of competition policy

focus on behaviour rather than market structure

prohibition of certain practices

tougher powers to identify secret collusion

Assessment of competition policy

focus on behaviour rather than market structure

prohibition of certain practices

tougher powers to identify secret collusion



PrivatisationPrivatisation

Nationalisation and privatisation history of nationalisation

forms and history of privatisation

Nationalisation and privatisation history of nationalisation

forms and history of privatisation

PRIVATISATIONPRIVATISATION

Nationalisation and privatisation in the UKNationalisation and privatisation in the UK



Arguments for privatisation

market forces

greater competition in the goods market

greater competition for finance

accountability to shareholders

reduced government interference

reducing the PSNCR

increased share ownership

Arguments for privatisation

market forces

greater competition in the goods market

greater competition for finance

accountability to shareholders

reduced government interference

reducing the PSNCR

increased share ownership


Arguments against privatisation

natural monopolies


natural monopolies


Profit-maximising natural monopolyProfit-maximising natural monopoly

LRAC

£

Q

LRAC

£

Q

LRMC


LRAC

£

Q

LRMC

D


LRAC

£

Q

LRMC

D

MR


Qm

LRAC

£

Q

LRMC

D

MR

Pm


LRAC

£

Q

LRMC

D

MR

Pm

Qm

LRACm


Qn

LRAC

£

Q

LRMC

D

MR

Pm

Qm

LRACm

Pn



natural monopolies

capital costs and entry barriers


natural monopolies




natural monopolies


lack of co-ordination of industries


natural monopolies





natural monopolies



externalities


natural monopolies



externalities



natural monopolies



externalities

fairness and social justice


natural monopolies



externalities




natural monopolies



externalities


problems with the PSNCR


natural monopolies



externalities





natural monopolies



externalities



Ownership and the public interest


natural monopolies



externalities



Ownership and the public interest



RegulationRegulation

Identifying short-run optimum price and output industry has monopoly power

the first-best situation

second-best pricing rules

industry produces externalities

questions of fairness

Identifying long-run optimum price and output

Identifying short-run optimum price and output industry has monopoly power

the first-best situation

second-best pricing rules

industry produces externalities

questions of fairness

Identifying long-run optimum price and output

REGULATIONREGULATION

MSC

Short-run and long-run marginal cost pricingShort-run and long-run marginal cost pricing

O

£

Q

D = AR

PS

QS

O

£

Q

MSC

D = AR

PS

QS

LRMSCPL

QL

Short-run and long-run marginal cost pricingShort-run and long-run marginal cost pricing

Regulation in practice: RPI – X formula Advantages of UK regulation

discretionary; flexible incentives

Disadvantages of UK regulation disincentives of changes to X excessive power of regulator? playing ‘games’ with industry alternatively, regulatory capture complexity of regulation

Regulation in practice: RPI – X formula Advantages of UK regulation

discretionary; flexible incentives

Disadvantages of UK regulation disincentives of changes to X excessive power of regulator? playing ‘games’ with industry alternatively, regulatory capture complexity of regulation


Increasing competition in the privatised industries limited extent of true natural monopoly

allowing competition where there is no natural monopoly

allowing access to grids by competitors

forbidding suppliers from being grid owners

capping market share of established firms

competitive franchising to make monopolies contestable

Increasing competition in the privatised industries limited extent of true natural monopoly

allowing competition where there is no natural monopoly

allowing access to grids by competitors

forbidding suppliers from being grid owners

capping market share of established firms

competitive franchising to make monopolies contestable



Privatisation in Transition Economies

Privatisation in Transition Economies

State ownership under communism the system of central planning

problems of inconsistency

inappropriate success indicators and rewards

results

Transition to a market economy forms of market liberalisation

degree of transition achieved

State ownership under communism the system of central planning

problems of inconsistency

inappropriate success indicators and rewards

results

Transition to a market economy forms of market liberalisation

degree of transition achieved

PRIVATISATION IN TRANSITION ECONOMIESPRIVATISATION IN TRANSITION ECONOMIES

Privatisation forms of privatisation

insider and outsider privatisation

Requirements for successful privatisation supportive environment

price liberalisation

restructuring of firms

corporate governance

Privatisation forms of privatisation

insider and outsider privatisation

Requirements for successful privatisation supportive environment

price liberalisation

restructuring of firms

corporate governance

PRIVATISATION IN TRANSITION ECONOMIESPRIVATISATION IN TRANSITION ECONOMIES

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08. applied microecomics

Education