Ecological EconomicsWeek 8

Tiago DomingosAssistant Professor

Environment and Energy SectionDepartment of Mechanical Engineering

Doctoral Program and Advanced Degree in Sustainable Energy Systems

Doctoral Program in Mechanical Engineering

Economic Growth

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

1870

1874

1878

1882

1886

1890

1894

1898

1902

1906

1910

1914

1918

1922

1926

1930

1934

1938

1942

1946

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

1990

Inte

rnat

ion

al G

eary

-Kh

amis

do

llars

GDP per capita UK

US

Germany

France

Japan

Source: http://www.ggdc.net/maddison/

Economic Growth

1

10

100

1.000

10.000

100.000

18

70

18

74

18

78

18

82

18

86

18

90

18

94

18

98

19

02

19

06

19

10

19

14

19

18

19

22

19

26

19

30

19

34

19

38

19

42

19

46

19

50

19

54

19

58

19

62

19

66

19

70

19

74

19

78

19

82

19

86

19

90

19

94

19

98

20

02

Lo

g [

1990

Inte

rnat

ion

al G

eary

-Kh

amis

do

llars

]

GDP per capita UK

US

Germany

France

Japan

Source: http://www.ggdc.net/maddison/

0

20

40

60

80

100

120

0 10 20 30 40 50 60

P

Q

MPC

MEC

MSC

MPB=MSB

Market Equilibrium to Social Optimum• Pigou taxes

– We have a negative externality which we want to internalise. • A tax shifts the marginal private cost curve up by the amount of the tax. Faced with this cost

increase, the producers have an incentive to reduce output to the socially optimum level by reducing the marginal externality to the marginal tax.

)(SOMECtaxPigou

Social optimum

Market equilibrium

Pig

ou ta

x

Market Equilibrium to Social Optimum• In a more generic way...