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Markets and the environment

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  1. Markets and the environment Markets are structures that allocate value-if market signals are allowed to reach individuals and market prices include all the social costs and benefits of individual actions-responses to problems will be rapid and efficient. When that does not happen you have a market failure. The market has failed to value sufficiently, for example, clean water, or keeping toxic chemicals out of the environment, or the value of the atmosphere with reduced carbon emissions.

  2. Markets and Resource Arenas/Property Rights • Private Property-owned and used by individual. Others can be excluded. • Public property-jointly owned by all citizens through agencies. • Common property resources-owned by a community of people that set rules for its use. • Open access resources-owned by no-one, state of “propertylessness”

  3. The Tragedy of the Commons • Article published in Science in 1968 by the famous biologist Garrett Hardin. • Applied his ideas in the field of foreign assistance and immigration in 1974 Living on a Lifeboat, BioScience, 24(10). • Had a lot of impact at the level of public policies. Argued that common property systems led inevitably to ecological degradation.

  4. Hardin’s model presumes a pasture that is the common property of the community, open to all. But if it belongs to all, it belongs to no one in particular. • Each herdsman receives a direct benefit from grazing his animals in the pasture. • He suffers delayed costs, not inmediate ones, with the deterioration of the common pasture due to his use and the use of others. • Each herdsman has the motivation to add more animals because he receives the benefit from each animal and only a portion of the costs of the degradation of the pasture. • In the short term, he will be motivated to add more animals, to take advantage of the pasture that is left before others start grazing additional animals.

  5. …The tragedy is that strategies that are individually rational lead to results that are collectively irrational. “That is the tragedy…Each person is closed in a system that leads him to increase his herd without limits-in a world that is limited. Ruin is the destiny towards which everyone rushes, each one pursing his rational interest in a society that believes in liberty.

  6. In 1990 what is considered the most important work on the subject, Governing the Commons by Elinor Ostrom (Indiana University). • Much of the initial work on the commons focused on fisheries, where the arguments of Hardin appeared to have the most impact.

  7. But most of those publications were criticizing Hardin, especially from anthropologists and others that observed commons management in developing countries. The tragedy of the commons was not observed there. • Basic confusion of Hardin • Difference between an “open access resource” and a “closed access resource” • an open access resource is owned by nobody, no clear property rights; a closes access resource has an owner who can enforce rules over use of the resouce

  8. Thus, the problem of the “Global Commons” • No one “owns” the ocean or the atmosphere. • they are “open access” resources • The global “community” must devise “rules” that “govern” access to them

  9. Ecological Economics-Prices and the Environment • Markets-abstractions to represent the interaction among the costs of production, the asking price and the price consumers are willing to pay for goods and services. Prices are determined by supply and demand (309 in harper). • Thus, economics is the science of scarcity. When a good or service is abundant, the price is low. When a good or service is scarce, the price is high.

  10. Uncalculated Costs in Product Prices: The Role of “Externalities” • what are externalities? • Externalities are common in virtually every area of economic activity. They are defined as third party (or spill-over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid.  • Externalities can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption.

  11. Social cost includes all the costs of production of the output of a particular good or service. We include the third party (external) costs arising, for example, from pollution of the atmosphere. • SOCIAL COST = PRIVATE COST + EXTERNALITY For example: - a chemical factory emits wastage as a by-product into nearby rivers and into the atmosphere. This creates negative externalities which impose higher social costs on other firms and consumers. e.g. clean up costs and health costs. 

  12. More on externalities • Full costs of keeping crude oil flowing not reflected in the price at the pump. • Cost-accounting problems-difficulties and costs of collecting information. • How much do we value the future environment? The problem of discounting.

  13. Public Policy, Taxes and the Environment: Towards “Green Taxes • Taxes generate revenue for government. • What kinds of things do we currently tax? • (incomes, sales, property) • Tax “breaks” are used to induce a certain kind of behavior i.e. tax reductions for mortgage payments encourage homeownership. • “Subidies” (lower taxes) for things like oil exploration encourage oil exploration.

  14. Tax Shifting: Taxing Goods and Taxing Bads • Environmental Public Policies for the future? Can use tax policy to achieve a cleaner environment? • Now, tax policy is aimed at taxing “good things” or “goods”, that is income, sales, property. These are all “good” things for the economy, things that we want to have happen. • But what if we taxed “bads”?

  15. Taxing Bads…….UnTaxing Goods • Tax Pollution………….UnTax Enterprise. • Tax • packaged foods associated with litter • tax every pound of pollution and toxic waste emitted into the air, water or ground • tax agrochemical sales and tailpipe emissions • (would double the price of pesticides, boost prices of non-recycled paper, make driving more expensive-$135 per car on average.

  16. From the New York Times (3/17/05) • “That’s why America urgently needs what I call a “geo-green” strategy, which combines geopolitics with environmentalism. Geo-greenism starts with a $1-per-gallon gasoline tax, which would help close our budget gap, force the U.S. auto industry to convert more of its fleet to hybrid and ethanol technology and thereby reduce the amount of money going to Sudan, Saudi Arabia and Iran for oil” (Thomas L. Friedman, Homeland Insecurity)

  17. Untax Enterprise • Eliminate most business taxes, corporate income taxes, corporate capital taxes, occupations tax.

  18. Tax Resource Depletion……..UnTax Income. • Tax • hydropower (dams rivers), tax petroleum extraction, tax cutting down trees (lower for certified sustainably harvested timber), diversion of water from rivers.

  19. UnTax • state personal income and sales taxes • “British Columbia could generate enough from natural resource taxes to exempt every family below the median income from provincial income taxes.” • “Washington could cuts its state and local taxes by one-third. .

  20. Tax Sprawl……….UnTax Buildings Tax Land but not buildings

  21. Taxing Urban Sprawl • What is Urban Sprawl? "Sprawl" is the increased use of urbanized land by fewer people than in the past.  • Traditional cities were compact and efficient, but over the past 30-50 years, the density of land used per person has declined drastically.  • Although the U.S. population grew by 17 percent from 1982 to 1997, urbanized land increased by 47 percent during the same 15 year period.  

  22. The developed acreage per person has nearly doubled in the past 20 years, and housing lots larger than 10 acres have accounted for 55 percent of land developed since 1994, according to the American Farmland Trust.

  23. A property tax is actually two conflicting taxes rolled into one: it’s a tax on the value of structures AND a tax on the value of the land under those structures. • Taxing built structures discourages building • Taxing land values encourages building (taxes higher on land with no buildings on it in urban areas).

  24. Parking lots would give way to buildings. Abandoned urban lots would become too expensive to leave empty. Forces urban growth inward.

  25. Tax Traffic Congestion…Untax Commerce • Congestion Pricing -near universal agreement among transportation experts that variable tolls offer to the only real solution to worsening gridlock. Depends on “phantom tollbooth” scanners.

  26. “SunPass is the Florida Department of Transportation's innovative Prepaid Toll Program. Incorporating the latest technology, SunPass has been implemented across most of Florida's toll roads, saving drivers' time, money, and the hassle of digging for change”. ( • What is Sunpass? Is it congestion pricing?

  27. The cost of purchasing a transponder is $25 plus tax, along with a required $25 minimum initial balance. That means you can get started with the SunPass system for as little as $50+tax.(www. SunPass customers typically pay 25 cents less than cash customers at most toll plazas and exits on Turnpike roads. A trip from Sunrise Boulevard in Broward County to the Disney World exit costs cash customers $15.70. SunPass customers pay only $12.40, a savings of $3.30 one-way, or $6.60 round trip. reduces congestion, carbon emissions, lost time.

  28. Taxing Carbon (Thomas Friedman) • On Sept. 11, 2001, the OPEC oil price was $25.50 a barrel. On Nov. 13, 2007, the OPEC basket price was around $90 a barrel. • In the wake of 9/11, some of us pleaded for a “patriot tax” on gasoline of $1 or more a gallon to diminish the transfers of wealth we were making to the very countries who were indirectly financing the ideologies of intolerance that were killing Americans and in order to spur innovation in energy efficiency by U.S. manufacturers.

  29. The debate according to Friedman (NY Times, 11/14/07 • Candidate #1: My opponent, true to form, wants to raise your taxes. Yes, now he wants to raise your taxes at the gasoline pump by $1 a gallon. Another tax-and-spend liberal who wants to get into your pocket.” • Candidate #2: Yes, my opponent is right. I do favor a gasoline tax phased in over 12 months. But let’s get one thing straight: My opponent and I are both for a tax. I just prefer that my taxes go to the U.S. Treasury, and he’s ready to see his go to the Russian, Venezuelan, Saudi and Iranian treasuries. His tax finances people who hate us. Mine would offset some of our payroll taxes, pay down our deficit, strengthen our dollar, stimulate energy efficiency and shore up Social Security. It’s called win-win-win-win-win for America. My opponent’s strategy is sit back, let the market work and watch America lose-lose-lose-lose-lose.” If you can’t win that debate, you don’t belong in politics.

  30. “Think about it,” says Phil Verleger, an energy economist. “We could have replaced the current payroll tax with a gasoline tax. Middle-class consumers would have seen increased take-home pay of between six and nine percent, even though they would have had to pay more at the pump. A stronger foundation for future economic growth would have been laid by keeping more oil revenue home, and we might not now be facing a recession.”

  31. But U.S. consumers would have known that, with a higher gasoline tax locked in for good, pump prices would never be going back to the old days, adds Mr. Verleger, so they would have a much stronger incentive to switch to more fuel-efficient vehicles and Detroit would have had to make more hybrids to survive. • “This would have put Detroit five years ahead of where it is now. “It’s called the America wins program,” said Mr. Verleger, “instead of the petro-states win program.” • We simply cannot go on being as dumb as we wanna be

  32. If you want to see America thrive by becoming the most energy productive economy in the world — a title that now belongs to Japan, which doesn’t have a drop of oil in its soil — you want a gasoline tax, which will only spur U.S. innovation in energy efficiency. • “Contrary to intuition, the more costly the price of energy resources, the more technological innovation and economic growth” Harper, p. 236

  33. New Measures of Economic and Social Progress • From GNP (Gross National Product-total value of all goods and services purchased) • To a Genuine Progress Indicator (GPI) that includes unpaid child care and volunteer work and subtracts externalities like traffic, pollution, and crime. While US GDP (domestic goods and services only) grew 56% from 1982-2002, the GPI grew just 2%.

  34. Markets alone are not the answer: Four limitations (Harper p. 239-242) • 1) Markets treat as equal worth all dollar values. Whether the item was created with child labor in a toxic waste environment or by well-paid adults in a clean environment. • 2) Markets don’t incorporate all values (systematically underprice some items). The value of tree in the marketplace is for timber only, but a tree has many other values which are not well-priced in the marketplace (watershed protection, amenity values) • 3) gauge real value only in present actual exchanges. Economic values depend on discounting future values

  35. 4) Markets tend to create vast systems of social inequality that represent social costs that affect human welfare and markets themselves.

  36. Should we just let markets be “free”, unconstrained by government? • But markets have always been constrained by politics and culture. We decide collectively what we want markets to do. • All of the market strategies for dealing with environmental problems all require political action to reengineer markets that deliver different signals to producers and consumers (p.241 Harper)

  37. Strategies for Public Policy • 1) Technological Fixes-like compact flourescent light bulbs. • 2) Behavioral fixes-publicity campaigns (turn down the thermostat, recycle your newspapers and bottles) • 3) Cognitive fixes-aimed at creating behavioral fixes-publicity campaigns. • Legal Fixes-forcing new technologies by public policy (raising fuel efficiency standards, requiring a certain percentage of fuel efficient vehicles sold by a particular date)

  38. Policy and the Economic Production Cycle • “end of the pipe solutions” –downstream interventions that work after consumption has taken place (recycling) • Mid-stream strategies-getting people to consume less • Upstream strategies-making production more environmental benign-industrial ecology, waste = food.

  39. Politics and the Limits of Policy • Why is Europe so far ahead of the US in recycling, tax and subsidy shifting, promoting alternative energy sources, supporting international environmental treaties, etc? • In the US it is “winner takes all” but in a parliamentary system, there is proportional representation of parties in the government, in cabinet level positions

  40. The rollback of the “environmental regulatory state”: the Bush administration The Bush administration has taken the stance that less environmental regulation is a positive thing. The results: • Lack of international cooperation with other nations on carbon emissions and global warming. • Completed clean up of toxic waste sites has fallen 52%. • Civil citations to polluters dropped 57%. • The environment is getting dirtier, and polluters are not caught • 36% increase in annual beach closings due to unsafe water quality since 2001. • Others too numerous to mention

  41. The benefits of environmental regulation • Does environmental regulation have high costs to the economy? Review Harper p. 250-252

  42. Ecological modernization p. 252 • Community management of commons resources-the “tragedy of the commons”is frequently not present in real world local commons situations. They are not “open access”. The tragedy of the commons is misnamed, is really “tragedy of open access resources” .(p 253-255)