Slide 1Setup & MotivationCharacteristics of goods -- ICharacteristics of goods -- IICharacteristics of goods -- IIIImportance of rivalry and excludabilityImportance of rivalry and excludabilityA taxonomyExamplesExamplesExamplesExamplesMore examplesWhy important?Externalities and Market FailureLet’s just rely on the free market to solve environmental problems…right?Setup & Motivation•What makes an environmental issue an “environmental problem?”–When one party’s actions affect another party without compensation.•Think of the physical “stuff” that makes up the environment as “goods” and “bads”–Goods: clean air, fuzzy critters, safe water–Bads: NOx, CO2, oil slicks, harm to species•A large part of economics is to classify and design/inform regulation of goods and bads.–Characteristics of goods/bads drives policy design3Characteristics of goods -- I•Excludability: A good/bad is excludable if it is feasible and practical to selectively allow consumption of the good–Examples (excludable?)•Harvest of a particular fish•Hamburger•Air pollution in LA4Characteristics of goods -- II•Rivalry: A good/bad is rival if one person’s consumption reduces amount available to others (holding supply fixed)–Examples (rival?)•A particular fish•Hamburger•Space on an uncongested freeway•A nonrival good can be simultaneously consumed by many people•Nonrival goods can become congested5Characteristics of goods -- III•Externalities: An externality exists when one person or firm controls something I consume or that affects my consumption (or well-being)–Smoke–Snowmobiling in Yellowstone–Biodiversity loss6Importance of rivalry and excludability•Excludability – necessary for price system to be used…why?•Rivalry – necessary for efficiency of price system….why?7Importance of rivalry and excludability•Excludability – necessary for price system to be used…why?–If cannot exclude, nobody will pay•Rivalry – necessary for efficiency of price system….why?–If non-rival, people will free-ride8A taxonomy9Examples10ExamplesMarkets work fine11ExamplesMarkets work but poorly12ExamplesMarkets don’t work13More examples•Rival? Excludable?–Prairie before invention of barbed wire–Litter before anti-littering laws–Municipal garbage–Fisheries subject to ITQs•An important finding:–Excludability can be changed with technology–Rivalry a fundamental characteristic14Why important?•Important for diagnosing problems–If we can rely on markets, it is much easier–If we know the market cannot work, we should expect things to need fixing•Important for fixing problems–If we can use technology to make an open access resource excludable, we know we can
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