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UCSB ECON 1 - Tragedy of the Commons; Environment; Safety

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Tragedy of the Commons; Environment; SafetyFor the rest of the quarterTragedy of the Commons/ Property rightsOur example todayWhat is the return on the safe stock?Income from calves:What will happen w/o property rights?Income from calves w/o property rights: Rate of return of 5%Slide 9What is efficient?Income from calves with property rightsSlide 12What is the commons worth as a private good?Investment analysisInvestment decision for the commons ownerSummary: Tragedy of the CommonsEnvironmental regulationEnvironmental regulation and externalitiesEnvironmental regulation and efficiencySlide 20ExampleSlide 22Slide 23Slide 24Our two methods to reach an efficient resultPollution taxSlide 27Pollution permitsSlide 29Alternative to taxes and permits: Command-and-control methodsSlide 31Summary: Environmental regulationWorkplace safetyThe real worldWhat else is going on?Unions and workplace safetyOther methods to increase safetySafety outside of the workplaceSummary: Workplace safetyMondayEnjoy life, take a deep breathTragedy of the Commons; Environment; SafetyToday: Three applications of market failure without government interventionFor the rest of the quarterWe will cover various topicsEach topic will be its own “mini-lecture”Today: Three mini-lecturesTragedy of the Commons/Property rightsEnvironmental regulationSafety regulationTragedy of the Commons/ Property rightsProperty rights are important in order for a person or firm to efficiently use its resourcesClassic exampleLack of property rights in a grassy fieldTotal benefit of the grassy field is zero without property rightsOur example todayTwo investment optionsA safe stock that always sells for $20 in equilibriumPays $1 per year every year foreverBuy a 1-year-old calf today for $100Able to sell at two years oldThe more calves on the grassy field, the less each will be worth at two years oldWhat is the return on the safe stock?Recall from earlier in the quarterThe present value of a permanent annual paymentPV = M / rPV = $20M = 1This implies that r = 0.05, or 5%Income from calves:# of calves on the commonsPrice per 2-year-old cow sold ($)Income per cow ($ per year)1 130 302 120 203 114 144 111 115 108 86 105 57 102 2What will happen w/o property rights?People will buy calves as long as the return on the commons is at least 5%$5 return for the $100 investmentIncome from calves w/o property rights: Rate of return of 5%# of calves on the commonsPrice per 2-year-old cow sold ($)Income per cow ($ per year)1 130 302 120 203 114 144 111 115 108 86 105 57 102 2Equilibrium w/o property rightsWhat will happen w/o property rights?People will buy calves as long as the return on the commons is at least 5%$5 return for the $100 investmentThis is not efficient, howeverNo gain versus the safe stock investmentSimilar to the no-toll situation on congestible routesWhat is efficient?We need marginal analysisFind marginal income of each calfIf marginal income is at least $5  invest in another calfIf marginal income is less than $5  stop investingIncome from calves with property rightsInvest as long as marginal income is at least $5# of calves on the commonsPrice per 2-year-old cow sold ($)Income per cow ($ per year)Total calf income ($ per year)Marginal income ($ per year)301 130 30 30 DD D D D 102 120 20 40 DD D D D 23 114 14 42D D D D 24 111 11 44 DIncome from calves with property rightsInvest as long as marginal income is at least $5>$5  INVEST<$5  STOP!# of calves on the commonsPrice per 2-year-old cow sold ($)Income per cow ($ per year)Total calf income ($ per year)Marginal income ($ per year)301 130 30 30 DD D D D 102 120 20 40 DD D D D 23 114 14 42D D D D 24 111 11 44 D>$5  INVESTWhat is the commons worth as a private good?An optimal investor (with property rights) will invest to maximize the value of commonsSuppose that someone has $1000 to investWhat is each person’s willingness to pay for the commons?How much will be invested in:Stocks?Calves?Investment analysisA person that owns the commons will buy 2 calves$200 invested$40 returnCould get $10 return on the safe stock instead$30 extra in returnWilling to pay $600 to purchase the commonsNote that the commons can be used every yearInvestment decision for the commons ownerInvestment decision of the person buying the commons$600 to buy commons$200 to buy two calves$200 in safe stocksTotal returns: $50Commons$40 for two calvesStock returns$10 in paymentsThis is equilibrium, since any person will be indifferent between investing in the commons and in stocksSummary: Tragedy of the CommonsWithout private ownership, use of commons leads to no gain to society, relative to safe investmentsWith private ownership, the land has a positive valueEnvironmental regulationEnvironmental quality is a good that people wantProblems with providing environmental qualityGoods without markets (air quality, global temperature, rivers)Goods that governments own (parks)Environmental regulation and externalitiesRecall externalities chapterWith negative externalities, too much of some goods are produced, relative to efficient outcomes possibleThree ways of reducing pollutionTaxesPollution permitsArbitrary controls (also known as “command and control” methods)Environmental regulation and efficiencyAssume we are trying to find efficiency in an air-polluted cityTo reach the efficient level of pollution, we need to find firms with the lowest cost to abate pollutionEnvironmental regulation and efficiencyExample with 3 firmsEfficient level of pollution, as determined by the government: 5 tons of smoke per dayOne of the two approaches (taxes or permits) is needed to solve for the optimal distribution of pollutionWe do not spend much time on “command and control” methods since it is often sub-optimalExampleThree firms produce light bulbsWith no abatement technology, each firm produces 4 tons of smoke per day12 tons of smoke with no regulationTo reach efficient level of 5 tons, 7 tons need to be abatedSome firms can more easily abate pollution than othersIf firms with low abatement costs abate the most, we can get an efficient resultExampleTons of smoke emitted per day4 3 2 1 0Total abatement cost, firm A $0 $14 $30 $50 $75Total abatement cost, firm B $0 $20 $45


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