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 quarterWe will cover various topicsEach topic will be its own “mini-lecture”Today: Three mini-lecturesTragedy of the Commons/Property rightsEnvironmental regulationSafety regulationTragedy of the Commons/ Property rightsProperty rights are important in order for a person or firm to efficiently use its resourcesClassic exampleLack of property rights in a grassy fieldTotal benefit of the grassy field is zero without property rightsOur example todayTwo investment optionsA safe stock that always sells for $20 in equilibriumPays $1 per year every year foreverBuy a 1-year-old calf today for $100Able to sell at two years oldThe 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 quarterThe present value of a permanent annual paymentPV = M / rPV = $20M = 1This implies that r = 0.05, or 5%Income from calves:# of calves on the commonsPrice per 2-year-old cow sold ($)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 investmentThis is not efficient, howeverNo gain versus the safe stock investmentSimilar to the no-toll situation on congestible routesWhat is efficient?We need marginal analysisFind marginal income of each calfIf marginal income is at least $5 invest in another calfIf 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 commonsSuppose that someone has $1000 to investWhat is each person’s willingness to pay for the commons?How much will be invested in:Stocks?Calves?Investment analysisA person that owns the commons will buy 2 calves$200 invested$40 returnCould get $10 return on the safe stock instead$30 extra in returnWilling to pay $600 to purchase the commonsNote that the commons can be used every yearInvestment decision for the commons ownerInvestment decision of the person buying the commons$600 to buy commons$200 to buy two calves$200 in safe stocksTotal returns: $50Commons$40 for two calvesStock returns$10 in paymentsThis is equilibrium, since any person will be indifferent between investing in the commons and in stocksSummary: Tragedy of the CommonsWithout private ownership, use of commons leads to no gain to society, relative to safe investmentsWith private ownership, the land has a positive valueEnvironmental regulationEnvironmental quality is a good that people wantProblems with providing environmental qualityGoods without markets (air quality, global temperature, rivers)Goods that governments own (parks)Environmental regulation and externalitiesRecall externalities chapterWith negative externalities, too much of some goods are produced, relative to efficient outcomes possibleThree ways of reducing pollutionTaxesPollution permitsArbitrary controls (also known as “command and control” methods)Environmental regulation and efficiencyAssume we are trying to find efficiency in an air-polluted cityTo reach the efficient level of pollution, we need to find firms with the lowest cost to abate pollutionEnvironmental regulation and efficiencyExample with 3 firmsEfficient level of pollution, as determined by the government: 5 tons of smoke per dayOne of the two approaches (taxes or permits) is needed to solve for the optimal distribution of pollutionWe do not spend much time on “command and control” methods since it is often sub-optimalExampleThree firms produce light bulbsWith no abatement technology, each firm produces 4 tons of smoke per day12 tons of smoke with no regulationTo reach efficient level of 5 tons, 7 tons need to be abatedSome firms can more easily abate pollution than othersIf 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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