Economics - Unit 5 – Mr Riekert

Economics - Unit 5
 Common Pool resources – 8th January 2024

 They are resources that are not owned by anyone, do not have a price and are available
for anyone to use without payment or any other restriction. They have two types of
special characteristics:
 Rivalrous (Most Common) – its consumption by one person reduces its
availability for someone else.
 Excludable – it’s possible to exclude people from using the good, this is usually
done by charging a price for the good.
 Rivalry and non-excludability. A pasture is rivalrous because the animal that eats the
grass leaving less for the next animal, it’s also non-excludable since one farmer cannot
exclude you from using the pasture. This shows us how there can be an overuse of
resources when there is no restriction on its use.

Policies to correct Neg externalities of Production, and policies to prevent overuse of

common pool resources.
 A: Market based policies... (changes the incentives faced by firms)
 A1. Indirect (Pigouvian) taxes… Indirect tax on the firm per unit of output produced.
 A2. Carbon taxes to reduce global warming. Indirect tax per unit of carbon produced in
production process.
 A3. Tradable permits / cap and trade scheme… in a country or internationally. If you
reduce your emissions, you can sell your excess carbon permits to others and gain an
income, e.g. Kazakhstan 2013, Switzerland 2008, or EU ETS 2005, or Paris agreement
2016.

Market based.
 Advantages
 It Internalizes the externality, meaning that costs that were external, are now
paid for by the producers or consumers.
 The taxes forces businesses to reduce their amount of pollution.

 Disadvantages
 Different production methods create different pollutants.
 It’s important to identify harmful pollutants but this is very technically difficult.
 Necessary to attach monetary value to the harm.
 How do we know how much to charge for tax on theses harmful pollutants.
 Consumers would be affected so that the prices of products would increase due
to the increased taxation on the products.
Economics - Unit 5 – Mr Riekert

Problems with traceable permits

 Maximum acceptable level of pollutants, called a ‘cap’.
 If this is set too low, then the permits become very costly causing hardship.
 Most find a fair way to distribute these permits.

Government legislation and regulation

 Restrictions on emissions
 Requirements to reduce pollution.
 Banning use of harmful substances
 Licenses needed for doing particular activities.
 Banning construction in protected areas
 Restriction of quantities of raw materials sourced.
 Establishing protected areas
 Advantages
 Simple to put and easy to oversee.
 Quite effective
 Help reduce harmful activates.
 Disadvantages
 Do not off incentives to reduce pollution.
 Cannot tell between firm which higher and lower cost of reducing pollutants.
 Cost of monitoring and supervising to detect violations.

Collective self-governance
 Solution to the use of common pool resources where a user takes control of them to use
them in a sustainable way.
 It’s an approach to manage resources undertaken by communities of resource users by
themselves, because they realize that it is in their own best interests to work collectively
for the preservation of resources that are vital to their livelihood.
 There are rules on how each user should behave and contribute to the management of
the resource, and rules of enforcement and sanctions against those who violate the
rules.
 Advantages
 People do not always act in self-interested.
 Done without private ownership.
 Completed in absence of government properties.
 Disadvantages
 It’s difficult to control large expanses of space.

Education and awareness

 This is the educating of the public of the information regarding polluting activities of
firms this could turn consumers away from a firm.
Economics - Unit 5 – Mr Riekert

 Advantages
 Firms are very much influenced by their custumers so will look to please.
 Disadvantages
 Solves only a small problem of negative externalities of production.
 Taxes are far more effective.

International agreements
 Agreement that are made internationally to stop use of highly polluting
activities/products.