Applied Microeconomics

Applied Microeconomics

Economics of the Environment

ECONOMICS OF THE ENVIRONMENT
s

The environmental problem
(

use of the environment as:
3 an 3a 3a

amenity

source of primary products dump for waste

The economy and the environment

Factor services Goods and services

Resources

Waste

Amenity value

(Clipart for the environment: e.g. countryside scene)

ECONOMICS OF THE ENVIRONMENT
s

The environmental problem
(

use of the environment as:
3 an 3a 3a

amenity

source of primary products dump for waste

(

conflicts between these uses

ECONOMICS OF THE ENVIRONMENT
s

The environmental problem
(

use of the environment as:
3 an 3a 3a

amenity

source of primary products dump for waste

( (

conflicts between these uses population pressures and limited resources

Accelerating environmental damage

Environmental damage

Total damage

O

W1

Waste

ECONOMICS OF THE ENVIRONMENT
s

The environmental problem
(

use of the environment as:
3 an 3a 3a

amenity

source of primary products dump for waste

( (

conflicts between these uses population pressures and limited resources case for optimism

(

ECONOMICS OF THE ENVIRONMENT
s

An optimum use of the environment
(

different approaches to sustainability
3 free-market

approach 3 social efficiency approach 3 conservationist approach 3 Gaia approach
(

making optimum decisions

Optimum level of an activity that involves pollution
MC pollution
Costs and benefits (£)

P4

P3 P2 O Q1 Q2 Q3 Q4 MB− MC

Output of good

ECONOMICS OF THE ENVIRONMENT
s

An optimum use of the environment
(

different approaches to sustainability
3 free-market

approach 3 social efficiency approach 3 conservationist approach 3 Gaia approach
(

making optimum decisions

s

Market failures

ECONOMICS OF THE ENVIRONMENT
s

An optimum use of the environment
(

different approaches to sustainability
3 free-market

approach 3 social efficiency approach 3 conservationist approach 3 Gaia approach
(

making optimum decisions environment as a public good

s

Market failures
(

ECONOMICS OF THE ENVIRONMENT
s

An optimum use of the environment
(

different approaches to sustainability
3 free-market

approach 3 social efficiency approach 3 conservationist approach 3 Gaia approach
(

making optimum decisions

s

Market failures
environment as a public good ( externalities
(

Optimum level of an activity that involves pollution
MC pollution
Costs and benefits (£)

P4

P3

O

Q1

Q3
Output of good

Q4

MB− MC

ECONOMICS OF THE ENVIRONMENT
s

An optimum use of the environment
(

different approaches to sustainability
3 free-market

approach 3 social efficiency approach 3 conservationist approach 3 Gaia approach
(

making optimum decisions

s

Market failures
environment as a public good ( externalities ( ignorance
(

ECONOMICS OF THE ENVIRONMENT
s

An optimum use of the environment
(

different approaches to sustainability
3 free-market

approach 3 social efficiency approach 3 conservationist approach 3 Gaia approach
(

making optimum decisions

s

Market failures
environment as a public good ( externalities ( ignorance ( inter-generational problems
(

ECONOMICS OF THE ENVIRONMENT
s

Market-based policies
( (

extending private property rights charging for use of the environment

An emissions charge
MSC
Costs and benefits (£)

P2

MB = MSB P1 = 0 L2
Level of emission

L1

ECONOMICS OF THE ENVIRONMENT
s

Market-based policies
( ( (

extending private property rights charging for use of the environment environmental ('green') taxes

A socially efficient green tax
MC pollution
Costs and benefits (£)

Socially efficient green tax P1

O

Q1
Output of good

Q2

MB− MC

Green tax revenues as a % of GDP

Green tax revenues as a % of GDP

ECONOMICS OF THE ENVIRONMENT
s

Non-market-based policies
(

command-and-control systems
3 technology-based 3 ambient-based 3 social-impact

standards

standards

standards

( (

voluntary agreements education

ECONOMICS OF THE ENVIRONMENT
s

Tradable permits
( (

how they work assessment of the system

s

Can we rely on governments?
(

game theory and international agreements

Outcomes for countries from strategies of pollution reduction

Other countries’ strategy
All cut pollution Cut pollution Some cut pollution None cut pollution

A
Moderate net gain for all

B

USA’s strategy
Don’t cut pollution

Small loss for USA Gain for countries not cutting pollution Fairly high gain for USA Loss for other countries

C

Large loss for USA Slight gain for other countries

D

High gain for USA Small gain for other countries

E

F

No gain for any country

Applied Microeconomics

Traffic Congestion and Transport Policies

TRAFFIC CONGESTION AND TRANSPORT POLICIES
s

The allocation of road space
(

demand for road space
3a

derived demand of demand

3 determinants

Increase in car ownership
Cars per thousand population

UK

Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm

Increase in car ownership
Cars per thousand population
USA

UK

Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm

Increase in car ownership
Cars per thousand population
USA

Sweden

Belgium

UK

Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm

Increase in car ownership
Cars per thousand population
USA W Germany Sweden Belgium Germany

UK

Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm

Increase in car ownership
Cars per thousand population
USA W Germany Sweden Belgium Germany

UK

Spain

Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm

TRAFFIC CONGESTION AND TRANSPORT POLICIES
s

The allocation of road space
(

demand for road space
3a

derived demand of demand

3 determinants 3 the

price and income elasticities of demand

Motoring costs as % of UK household expenditure: 2000/1

Motoring costs as % of household expenditure

Quintile groups of household income

Passenger transport in Great Britain
(percentage of passenger kilometres by road)

Passenger transport in Great Britain
(percentage of passenger kilometres by road)

Passenger transport in Great Britain
(percentage of passenger kilometres by road)

Passenger transport in Great Britain
(percentage of passenger kilometres by road)

Passenger transport in Great Britain
(percentage of passenger kilometres by road)

TRAFFIC CONGESTION AND TRANSPORT POLICIES
s

The allocation of road space
(

demand for road space
3a

derived demand of demand

3 determinants 3 the

price and income elasticities of demand

(

supply of road space

TRAFFIC CONGESTION AND TRANSPORT POLICIES
s

The allocation of road space
(

demand for road space
3a

derived demand of demand

3 determinants 3 the

price and income elasticities of demand

(

supply of road space
3 short

run

TRAFFIC CONGESTION AND TRANSPORT POLICIES
s

The allocation of road space
(

demand for road space
3a

derived demand of demand

3 determinants 3 the

price and income elasticities of demand

(

supply of road space
3 short 3 long

run

run

TRAFFIC CONGESTION AND TRANSPORT POLICIES
s

Social optimum level of road usage
( (

marginal social benefit marginal social cost
3 congestion

costs: time

Time taken to travel between two points along a given road

Time taken to travel between two points along a given road

Time taken to travel between two points along a given road

Time taken to travel between two points along a given road

TRAFFIC CONGESTION AND TRANSPORT POLICIES
s

Social optimum level of road usage
( (

marginal social benefit marginal social cost
3 congestion 3 congestion

costs: time costs: monetary

TRAFFIC CONGESTION AND TRANSPORT POLICIES
s

Social optimum level of road usage
( (

marginal social benefit marginal social cost
3 congestion 3 congestion

costs: time costs: monetary costs

3 environmental

TRAFFIC CONGESTION AND TRANSPORT POLICIES
s

Social optimum level of road usage
( (

marginal social benefit marginal social cost
3 congestion 3 congestion

costs: time costs: monetary costs

3 environmental

(

socially efficient level of road usage

Actual and optimum road usage

Costs and benefits (£)

MSB
O Cars per minute

Actual and optimum road usage

Costs and benefits (£)

MC (private)

a MSB
O Cars per minute

Actual and optimum road usage

Costs and benefits (£)

MC (private)

a

e

MSB
O Q1 Cars per minute

Actual and optimum road usage
MSC
Costs and benefits (£)

MC (private)

b a e

MSB
O Q1 Cars per minute

Actual and optimum road usage
MSC
Costs and benefits (£)

MC (private)

b a

d c e

Optimum charge

MSB
O Q2 Q1

Cars per minute

TRAFFIC CONGESTION AND TRANSPORT POLICIES
s

Policy 1: direct provision
( (

the road solution public transport

s

Policy 2: regulation and legislation
(

restricting car access
3 bus 3 no

and cycle lanes areas

entry to side streets

3 pedestrian-only

(

parking restrictions

TRAFFIC CONGESTION AND TRANSPORT POLICIES
s

Policy 3: changing market signals
( (

extending existing taxes road pricing
3 variable

tolls licences

3 supplementary 3 electronic

road pricing

(

subsidising alternative means of transport

Applied Microeconomics

Competition Policy

COMPETITION POLICY
s

Competition, monopoly and the public interest The targets of policy
(

s

abuse of monopoly power

Equilibrium of industry under perfect competition and monopoly: with the same MC curve
£

MC

Monopoly
P1

AR = D

MR
O
Q1

Q

Equilibrium of industry under perfect competition and monopoly: with the same MC curve
£

MC ( = supply under
perfect competition)

P1 P2

Comparison with Perfect competition

AR = D

MR
O
Q1 Q2

Q

Equilibrium of industry under perfect competition and monopoly: with different MC curves
£

MCmonopoly

P1

AR = D MR
O Q1 Q

Equilibrium of industry under perfect competition and monopoly: with different MC curves
£

MC ( = supply)perfect competition MCmonopoly

P2 P1 P3 P4

ACmonopoly x

AR = D MR
O Q2 Q1 Q3 Q4 Q

COMPETITION POLICY
s

Competition, monopoly and the public interest The targets of policy
( (

s

abuse of monopoly power mergers

COMPETITION POLICY
s

Competition, monopoly and the public interest The targets of policy
( ( (

s

abuse of monopoly power mergers oligopolistic collusion: restrictive practices

COMPETITION POLICY
s

EU legislation
( ( ( (

Article 81: restrictive practices Article 82: monopolies and mergers merger control measures assessing EU policy

COMPETITION POLICY
s

UK competition policy
( (

the OFT and the Competition Commission restrictive practices policy
3 Chapter 3 types

1 prohibition of the OFT 2 prohibition criterion practices

of anti-competitive behaviour

3 powers

(

monopoly policy
3 Chapter 3 market-share 3 market

contestability

3 anti-competitive

COMPETITION POLICY
s

UK competition policy (cont.)
(

merger policy
3 role

of OFT and Competition Commission for judgement

3 criteria

(

features of the 2002 Enterprise Act

UK competition legislation

COMPETITION POLICY
s

Assessment of competition policy
(

focus on behaviour rather than market structure prohibition of certain practices tougher powers to identify secret collusion

( (

Applied Microeconomics

Privatisation

PRIVATISATION
s

Nationalisation and privatisation
( (

history of nationalisation forms and history of privatisation

Nationalisation and privatisation in the UK

Nationalisation and privatisation in the UK

Nationalisation and privatisation in the UK

PRIVATISATION
s

Arguments for privatisation
(

market forces
3 greater 3 greater

competition in the goods market competition for finance to shareholders

3 accountability

( ( (

reduced government interference reducing the PSNCR increased share ownership

PRIVATISATION
s

Arguments against privatisation
(

natural monopolies

Profit-maximising natural monopoly
£

LRAC

Q

Profit-maximising natural monopoly
£

LRAC LRMC

Q

Profit-maximising natural monopoly
£

LRAC LRMC D

Q

Profit-maximising natural monopoly
£

LRAC LRMC D MR

Q

Profit-maximising natural monopoly
£

Pm

LRAC LRMC D Qm MR

Q

Profit-maximising natural monopoly
£

Pm

LRACm LRAC LRMC D Qm MR

Q

Profit-maximising natural monopoly
£

Pm

LRACm LRAC LRMC D Qm MR Qn

Pn

Q

PRIVATISATION
s

Arguments against privatisation
( (

natural monopolies capital costs and entry barriers

PRIVATISATION
s

Arguments against privatisation
( ( (

natural monopolies capital costs and entry barriers lack of co-ordination of industries

PRIVATISATION
s

Arguments against privatisation
( ( ( (

natural monopolies capital costs and entry barriers lack of co-ordination of industries externalities

PRIVATISATION
s

Arguments against privatisation
( ( ( ( (

natural monopolies capital costs and entry barriers lack of co-ordination of industries externalities fairness and social justice

PRIVATISATION
s

Arguments against privatisation
( ( ( ( ( (

natural monopolies capital costs and entry barriers lack of co-ordination of industries externalities fairness and social justice problems with the PSNCR

PRIVATISATION
s

Arguments against privatisation
( ( ( ( ( (

natural monopolies capital costs and entry barriers lack of co-ordination of industries externalities fairness and social justice problems with the PSNCR

s

Ownership and the public interest

Applied Microeconomics

Regulation

REGULATION
s

Identifying short-run optimum price and output
(

industry has monopoly power
3 the

first-best situation pricing rules

3 second-best

( (

industry produces externalities questions of fairness

s

Identifying long-run optimum price and output

Short-run and long-run marginal cost pricing
£ MSC

PS

D = AR
O QS Q

Short-run and long-run marginal cost pricing
£ MSC

PS PL

LRMSC D = AR

O

QS

QL

Q

REGULATION
s s

Regulation in practice: RPI – X formula Advantages of UK regulation
discretionary; flexible ( incentives
(

s

Disadvantages of UK regulation
disincentives of changes to X ( excessive power of regulator? ( playing ‘games’ with industry ( alternatively, regulatory capture ( complexity of regulation
(

REGULATION
s

Increasing competition in the privatised industries
( (

limited extent of true natural monopoly allowing competition where there is no natural monopoly allowing access to grids by competitors forbidding suppliers from being grid owners capping market share of established firms competitive franchising to make monopolies contestable

( ( ( (

Applied Microeconomics

Privatisation in Transition Economies

PRIVATISATION IN TRANSITION ECONOMIES
s

State ownership under communism
( ( (

the system of central planning problems of inconsistency inappropriate success indicators and rewards results

(

s

Transition to a market economy
( (

forms of market liberalisation degree of transition achieved

PRIVATISATION IN TRANSITION ECONOMIES
s

Privatisation
( (

forms of privatisation insider and outsider privatisation

s

Requirements for successful privatisation
( ( ( (

supportive environment price liberalisation restructuring of firms corporate governance

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