Externalities and Corrective Taxes
Lecture 1
Efficiency and externalities (theory)
- We review the efficiency of markets and why markets will be inefficient in the presence of externalities.
- We introduce the concept of a Pigouvian tax to correct for the inefficiency from externalities, and discuss why it works.
- We then discuss the social cost of carbon.
Pre-class
- Watch this video and read this RFF explainer on the social cost of carbon.
- Watch this short video by Catie Hausman on how a carbon tax works.
Post-class
- If you need a review of the market inefficiency from externalities, or how a Pigouvian tax can correct it, check out this video from Marginal Revolution University.
- Make sure you can draw the deadweight loss from unpriced externalities.
- If you need a review of present value calculation, and discounting, see this Khan Academy video.
- Then do these practice problems.
- Here are the solutions.
- Be familiar with the social cost of carbon and conceptually how it is calculated.
Lecture 2
Carbon taxes in the electric power sector
Pre-class
- Read the blog post “What can carbon pricing do?” by Severin Borenstein.
Post-class
- What are the channels through which a tax on carbon emissions from electric generators reduces carbon emissions?
- In markets with constant externalities, inefficiency comes simply from consuming too much of the good. In electricity markets, the externality from carbon emissions varies by generator. This introduces allocative inefficiency. What is that? Can you draw it graphically and describe it?
- How will a carbon tax effect the LCOE of renewable and fossil fuel generators? How will those two changes effect which plants get built? Which get shut down?
Lecture 3
Coase Theorem
Pre-class
- Read Keohane and Olmstead pp 139 - 143
- Read New York Times article “Town Utility Buys Town It Choked, Lock, Stock and Blue Plume”
Some questions to think about:
- Was this utility transaction a “good” thing?
- Why don’t we see more externalities being resolved with transactions like this?
Post-class
- For additional review, watch this MRU video on the Coase Theorem
- Do this practice problem on the Coase Theorem.
- Note: When it says “cooperation isn’t feasible”, that means there can’t be any side payments between parties. When cooperation is feasible, one party can pay the other to get what they want.
- Solutions are here
Additional material
- Bill Nordhaus in NYRB, “Why the Global Warming Skeptics are Wrong”
- Rob Stavins “From the science to the economics and politics of climate change: An introduction” (link).
- Ronald Coase’s original article on this topic is one of the most cited papers in economics.
- Another, longer, article on the Gavin Power Plant transaction, “For $20 Million, a Coal Utility Bought an Ohio Town and a Clear Conscience,” from the Atlantic