Economic Efficiency, Free Markets and the Environment
Slides [link]Required reading
- Read KO Chapter 2 pp 11-30
- Read sections 1-5 of EPIC’s AQLI “Pollution Facts” page.
Reading questions
- What are the main benefits of reducing particulate matter emissions?
- Particulate matter concentrations in the US are 30%-40% lower today than they were 20 years ago (data here). Given that, do you think the marginal benefits of reducing PM by one unit are higher or lower today?
- What are the main costs of reducing particulate matter emissions?
- Do you think the marginal costs of reducing one unit of PM are higher or lower today, compared to 2000.
Additional material
- Read KO chapter 4 if you need a refresher on the efficiency of markets (optional)
- Mark Bitman’s short NY Times article on “The True Cost of Burger” is a good example of what market prices leave out.
Key Points
- Review difference between net and gross benefits. Economic efficiency maximizes net benefits.
- Be able to relate total and marginal benefits and costs (equimarginal principle). Know the shape of these curves and the intuition behind it.
- Markets are capable of of efficiently allocating private resources in incredibly complex systems. But when it comes to the environment, free markets are not efficient.
- Review relationship between total benefits and costs and supply and demand curves.
- Under conditions of perfect competition, perfect information, and no externalities, markets will maximize net benefits.
- Be able to identify market outcomes and welfare loss when these conditions are not met.