Abstract
The preceding section closed by stating a serious problem: market failure. It is at this point that a third “protagonist” is called upon the “stage” of economics to make amends, the government. To see how this might be done in principle, we introduce the concept of “internalizing externalities”, an idea that the media love to quote but seem to not always fully understand. Then, we turn from the principle to its practical application. Pollution taxes and command and control are introduced as alternative environmental policy instruments, and are evaluated according to economic criteria. This chapter is supposed to show how microeconomic analysis, as discussed in the preceding chapter, is useful for the analysis of environmental problems and policy.
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Notes
- 1.
We are talking about the firm as it is stylized in mainstream microeconomic models. It is not so easy in reality. Here, the manager of a firm might care for the environment because his/her conscience does not allow doing otherwise, or because doing otherwise would draw punishment from the consumers, or employees (or even his/her children at home at the breakfast table!). In this introductory textbook we ignore these real deviations from the standard model of the firm. We may do so without worrying too much about this omission because the standard model of the firm catches an important part of reality. If it were otherwise we would not suffer as much from environmental problems as we do.
- 2.
The Pigouvian tax is the Godfather of all kinds of ecological taxes that are presently used in most industrial countries. See Dias Soares et al. (2010) for a recent overview. The authors emphasize that the numerous examples of environmental taxes from the many different countries discussed in their analysis are all part of the “Pigouvian approach” (p. 23).
- 3.
It may be noted that the tax rate drives a wedge between the price consumers pay (\( {p^{{**}}} \)) and the price producers receive (\( {p^{{**}}} - {t^{{**}}} \)). Market price increases due to the imposition of the tax, although the price increase (\( {p^{{**}}} - {p^{*}} \)) is smaller than the tax rate (\({t^{**}}\)). So the burden of the tax is shared among producers and consumers in that consumers pay a higher price and producers receive a lower price compared to the situation without tax.
- 4.
See, e.g., Endres (2011, pp. 174–187), for a critical appraisal.
- 5.
- 6.
Calculus club, mini session: the marginal abatement cost function is the first order derivative of the total abatement cost function.
- 7.
In formal terms, \( i \in \left\{ {\left. {1,2} \right\}} \right. \) holds.
- 8.
For simplicity, we interpret “not to be exceeded” such that the two individual emission quantities add up to exactly \( \bar{e} \).
- 9.
“ab initio” is a mildly snobbish expression for “right from the start”.
- 10.
With the term “general”, we mean that a tax rate is not differentiated across firms.
- 11.
A prerequisite for the evolution of a market is that emission rights are scarce. If the firms are “flooded” with costless pollution allowances, no one wants to buy and the equilibrium permit price is zero.
- 12.
- 13.
The curves in this figure are the same as in Fig. 7.4 illustrating the pollution tax in the standard and pricing approach. This is to facilitate the comparison between these two standard-oriented environmental policy instruments.
- 14.
See, e.g., Kollmann and Schneider (2010).
- 15.
- 16.
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Endres, A., Radke, V. (2012). A Sketch of Environmental Microeconomics. In: Economics for Environmental Studies. Springer Texts in Business and Economics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-31193-2_7
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