Download Lecture 5b: Correcting for Information Problems

Lecture 6:
Achieving the efficient level of residuals.
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[We have learned to value resources according to their shadow values. We
can now construct MD and MAC curves. MAC costs are added horizontally,
though administration, monitoring and enforcement costs should be added
vertically to per emission abatement costs. I won’t ask you to do this.]
Having MD and MAC, we can find the socially efficient level of emissions.
But how to get society to this point?
The reason society that is not at the socially efficient level of emissions
must be market failures, or the absence of a market. Identify the market
failures and correct them as best you can.
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Information failures can be addressed by providing information.
Market concentration failures can be addressed by breaking up monopolies
or monopsonies.
Open access resources can be managed by controlling access.
Public goods can be provided by governments or social agencies.
Externalities can be internalized by manipulating prices through taxes,
subsidies or tradable permit systems. This is a market-based way of
influencing social behaviour.
Finally, command-and-control methods can simply mandate consumers’ and
firms’ emission levels directly, or indirectly by mandating their choice of
technology or production methods.
Which method is best?
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A policy should get us as close to the socially efficient level of emissions as
possible.
A policy should also be cost-effective. Abatement and administration costs
should be as low as possible. For abatement costs to be as low as
possible, lower cost firms or households should abate more than higher cost
ones.
The policy should be politically attractive: easy to understand, and seeming
fair. “Polluter pays” is one principle of fairness, but who exactly is the
polluter?
A good policy should provide an incentive to innovate. If emissions can be
abated at lower cost than before because of a breakthrough in technology,
money and resources are released to be used elsewhere in society.
Correcting Information Failures
• The obvious way to correct for information failures is to research and
publish information. Research activity generally has a large positive
externality, and is undersupplied by the market.
• Patents restrict use of information and put a price on it. However,
most information is not marketed at all.
• Marketed information will be sold where private marginal benefits =
private marginal costs. However, social marginal benefits are
usually higher than private benefits, so the government has an
incentive to encourage research and spread the knowledge around.
• What is the best way to inform consumers about the environmental
consequences of their actions? There are 2 main methods of
increasing “eco-literacy”: Certification, and Labelling.
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Certification tests a product against specific criteria. It is a pass/fail
designation.
If participation is voluntary, the low-cost abaters will participate, keeping
abatement costs low.
Since it is pass/fail, there are still some information gaps.
Easy for consumers to understand.
No incentive to innovate once you have been certified.
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In July 2007, the Canadian Food Inspection Agency introduced a national
certification process for organic food. CTV reports that to be certified
organic:
-prepared food must contain at least 95% organic ingredients
-vegetables, fruits or grains must be grown using natural fertilizers
-animals must be raised in conditions that mimic nature as much as possible
• Organic foods appear to be produced with less residual impact on the
environment, though the actual emissions used to produce, transport, and
store the food is unknown. We need to study the complete life-cycle of the
product.
• Generally, with certification, the information is limited.
• Certification makes things easier for the harried consumed and makes
nonconformity more obvious.
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Labelling provides more precise information as to the content or
environmental footprint of a product, so that it can be compared to all other
products that are labelled.
Participation does not require abatement. Abatement costs will be low, and
will stay low unless consumers rush to greener products.
There is an ongoing incentive to innovate so as to be better than rivals.
The information collection burden is higher than for certification.
The information detail may be to complex for consumers. Care must be
taken to present the information in a user-friendly way.
• Example: Government
- Energy Star, run by the US EPA and Department of Energy, certifies
appliances and buildings that are energy efficient
- Even better, in terms of information given, is Canada’s EnerGuide
Program, which specifies the amount of electricity likely to be used by
the appliance and compares it to other such appliances.
Case Study: Food Miles
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The European Union is considering labeling grocery items with “food miles”
to indicate how far the food has been transported. The average
supermarket product travels 1500 miles before reaching the shelf.
Eating locally, perhaps within a 100-mile radius around your home, is a
growing trend, meant to reduce GHG emissions from transportation. Other
reasons to eat locally include freshness, supporting local farmers, and food
security.
About 25% of North American’s ecological footprint comes from food…from
planting to landfill. And there’s a lot more to it than transportation.
• Life-cycle analysis might show that greenhouse gas (GHG)
expenses are actually higher for the local food. GHG should be
considered not just with regard to transportation but also with regard
to lighting, heating, watering, fertilizing, cultivating, feeding,
packaging, and storage etc.
• If GHG is what we are ultimately interested in, then GHG should be
on the label, not miles.
• Obviously, if Canadians insisted on growing their own oranges,
much electricity would be spent heating and lighting the crop. Even
less exotic food may be more polluting when locally produced:
researchers at Lincoln University in New Zealand argue that it would
be better for the environment if Britons purchased New Zealand
lamb rather than British lamb. This is largely because the New
Zealand lamb is pasture-fed rather than grain fed.
• Local transportation costs may be substantial. It’s possible that all
the driving by consumers to and fro local suppliers would exceed the
driving used to pick up imported food from central shopping depots.
E.g. Desert Lake Gardens.
http://www.openthefuture.com
Tips for greener eating
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Eat local food that does not require greenhouse production
Eat local food in season to avoid refrigeration
Eat low on the food chain
Buy food having less packaging
Own an efficient refrigeration, and keep it full.
Waste less food.
Compost. Food in the landfill decays anaerobically, producing
methane, a powerful greenhouse gases.
Moral Suasion
• Once information deficits have been corrected, externalities may yet
exist so that agents do not behave optimally, even though they are
fully informed as to the social consequences of their actions.
• Moral suasion is attempting to change society’s choices by means of
exhortation as well as information.
• Moral suasion is very inexpensive and, since it is voluntary, requires
no monitoring.
• Moral suasion has had quite a bit of success in changing attitudes
about littering, smoking, recycling, and scooping doggy doo.
• Those who agree to comply have an incentive to innovate to lower
their costs.
• Not all people will comply. There is no guarantee that the
allocatively efficient solution will be achieved.
• Since the program is voluntary, the low-cost abaters are more likely
to abate. High-cost abaters, if altruistic enough, will abate also.
• Danger: Both types of abaters may become bitter if they observe
lower-cost abaters not complying.