Promoting active learning

1
Applied Microeconomics
2
Applied Microeconomics

• Economics of the Environment

3
ECONOMICS OF THE ENVIRONMENT

• The environmental problem
• use of the environment as
• an amenity
• a source of primary products
• a dump for waste

4
The economy and the environment
(Clipart for the environment e.g. countryside
scene)
5
ECONOMICS OF THE ENVIRONMENT

• The environmental problem
• use of the environment as
• an amenity
• a source of primary products
• a dump for waste
• conflicts between these uses

6
ECONOMICS OF THE ENVIRONMENT

• The environmental problem
• use of the environment as
• an amenity
• a source of primary products
• a dump for waste
• conflicts between these uses
• population pressures and limited resources

7
Accelerating environmental damage
Environmental damage
O
W1
Waste
8
ECONOMICS OF THE ENVIRONMENT

• The environmental problem
• use of the environment as
• an amenity
• a source of primary products
• a dump for waste
• conflicts between these uses
• population pressures and limited resources
• case for optimism

9
ECONOMICS OF THE ENVIRONMENT

• An optimum use of the environment
• different approaches to sustainability
• free-market approach
• social efficiency approach
• conservationist approach
• Gaia approach
• making optimum decisions

10
Optimum level of an activity that involves
pollution
Costs and benefits ()
Q4
Q1
O
Output of good
11
ECONOMICS OF THE ENVIRONMENT

• An optimum use of the environment
• different approaches to sustainability
• free-market approach
• social efficiency approach
• conservationist approach
• Gaia approach
• making optimum decisions
• Market failures

12
ECONOMICS OF THE ENVIRONMENT

• An optimum use of the environment
• different approaches to sustainability
• free-market approach
• social efficiency approach
• conservationist approach
• Gaia approach
• making optimum decisions
• Market failures
• environment as a public good

13
ECONOMICS OF THE ENVIRONMENT

• An optimum use of the environment
• different approaches to sustainability
• free-market approach
• social efficiency approach
• conservationist approach
• Gaia approach
• making optimum decisions
• Market failures
• environment as a public good
• externalities

14
Optimum level of an activity that involves
pollution
Costs and benefits ()
Q4
Q1
O
Output of good
15
ECONOMICS OF THE ENVIRONMENT

• An optimum use of the environment
• different approaches to sustainability
• free-market approach
• social efficiency approach
• conservationist approach
• Gaia approach
• making optimum decisions
• Market failures
• environment as a public good
• externalities
• ignorance

16
ECONOMICS OF THE ENVIRONMENT

• An optimum use of the environment
• different approaches to sustainability
• free-market approach
• social efficiency approach
• conservationist approach
• Gaia approach
• making optimum decisions
• Market failures
• environment as a public good
• externalities
• ignorance
• inter-generational problems

17
ECONOMICS OF THE ENVIRONMENT

• Market-based policies
• extending private property rights
• charging for use of the environment

18
An emissions charge
Costs and benefits ()
P1 0
L1
Level of emission
19
ECONOMICS OF THE ENVIRONMENT

• Market-based policies
• extending private property rights
• charging for use of the environment
• environmental ('green') taxes

20
A socially efficient green tax
MC pollution
Costs and benefits ()
Q2
O
MB- MC
Output of good
21
Green tax revenues as a of GDP
22
Green tax revenues as a of GDP
23
ECONOMICS OF THE ENVIRONMENT

• Non-market-based policies
• command-and-control systems
• technology-based standards
• ambient-based standards
• social-impact standards
• voluntary agreements
• education

24
ECONOMICS OF THE ENVIRONMENT

• Tradable permits
• how they work
• assessment of the system
• Can we rely on governments?
• game theory and international agreements

25
Outcomes for countries from strategiesof
pollution reduction
Other countries strategy
None cut pollution
Some cut pollution
All cut pollution
A
B
C
Small loss for USA Gain for countries not cutting
pollution
Large loss for USA Slight gain for other countries
Cut pollution
Moderate net gain for all
USAs strategy
D
E
F
Dont cut pollution
High gain for USA Small gain for other countries
Fairly high gain for USA Loss for other countries
No gain for any country
26
Applied Microeconomics

• Traffic Congestion and Transport Policies

27
TRAFFIC CONGESTION AND TRANSPORT POLICIES

• The allocation of road space
• demand for road space
• a derived demand
• determinants of demand

28
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
29
Increase in car ownership
USA
Cars per thousand population
UK
Energy and Transport in Figures (EC, 2002)
Federal Highway Administration
http//www.fhwa.dot.gov/ohim/qfvehicles.htm
30
Increase in car ownership
USA
Belgium
Sweden
Cars per thousand population
UK
Energy and Transport in Figures (EC, 2002)
Federal Highway Administration
http//www.fhwa.dot.gov/ohim/qfvehicles.htm
31
Increase in car ownership
USA
Germany
W Germany
Belgium
Sweden
Cars per thousand population
UK
Energy and Transport in Figures (EC, 2002)
Federal Highway Administration
http//www.fhwa.dot.gov/ohim/qfvehicles.htm
32
Increase in car ownership
USA
Germany
W Germany
Belgium
Sweden
Cars per thousand population
UK
Spain
Energy and Transport in Figures (EC, 2002)
Federal Highway Administration
http//www.fhwa.dot.gov/ohim/qfvehicles.htm
33
TRAFFIC CONGESTION AND TRANSPORT POLICIES

• The allocation of road space
• demand for road space
• a derived demand
• determinants of demand
• the price and income elasticities of demand

34
Motoring costs as ofUK household expenditure
2000/1
Motoring costs as of household expenditure
Quintile groups of household income
35
Passenger transport in Great Britain (percentage
of passenger kilometres by road)
36
Passenger transport in Great Britain (percentage
of passenger kilometres by road)
37
Passenger transport in Great Britain (percentage
of passenger kilometres by road)
38
Passenger transport in Great Britain (percentage
of passenger kilometres by road)
39
Passenger transport in Great Britain (percentage
of passenger kilometres by road)
40
TRAFFIC CONGESTION AND TRANSPORT POLICIES

• The allocation of road space
• demand for road space
• a derived demand
• determinants of demand
• the price and income elasticities of demand
• supply of road space

41
TRAFFIC CONGESTION AND TRANSPORT POLICIES

• The allocation of road space
• demand for road space
• a derived demand
• determinants of demand
• the price and income elasticities of demand
• supply of road space
• short run

42
TRAFFIC CONGESTION AND TRANSPORT POLICIES

• The allocation of road space
• demand for road space
• a derived demand
• determinants of demand
• the price and income elasticities of demand
• supply of road space
• short run
• long run

43
TRAFFIC CONGESTION AND TRANSPORT POLICIES

• Social optimum level of road usage
• marginal social benefit
• marginal social cost
• congestion costs time

44
Time taken to travel between two points along a
given road
45
Time taken to travel between two points along a
given road
46
Time taken to travel between two points along a
given road
47
Time taken to travel between two points along a
given road
48
TRAFFIC CONGESTION AND TRANSPORT POLICIES

• Social optimum level of road usage
• marginal social benefit
• marginal social cost
• congestion costs time
• congestion costs monetary

49
TRAFFIC CONGESTION AND TRANSPORT POLICIES

• Social optimum level of road usage
• marginal social benefit
• marginal social cost
• congestion costs time
• congestion costs monetary
• environmental costs

50
TRAFFIC CONGESTION AND TRANSPORT POLICIES

• Social optimum level of road usage
• marginal social benefit
• marginal social cost
• congestion costs time
• congestion costs monetary
• environmental costs
• socially efficient level of road usage

51
Actual and optimum road usage
Costs and benefits ()
MSB
O
Cars per minute
52
Actual and optimum road usage
MC (private)
Costs and benefits ()
a
MSB
O
Cars per minute
53
Actual and optimum road usage
MC (private)
Costs and benefits ()
e
a
MSB
O
Q1
Cars per minute
54
Actual and optimum road usage
MSC
MC (private)
Costs and benefits ()
b
e
a
MSB
O
Q1
Cars per minute
55
Actual and optimum road usage
MSC
MC (private)
Costs and benefits ()
d
b
e
a
MSB
O
Q1
Q2
Cars per minute
56
TRAFFIC CONGESTION AND TRANSPORT POLICIES

• Policy 1 direct provision
• the road solution
• public transport
• Policy 2 regulation and legislation
• restricting car access
• bus and cycle lanes
• no entry to side streets
• pedestrian-only areas
• parking restrictions

57
TRAFFIC CONGESTION AND TRANSPORT POLICIES

• Policy 3 changing market signals
• extending existing taxes
• road pricing
• variable tolls
• supplementary licences
• electronic road pricing
• subsidising alternative means of transport

58
Applied Microeconomics

• Competition Policy

59
COMPETITION POLICY

• Competition, monopoly and the public interest
• The targets of policy
• abuse of monopoly power

60
Equilibrium of industry under perfect
competition and monopoly with the same MC curve

Monopoly
P1
Q1
O
Q
61
Equilibrium of industry under perfect
competition and monopoly with the same MC curve

MC ( supply under perfect competition)
Comparison with Perfect competition
P1
AR D
MR
Q1
Q2
O
Q
62
Equilibrium of industry under perfect
competition and monopoly with different MC curves

MCmonopoly
P1
AR D
MR
O
Q
Q1
63
Equilibrium of industry under perfect
competition and monopoly with different MC curves
MC ( supply)perfect competition

MCmonopoly
P2
P1
x
P3
AR D
MR
O
Q2
Q3
Q
Q1
64
COMPETITION POLICY

• Competition, monopoly and the public interest
• The targets of policy
• abuse of monopoly power
• mergers

65
COMPETITION POLICY

• Competition, monopoly and the public interest
• The targets of policy
• abuse of monopoly power
• mergers
• oligopolistic collusion restrictive practices

66
COMPETITION POLICY

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

67
COMPETITION POLICY

• UK competition policy
• the OFT and the Competition Commission
• restrictive practices policy
• Chapter 1 prohibition
• types of anti-competitive behaviour
• powers of the OFT
• monopoly policy
• Chapter 2 prohibition
• market-share criterion
• market contestability
• anti-competitive practices

68
COMPETITION POLICY

• UK competition policy (cont.)
• merger policy
• role of OFT and Competition Commission
• criteria for judgement
• features of the 2002 Enterprise Act

69
UK competition legislation
70
COMPETITION POLICY

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

71
Applied Microeconomics

• Privatisation

72
PRIVATISATION

• Nationalisation and privatisation
• history of nationalisation
• forms and history of privatisation

73
Nationalisation and privatisation in the UK
74
Nationalisation and privatisation in the UK
75
Nationalisation and privatisation in the UK
76
PRIVATISATION

• Arguments for privatisation
• market forces
• greater competition in the goods market
• greater competition for finance
• accountability to shareholders
• reduced government interference
• reducing the PSNCR
• increased share ownership

77
PRIVATISATION

• Arguments against privatisation
• natural monopolies

78
Profit-maximising natural monopoly

LRAC
Q
79
Profit-maximising natural monopoly

LRAC
LRMC
Q
80
Profit-maximising natural monopoly

LRAC
LRMC
D
Q
81
Profit-maximising natural monopoly

LRAC
LRMC
D
Q
MR
82
Profit-maximising natural monopoly

Pm
LRAC
LRMC
D
Q
MR
83
Profit-maximising natural monopoly

Pm
LRACm
LRAC
LRMC
D
Qm
Q
MR
84
Profit-maximising natural monopoly

Pm
LRACm
LRAC
Pn
LRMC
D
Qm
Q
MR
85
PRIVATISATION

• Arguments against privatisation
• natural monopolies
• capital costs and entry barriers

86
PRIVATISATION

• Arguments against privatisation
• natural monopolies
• capital costs and entry barriers
• lack of co-ordination of industries

87
PRIVATISATION

• Arguments against privatisation
• natural monopolies
• capital costs and entry barriers
• lack of co-ordination of industries
• externalities

88
PRIVATISATION

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

89
PRIVATISATION

• 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

90
PRIVATISATION

• 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
• Ownership and the public interest

91
Applied Microeconomics

• Regulation

92
REGULATION

• Identifying short-run optimum price and output
• industry has monopoly power
• the first-best situation
• second-best pricing rules
• industry produces externalities
• questions of fairness
• Identifying long-run optimum price and output

93
Short-run and long-run marginal cost pricing

D AR
O
Q
94
Short-run and long-run marginal cost pricing

MSC
PS
LRMSC
D AR
O
QS
Q
95
REGULATION

• Regulation in practice RPI X formula
• Advantages of UK regulation
• discretionary flexible
• incentives
• Disadvantages of UK regulation
• disincentives of changes to X
• excessive power of regulator?
• playing games with industry
• alternatively, regulatory capture
• complexity of regulation

96
REGULATION

• 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

97
Applied Microeconomics

• Privatisation in Transition Economies

98
PRIVATISATION IN TRANSITION ECONOMIES

• State ownership under communism
• the system of central planning
• problems of inconsistency
• inappropriate success indicators and rewards
• results
• Transition to a market economy
• forms of market liberalisation
• degree of transition achieved

99
PRIVATISATION IN TRANSITION ECONOMIES

• Privatisation
• forms of privatisation
• insider and outsider privatisation
• Requirements for successful privatisation
• supportive environment
• price liberalisation
• restructuring of firms
• corporate governance