EEP 101/Econ 125 lecture 7 Property rights

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EEP 101/Econ 125 lecture 7Property rights

• David Zilberman

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Outline

• Property rights and the Coase Theorem
• The economics of clean up and restoration
• Limited information
• Political economy models
• Capture
• Rent seeking

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Property right and the environment

• Property right define entitlement that can not eb
  taken away
• Polluter may have rights to pollute-
• precedent establishes right in many cases
• A chemical plant got the right to pollute when a
  plant is established
• Victims( pollutees) may have rights for
  protection from pollutions
• Downstream users have rights to clean water

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The Coase theorem

• Assumptions
• property rights are clear and enfrocable
• Full information
• Zero transaction costs
• Then
• No need for intervention in cases of
  externalities
• Pareto optimality
• Regardless of initial distribution of rights

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Negotiations and the Coase outcomes

• Clear property rights lead to Pareto efficient
  outcomes
• The exact distribution of surplus gain depend on
  negotiation
• We assumed the parties are splitting the benefits
• In case of polluter rights the pollutee pay the
  polluters not to pollute
• In case of pollutee rights the polluter pays the
  pollution to pollute

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Initial outcome B Pollutee pays CEBD,gains CEF
Final outcome C Polluter gains BCE Social gains
FCB
Gain to polluters
F
D


Polluter marginal benefits
Marginal pollutee benefits
C
E
A
D
B
Pollution
CASE OF POLLUTER RIGHTS
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Initial outcome A Polluter pays GCDA,gains DCG
Final outcome C Polluter gains GCA Social gain
DCA
Gain to polluters
F
D


Polluter marginal benefits
Marginal pollutee benefits
C
E
G
A
D
B
CASE OF POLLUTEE RIGHTS
Pollution
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Implications and limitations of Coase theorem

• A functioning legal system is key for
  environmental policy
• Externalities-caused by
• Missing markets
• Undefined property rights
• Market failure
• The Coase theorem works when
• Small number of actor-low transaction costs
• It does not work when there are many parties and
  negotiation and collaboration are costly

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Liability rules

• Allow violation of property rights but imposes
  penalties
• Polluter has to pay damages for accidental water
  contamination.Has to pay a penalty for
  intentional
• Pollution tax is a liability payment
• Negligence Rules Penalize individuals for not
  exercising sufficient care in action.
• Due care standards-set basis for liability
• A farmer may not be liable for run off damages if
  she performed due care.
• Part of policy is establishing these standards

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Full Restoration May Be Suboptimal
Price
MC of Restoration
MB of Restoration
Q
Quantity
Q Full Restoration Optimal Restoration
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Waste management

• Liability may be retroactive- New owners are
  liable for pollution of old ones.
• It leads to care in purchases of new properties
  and prevent people from polluting and selling
• In cases of ex Soviet Union may prevent
  development-many sites are worth to buyer less
  than clean up cost-
• Government may pay if public gain from clean up
  and development is greater than private gain

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Point vs. non point source pollution

• When pollution can be assigned to pollution we
  have polluters we have source point
• Example-when each smoke stack is monitored
• When individual pollution can not be assigned we
  have non point source
• Pollution at point source can be taxed
• In case of non point pollution of individuals can
  not be observed- other action related to
  pollution can be regulated or taxed

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Contamination by firms-point vs non point

• Suppose that there are N firms, each firm is
  index by n who assume values from 1 to N
• Pollution of the nth farmer is Zn.It is produced
  by the input of this farmer Xn.This input is
  generating output Yn.
• The production function of the nth producer is
  YnFn(Xn). The pollution function of the nth
  producer is ZnGn(Xn)
• Suppose output price is P, input price is W and
  pollution damage per unit is V.

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Case of point source

• If the policy maker can observe Zn, he will
  charge the nth firm VZ. It will lead to optimal
  outcome.
• The optimal choice of the firm will be
• The optimality is
• At optimal outcome
• value of marginal benefit of production is equal
  to
• input price plus
• marginal pollution damage cost

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Example

• If
• Optimality condition
• Implying
• If
• A tax of 2 will lead to optimality if Zn is
  observable.
• If Zn is not observables but Xn is a tax on input
  2VcnXn.It will also be optimal.In our case the
  input tax is 12.

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Heterogeneity

• Suppose all firms have the same production
  function, but vary pollution function.
• 50 have cn1and the other 50 have cn0
• If the policy maker observes Zn
• Firms with cn1 pay tax of 2 per unit of
  pollution and produce 3 units making
• The clean firms have Xn.5(20-2)9 and make
• Average income is 54 per firm

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Non point source

• If only Xn is not observable the policy maker
  will optimize average behavior
• So the tax will be based 2 per unit of output
  resulting in output of Xn.5(20-2)/(11)6
• The profit per firm will be
• The social welfare will be 72 for clean firms
  and 0 for dirty ones. Since the cost fo their
  pollution is 236.
• Average welfare is 36 per firm
• Information will generate welfare gain of 9 per
  firm.

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The Gain From Information
Avg. MEC
MECH
MB
A
High Tax
MECL
C
Avg. Tax
E
Low Tax
B
D
The area ABC is loss of pollution generated by
dirty firms. The area CDE is loss of insufficient
pollution by cleaner firms.
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Investment in Monitoring

• Monitoring of pollution allows discrimination
  among polluters and non-polluters and increases
  welfare.
• If monitoring cost is greater than the gain from
  information, do not invest.
• Government can induce monitoring by assuming that
  everyone is a heavy polluter and is being taxed
  accordingly. Refunds will be issued to firms that
  prove to be clean.
• This leads to an industry of monitoring and
  environmental auditors.