Describe the relationship between public goods and club goods.
As initially defined by (Kaul et al., p. 211), pure public goods have distinct characteristics of no rivalry and non-excludable. Strictly, economists have defined public goods as goods that are non-excludable and non-rival. Non-excludable feature of a public good means that the commodity cannot be limited to particular consumers. The second characteristic of the public good that it is non-rivalrous simply means that the product can be comfortably shared among consumers without limiting the share portion among the consumers of such a good. For instance, the provision of national defense would be entitled to every citizen of a nation as would be consumed at equal measure. However, on the other hand, club goods have been defined by economists as goods that are excludable but non-rivalrous (Keohane et al., p. 31). Concerning public goods, there exists a contrast in the sense that public products are non-excludable while club goods are excludable. TV broadcast presents an excellent example for a club good since its consumers can all use it as long as they subscribe or pay for the services after which, there is no rivalry in the consumption of the goods. However, as one consumer uses the TV broadcast, it does not affect the consumption of another consumer of the same TV broadcast.
Using a real-life example, describe the relationship between public goods and externality, and explain the provision problem of public goods.
Usually, externalities happen when a consumer’s actions influence another consumer’s welfare. An externality can be defined as the cost or benefit occurring to a party that is not a partisan in the economic transaction (Keohane et al., p. 95). Therefore, externality exists as both positive and negative externalities. There exists a close relationship concept between positive externalities and public goods. A case for a positive externality is when I clean my backyard garbage that would amount to a clean air that would be benefited by my neighbors.
On the other hand, a negative externality would be a traffic jam caused by a company’s trucks on a public road. This traffic jam would result in inconveniencing of many other motorists using the same public road. Keohane et al. (p. 53) opine that Public goods being non-excludable and non-rivalrous, present a problem with their provision. One of the significant issues with the public good provision is the free-rider problem. Consumers want to consume a public good but with little no willingness to contribute toward the production of the good since they cannot be excluded (Keohane et al., p. 54). This factor led to everyone hoping that other consumers will contribute to the good as they consume. Therefore, it attributed to the notion that consumers don’t want to incur an upfront contribution and that other people gain from their contribution.
How do you compare marginal cost and marginal benefit when the total benefit is maximized? Why?
Every market presents both benefits and opportunity costs. Marginal benefit is considered to be small but again measurable change in a consumer’s benefit if he/she uses an additional unit of a good or service. Marginal benefit, on the other hand, is the amount of extra pay a consumer is willing to incur for each purchase of a good or service (Keohane et al., p. 77). When the total benefit is maximized, marginal benefit normally declines as consumers opt to consume more of a single good or service considering the satisfaction that the consumer benefit from a particular good or service Producer. On the other hand, it pays attention to the marginal cost, which could be small but measured change in considering the expense to the firm in producing an additional one unit. To maximize total benefit, consumers and producers/firms assess every activity at the margin upon considering additional gain as well as other costs of any extra unit of the activity.
Find a real-life example of the tragedy of the commons, discuss the externality there, and explain possible solutions.
The term tragedy of the commons was described by ecologists. (Keohane et al., p. 49) postulates tragedy of commons is how shared resources get destroyed or somewhat depleted by individuals that act independently and rationally according to self-interest in contrary to the common interest of a group. In some instances, the tragedy of the commons is sometimes inevitable but can be given a sustainable and controlled utilization approach. A real-life example of a tragedy of the commons can be the use of public roads. Public roads being free, most people tend to prefer using them. Each individual sharing the public road at a particular time has his or her interest. The interest, for instance, in the morning, may typically be on how to reach work or whatever destination in time and the cheapest way possible. Due to the interest of everyone that public road is the best to meet their travel needs, arise in a traffic jam on the road, and eventually slow traffic movement. This further results in air pollution caused by idling cars on the road during the traffic jam. To capture the sustainability approach, introducing tolls on the road would reduce the number of consumers opting to use the road in a scenario where the toll is set high during peak hours. With this control approach, some drivers would seek a direct route or even reschedule their time to get to work, probably at off-peaks when there are no toll charges or when it is lower. This approach would hence reduce the rate of pollution caused by idling cars during the traffic jam on the public roads.
What are the two main approaches to measure the value/benefit of environmental policy? What are the main differences between the two approaches?
Environmental policies are measured to derive their economic value to social welfare. The significant two primary measures are the evaluating benefit of a policy (Speth and Gustave, p. 66). For people to accept a policy to be returning a benefit, they need to understand the economic point of view. A person’s value for a given good can be estimated by whatever they are willing to give up in return to the policy. This approach is preferred by economists as the measure of benefits willingness to pay for the policy. This approach does not put into consideration how much people are informed about their environment. The second approach to measuring the value of the environmental policy benefits cost analysis. This approach arrives at a decision based on whether the benefits derived from the policy out ways costs. The approach entails the net benefit of the policy to society. In general, ignore the identity of the best beneficiaries as in the case for goods such as clean air. The approach differs from the former since it is considered to be used to add more information towards decision making on a particular environmental policy. However, this approach is also criticized for excluding the losers from the environmental policy.
What are the two main approaches to measure the cost of pollutant abatement? What are the main differences between the two approaches?
Pollution abatement generally is the measure that is applied to control pollution together with its impact on the environment. The regulatory body or the government comes up with a method of setting the levels of abatement cost that each polluting firm should meet. The abatement costs may be cheaper compared to the actual pollution, or a firm may opt for pollution if the abatement costs are high. The primary two approaches used to measure the cost of pollutant abatement are, one that relies on the information that is provided by the firm/ producers in the various industries as they are required to report to the government (Speth and Gustave, p. 81). The polluting firm gives information to the regulatory body about its pollution levels. The government then comes up with an abatement cost curve for the polluting firm based on the information that the firm presented to the government. The second approach is one that uses data on revenue and cost of production to estimate the profit lost or productivity diminished related to environmental protection. The costs incurred by a firm during the production process are numerous, ranging from costs on raw materials, wages, technology, distribution, and marketing as well as abatement costs. For a polluting firm, information about the total revenue and total expenses on abatement is availed by the firm to the regulatory bodies. The cost that the firm will have foregone to ensure that the environment stays clean is the total abatement cost. This approach explores the fact that forgone profits are equal to the incurred cost. The cost of environmental quality is often less critical.
Why do we need to use sensitivity analysis or Monte-Carlo simulations in Benefit-Cost Analysis? What is the difference between the two methods?
Sensitivity analysis is referred to as a response to the inherent uncertainties and risks confined within any cost-benefit analysis. Sensitivity analysis is an essential part of the cost-benefit analysis process in drawing results together, comprehending, and finally to understand the consequences (Keohane et al., p. 113). It is usually undertaken by altering the critical parameters within the analysis and then calculating incurred benefits again. During analysis, quite often, economists tend to think that they understand the impact of altering one or more parameters. However, upon calculating the effect of changing the parameter, the result proves otherwise. To avoid such surprises, therefore, sensitivity analysis should be included in every cost-benefit analysis. The reason is that it is useful in exploring elements of the analysis that may be uncertain. sOn the other hand, Monte Carlo analysis is a form of sensitivity analysis where outcomes are obtained using outputs values based on the probability-weighted distribution (Bremaud, p.61). The technique can be used where a large number of draws from a given distribution input variables are considered to realize the eventuality distributions of outcomes. However, this outcome can only be accurate when the assumptions and data simulating the analysis are realistic and capturing the intercession’s costs and benefits (Keohane et al., p. 114).
Guiding principles on how will decide the amount of emissions abated by each factory?
The government may set a constant level of emission to be emitted, which may be costly to some firms if they emit past the set level. Suppose two factories emit a specific type of pollutant with two different abatement cost functions. If a social planner would like to decrease 100USD units of emission in total, then they must, first of all, determine which firm between the two that pollutes more. (Say firm A and B). If the social planner finds out that firm A pollutes more than firm B and that its abatement costs are higher than that of B, they should allocate more units of emission to firm A. firm A will incur more costs if it chooses to decrease due to its higher abatement costs. Still, if it acquires more units of emission, it means that it can now emit without incurring expenses, which is a less costly option. From the 100USD units of emission, the social planner should consider giving 70USD units of emission to firm A, or the firm with a higher abatement cost. The firm with a low abatement cost may not optimally use the received emission units; therefore, the firm with a higher abatement cost may buy the emission units from the one with low abatement costs. Thus, the firm with a high abatement cost function will get more emission units and pollute more in return instead of choosing to abate hence incurring huge expenses. This trade-in emission unit is advantageous to both firms as one will gain revenue from the sale of emission units while the other one will avoid high costs of abatement.
Works Cited
Keohane, Mr. Nathaniel O., and Sheila M. Olmstead. Markets and the Environment.
Island Press, 2016.
Brémaud, Pierre. Markov chains: Gibbs fields, Monte Carlo simulation, and queues. Vol. 31. Springer Science & Business Media, 2013.
Speth, James Gustave. Foundations of Contemporary Environmental Studies. Island Press, 2006.
Kaul, Inge, et al., eds. providing global public goods: managing globalization. Oxford University Press, 2003.