Environmental Economics
Imagine a factory located upstream that pollutes a river. It produces steel for the automotive industry. Downstream, local fishermen find they catch less fishes due to the pollution. Both are flourishing businesses that produce wealth and prosperity for the community.
At this case there are negative external effects, because the action of the factory influence the benefit of the fishermen and the factory does not compensate the fishermen for it. This is caused by the absence of property rights.
Is there a criterion that could be used to decide on who has the right to use the river? Let’s consider both possibilities: If the factory has the right to pollute the river without compensating the fishermen. In this case the factory has the right to damage. The fishermen could pay the factory not to pollute the river. This might sound little bit strange, but for Economists this is a possible solution. The second scenario would be if the fishermen have the right to use the river and the factory has to compensate them hence the factory has the liability for the damage. Hence, we can solve this case by distributing property rights. But how to decide who has the right to use the river? This decision depends on the amount of the resulting external costs and thus ultimately on the social preferences.
Here are some solutions to internalise external effects:
- Merger, Acquisition by a Third Party
- Property Rights and Bargaining (Coase Theorem)
- Pigovian Tax or Subsidy
- Certificate Solution
Resources (German), last accessed 21.11.2011: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CCEQFjAB&url=http%3A%2F%2Fwww.uni-leipzig.de%2F~micro%2FFolien%2FMikro%2Fmikro5.ppt&ei=7rLCTui_EMrKswaQ_InrCw&usg=AFQjCNE_OdewgI6uKJsQ7GlIYWQ_skDH7w
http://www.waellisch.de/home/Coase.pdf
Comments Off on Environmental Economics /
21 Nov 2011
por
Marie Glueck
IMSD /
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