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Week 4b Taxes and Permits

The presentation by Elias Asproudis focuses on environmental taxes, Coasian theory, and emissions tradable permits. It discusses Pigouvian taxes aimed at aligning private and social costs, the Coase theory which suggests parties can resolve externalities without government intervention, and the characteristics of marketable pollution permits. The document emphasizes the importance of understanding these concepts for effective environmental policy and management.

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4 views

Week 4b Taxes and Permits

The presentation by Elias Asproudis focuses on environmental taxes, Coasian theory, and emissions tradable permits. It discusses Pigouvian taxes aimed at aligning private and social costs, the Coase theory which suggests parties can resolve externalities without government intervention, and the characteristics of marketable pollution permits. The document emphasizes the importance of understanding these concepts for effective environmental policy and management.

Uploaded by

amxcom3_904260741
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Taxes, Permits

and Environment

presentation by Elias (Ilias) Asproudis

1
Aims

Further analysis on environmental taxes

To understand what is Coasian theory

What are the emissions tradable permits?

2
Outline

Pigouvian Taxes

Coase Theory

Marketable Pollution Permits

Characteristics of the tradable permits

3
Reading

Varian “Intermediate Microeconomics”


Gravelle and Rees “Microeconomics”
Cullis and Jones “Microeconomics”
Nicholson and Snyder “Theory and Applications of
Intermediate Microeconomics”
Robert Frank “Microeconomics and Behavior”

4
Pigouvian Taxes

Arthur Pigou (1877-1959), Professor of Economics,


Cambridge University
5
According to Pigou; if we tax the good that creates the
negative externality then the level of the production will
reduced to the socially optimal level.

The aim of the taxes is to change the private cost and to


make it equal to the social cost or to become the marginal
private cost equal to marginal social cost.

Simply, the price is increasing and the production is


decreasing.
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How much is the level of the tax?

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Tax under elastic demand

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Tax under more inelastic demand

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Also, there is the case of the (Pigouvian) subsidies

Where the subsidy will reduce the price and will increase
the quantity.

The producers will produce more.

The subsidies are necessary in order to internalise the


positive externalities.
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Observe that the consumers will pay 4£ but they consume
150 units.

Not only the price is cheaper but also the consumption is


more.

The cost for the subsidy is 6£/unit (10£ - 4£).

14
Coase Theory

Ronald Coase (1910- 2013 ) Nobel Prize, 1991


Professor of Economics, University of Chicago
15
According to the Coasian Theory, the parties could find a
socially optimum level or efficient solution for the case of
the externalities without the government’s participation.

The parties can bargain without cost for the optimum


allocation of resources. Hence, they can solve the
externalities problem on their own.

For example, bargaining between polluter and “victim”


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Marketable Pollution Permits

The regulator allocates number of permits to the firms.

The total number of permits represents the maximum


allowable level of pollution

If one firm the buyer needs more permits (pollute more)


can purchase from another firm the seller (pollute less),
through the permits’ market.
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So, if the firms will invest to better technology, R&D,
innovation etc then these firms can pollute less and they
could sell the permits that they do not need in the market.

If one firm will produce more, so will pollute more, then


can purchase the extra permits from the permits market
from another firm. In the end the total pollution is the
same.

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Characteristics of the tradable permits

Flexibility: Firms can choose how to reduce emissions.

Trade: Firms purchase or sell permits on the permits


market but the total number of permits is limited
(limited level of pollution).

Penalty: At the end of each period (year), each firm


must have at least as many allowances as its emissions,
otherwise will pay a penalty.

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Some examples of Pollution Permits

 SO2 in U.S.
 NOX in U.S.
 CO2 in Europe

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Graphically

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The regulator can reduce the level of the permits supplied
to the firms. Then the price is increasing because the
supply is decreasing. The permits are more expensive and
the pressure to the firms for the adoption of a better less
pollution technology becomes more important.

What will happen to the firms if the regulator will


decrease a lot the quantity of the permits? What will
happen with the firms’ profits and the price of the good?
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Summary

Students should be able to understand the

Environmental Taxes

Emissions Tradable Permits

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