Efficiency, the Environment and Property Rights

1. Efficiency, the Environment and Property Rights 1

2. Efficiency, the Environment and Property Rights • What is economic efficiency? • How does the market secure efficiency? • Equalizing social and private costs and benefits in the face of externalities • Where do property rights figure in the story? 2

3. Different Notions of Efficiency • Pareto efficiency • Allocative efficiency • Distributive efficiency • X-efficiency or technical efficiency • Dynamic efficiency 3

4. Market Solutions • No externalities • Fully specified property rights (exclusivity, transferability and enforceability) • Price-takers on both sides of market • Perfect information • Instant adjustment • Constant returns to scale 4

5. Product-mix Efficiency 5

6. Market Imperfection: Monopoly With competition MC=Pc, output at Qc With monopoly MR=MC, with output at Qm and price up from Pc to Pm Producers surplus maximized, but deadweight losses Policy solutions: regulation, re-assignation of property rights? 6

7. Efficiency: Economic, Social and Technical • Economic: use resources such that they minimize costs and maximize profits (private costs = private benefits) • Social: use resources such that they minimize costs and maximize profits (but this time private + social costs = private + social benefits) • Technical: minimize inputs with respect to outputs  minimizing energy use • Absent these conditions: externalities, inadequately specified property rights 7

8. Enter Externalities and Market Failure • Externalities are un-priced in the market, leading to under-supply of positive externalities and over-supply of positive ones • Four main policy solutions: • Pigovian tax • Regulatory approach using the market(e.g. emission permits) • “Pure” regulation • Property right assignation (Coase) 8

9. Pigovian Tax 9

10. The Coasian analysis • According to Coase, we can use property right assignation rather than taxes • This has the same effect of achieving an efficient outcome as long as property rights are fully allocated • Argument: What matters is the overall cost and benefit • Issue can be resolved by negotiation, don’t need fiscal policy or regulation beyond property rights • Free market environmentalism? 10

11. Bargaining on Externalities $ MEC MB a c b d Hours of music 0 Mx Mo 11

12. Bargaining on Externalities (cont.) $ MEC MB a c b d Hours of music 0 Mx Mo 12

13. Assumptions Behind Coasian Solution • Markets work • No negotiation or transaction costs • Need small numbers • All parties enjoy full information (no gaming) • No distributional problems to worry about, and allocation is efficient • No wealth effects following bargaining • Allocation of rights might influence behaviour of other parties in same business (strategic reactions) 13

14. What do property rights provide? • Demsetz claims that they are an internalization of externalities • Adjustment of property rights are an adjustment to externalities • Example: forced labor • Property rights originate under scarcities in particular environmental scarcities 14

15. Problems raised by Dasgupta and Heal • Property rights are not created in a vacuum • Problem often comes from partially defined property rights • Coase and Demsetz assume symmetry which might not exist • They implicitly assume unique equilibrium • Problem: Multiple equilibria 15

16. Multiple equilibria 16

17. Solutions • In these cases, solutions have to be revealed to producers • Sometimes solutions have to be imposed 17