5. Markets and the Environment - Web.UVic.ca精品.pdfVIP

5. Markets and the Environment 5.1 The First Welfare Theorem • Central question of interest: can an unregulated market be relied upon to allocate natural capital efficiently? • The first welfare theorem: in an economy in which – all agent are ___________ – there are no ____________ – there are no _____________ – information is ____________ between buyers and sellers market allocations are Pareto efficient. • Such an economy is usually called “perfectly competitive”. • Reflects Adam Smith’s notion of the “invisible hand” of the market bringing about a socially desirable outcome. • The 1st welfare theorem is the basis for the faith that liberal democracies place in the market to allocate resources. • Market failure: when the market fails to allocate resources efficiently due to one or more of these conditions not being met. • Our focus in this course is on market failure due to externalities. 5.2 Externalities • An externality (or external effect) is a cost or benefit associated with an action that is external to the agent taking that action. • Externalities can be _________ (an external benefit) or __________ (an external cost). • The important example of a negative externality is unpriced pollution: – an action generates pollution and that pollution has an effect on other agents for which the polluting agent does not have to account. • If an action has an associated externality then the privately optimal action may be inefficient from a social perspective, that is, it does not maximize social surplus. 1 Private optimum • Let PB(z) denote private benefit as a function of some action z (eg. benefit from driving a car z kilometers). • Let PC(z) denote the private cost of z (eg. fuel and maintenance costs). • An agents will choose a level of z that maximizes