AppliedMicroeconomics

Applied Microeconomics Economics of the Environment

n The environmental problem < use of the environment as: F an amenity F a source of primary products F a dump for waste n The environmental problem < use of the environment as: F an amenity F a source of primary products F a dump for waste ECONOMICS OF THE ENVIRONMENT

(Clipart for the environment: e.g. countryside scene) Goods and services Factor services Waste The economy and the environment Resources Amenity value

n The environmental problem < use of the environment as: F an amenity F a source of primary products F a dump for waste < conflicts between these uses n The environmental problem < use of the environment as: F an amenity F a source of primary products F a dump for waste < conflicts between these uses ECONOMICS OF THE ENVIRONMENT

n The environmental problem < use of the environment as: F an amenity F a source of primary products F a dump for waste < conflicts between these uses < population pressures and limited resources n The environmental problem < use of the environment as: F an amenity F a source of primary products F a dump for waste < conflicts between these uses < population pressures and limited resources ECONOMICS OF THE ENVIRONMENT

O W1W1 Environmental damage Waste Total damage Accelerating environmental damage

n The environmental problem < use of the environment as: F an amenity F a source of primary products F a dump for waste < conflicts between these uses < population pressures and limited resources < case for optimism n The environmental problem < use of the environment as: F an amenity F a source of primary products F a dump for waste < conflicts between these uses < population pressures and limited resources < case for optimism ECONOMICS OF THE ENVIRONMENT

n An optimum use of the environment < different approaches to sustainability F free-market approach F social efficiency approach F conservationist approach F Gaia approach < making optimum decisions n An optimum use of the environment < different approaches to sustainability F free-market approach F social efficiency approach F conservationist approach F Gaia approach < making optimum decisions

O Q1Q1 MB  MC Q3Q3 Q4Q4 Q2Q2 P3P3 MC pollution P2P2 P4P4 Output of good Costs and benefits (£) Optimum level of an activity that involves pollution

ECONOMICS OF THE ENVIRONMENT n An optimum use of the environment < different approaches to sustainability F free-market approach F social efficiency approach F conservationist approach F Gaia approach < making optimum decisions n Market failures n An optimum use of the environment < different approaches to sustainability F free-market approach F social efficiency approach F conservationist approach F Gaia approach < making optimum decisions n Market failures

ECONOMICS OF THE ENVIRONMENT n An optimum use of the environment < different approaches to sustainability F free-market approach F social efficiency approach F conservationist approach F Gaia approach < making optimum decisions n Market failures < environment as a public good n An optimum use of the environment < different approaches to sustainability F free-market approach F social efficiency approach F conservationist approach F Gaia approach < making optimum decisions n Market failures < environment as a public good

ECONOMICS OF THE ENVIRONMENT n An optimum use of the environment < different approaches to sustainability F free-market approach F social efficiency approach F conservationist approach F Gaia approach < making optimum decisions n Market failures < environment as a public good < externalities n An optimum use of the environment < different approaches to sustainability F free-market approach F social efficiency approach F conservationist approach F Gaia approach < making optimum decisions n Market failures < environment as a public good < externalities

O Q1Q1 MB  MC Q3Q3 Q4Q4 P3P3 MC pollution P4P4 Output of good Costs and benefits (£) Optimum level of an activity that involves pollution

ECONOMICS OF THE ENVIRONMENT n An optimum use of the environment < different approaches to sustainability F free-market approach F social efficiency approach F conservationist approach F Gaia approach < making optimum decisions n Market failures < environment as a public good < externalities < ignorance n An optimum use of the environment < different approaches to sustainability F free-market approach F social efficiency approach F conservationist approach F Gaia approach < making optimum decisions n Market failures < environment as a public good < externalities < ignorance

ECONOMICS OF THE ENVIRONMENT n An optimum use of the environment < different approaches to sustainability F free-market approach F social efficiency approach F conservationist approach F Gaia approach < making optimum decisions n Market failures < environment as a public good < externalities < ignorance < inter-generational problems n An optimum use of the environment < different approaches to sustainability F free-market approach F social efficiency approach F conservationist approach F Gaia approach < making optimum decisions n Market failures < environment as a public good < externalities < ignorance < inter-generational problems

n Market-based policies < extending private property rights < charging for use of the environment n Market-based policies < extending private property rights < charging for use of the environment ECONOMICS OF THE ENVIRONMENT

MB = MSB L2L2 L1L1 P2P2 MSC Level of emission Costs and benefits (£) P 1 = 0 An emissions charge

n Market-based policies < extending private property rights < charging for use of the environment < environmental ('green') taxes n Market-based policies < extending private property rights < charging for use of the environment < environmental ('green') taxes ECONOMICS OF THE ENVIRONMENT

O MC pollution MB  MC Q1Q1 P1P1 Output of good Costs and benefits (£) Q2Q2 A socially efficient green tax Socially efficient green tax

Green tax revenues as a % of GDP

n Non-market-based policies < command-and-control systems F technology-based standards F ambient-based standards F social-impact standards < voluntary agreements < education n Non-market-based policies < command-and-control systems F technology-based standards F ambient-based standards F social-impact standards < voluntary agreements < education ECONOMICS OF THE ENVIRONMENT

n Tradable permits < how they work < assessment of the system n Can we rely on governments? < game theory and international agreements n Tradable permits < how they work < assessment of the system n Can we rely on governments? < game theory and international agreements ECONOMICS OF THE ENVIRONMENT

Outcomes for countries from strategies of pollution reduction All cut pollution All cut pollution Some cut pollution Some cut pollution Cut pollution Don’t cut pollution Don’t cut pollution Other countries’ strategy USA’s strategy USA’s strategy E Moderate net gain for all Moderate net gain for all High gain for USA Small gain for other countries High gain for USA Small gain for other countries Small loss for USA Gain for countries not cutting pollution Small loss for USA Gain for countries not cutting pollution F No gain for any country No gain for any country Large loss for USA Slight gain for other countries Large loss for USA Slight gain for other countries None cut pollution None cut pollution Fairly high gain for USA Loss for other countries Fairly high gain for USA Loss for other countries AB D C

Applied Microeconomics Traffic Congestion and Transport Policies

n The allocation of road space < demand for road space F a derived demand F determinants of demand n The allocation of road space < demand for road space F a derived demand F determinants of demand TRAFFIC CONGESTION AND TRANSPORT POLICIES

UK Cars per thousand population Energy and Transport in Figures (EC, 2002); Federal Highway Administration: Increase in car ownership

USA UK Cars per thousand population Energy and Transport in Figures (EC, 2002); Federal Highway Administration: Increase in car ownership

USA Belgium Sweden UK Cars per thousand population Energy and Transport in Figures (EC, 2002); Federal Highway Administration: Increase in car ownership

USA Germany Belgium Sweden UK Cars per thousand population W Germany Energy and Transport in Figures (EC, 2002); Federal Highway Administration: Increase in car ownership

USA Germany Belgium Sweden UK Spain Cars per thousand population W Germany Energy and Transport in Figures (EC, 2002); Federal Highway Administration: Increase in car ownership

n The allocation of road space < demand for road space F a derived demand F determinants of demand F the price and income elasticities of demand n The allocation of road space < demand for road space F a derived demand F determinants of demand F the price and income elasticities of demand TRAFFIC CONGESTION AND TRANSPORT POLICIES

Motoring costs as % of UK household expenditure: 2000/1 Quintile groups of household income Motoring costs as % of household expenditure

Passenger transport in Great Britain (percentage of passenger kilometres by road) Passenger transport in Great Britain (percentage of passenger kilometres by road)

Passenger transport in Great Britain (percentage of passenger kilometres by road) Passenger transport in Great Britain (percentage of passenger kilometres by road)

Passenger transport in Great Britain (percentage of passenger kilometres by road) Passenger transport in Great Britain (percentage of passenger kilometres by road)

Passenger transport in Great Britain (percentage of passenger kilometres by road) Passenger transport in Great Britain (percentage of passenger kilometres by road)

Passenger transport in Great Britain (percentage of passenger kilometres by road) Passenger transport in Great Britain (percentage of passenger kilometres by road)

n The allocation of road space < demand for road space F a derived demand F determinants of demand F the price and income elasticities of demand < supply of road space n The allocation of road space < demand for road space F a derived demand F determinants of demand F the price and income elasticities of demand < supply of road space TRAFFIC CONGESTION AND TRANSPORT POLICIES

n The allocation of road space < demand for road space F a derived demand F determinants of demand F the price and income elasticities of demand < supply of road space F short run n The allocation of road space < demand for road space F a derived demand F determinants of demand F the price and income elasticities of demand < supply of road space F short run TRAFFIC CONGESTION AND TRANSPORT POLICIES

n The allocation of road space < demand for road space F a derived demand F determinants of demand F the price and income elasticities of demand < supply of road space F short run F long run n The allocation of road space < demand for road space F a derived demand F determinants of demand F the price and income elasticities of demand < supply of road space F short run F long run TRAFFIC CONGESTION AND TRANSPORT POLICIES

n Social optimum level of road usage < marginal social benefit < marginal social cost F congestion costs: time n Social optimum level of road usage < marginal social benefit < marginal social cost F congestion costs: time TRAFFIC CONGESTION AND TRANSPORT POLICIES

Time taken to travel between two points along a given road

n Social optimum level of road usage < marginal social benefit < marginal social cost F congestion costs: time F congestion costs: monetary n Social optimum level of road usage < marginal social benefit < marginal social cost F congestion costs: time F congestion costs: monetary TRAFFIC CONGESTION AND TRANSPORT POLICIES

n Social optimum level of road usage < marginal social benefit < marginal social cost F congestion costs: time F congestion costs: monetary F environmental costs n Social optimum level of road usage < marginal social benefit < marginal social cost F congestion costs: time F congestion costs: monetary F environmental costs TRAFFIC CONGESTION AND TRANSPORT POLICIES

n Social optimum level of road usage < marginal social benefit < marginal social cost F congestion costs: time F congestion costs: monetary F environmental costs < socially efficient level of road usage n Social optimum level of road usage < marginal social benefit < marginal social cost F congestion costs: time F congestion costs: monetary F environmental costs < socially efficient level of road usage TRAFFIC CONGESTION AND TRANSPORT POLICIES

Actual and optimum road usage O Costs and benefits (£) MSB Cars per minute

O Costs and benefits (£) MSB Cars per minute MC (private) Actual and optimum road usage a

O Costs and benefits (£) MSB Cars per minute Q1Q1 e Actual and optimum road usage MC (private) a

b O Costs and benefits (£) MSB Cars per minute Q1Q1 e MSC Actual and optimum road usage MC (private) a

a b d O Costs and benefits (£) MSB Cars per minute Q1Q1 e Q2Q2 c Optimum charge MSC Actual and optimum road usage MC (private)

n Policy 1: direct provision < the road solution < public transport n Policy 2: regulation and legislation < restricting car access F bus and cycle lanes F no entry to side streets F pedestrian-only areas < parking restrictions n Policy 1: direct provision < the road solution < public transport n Policy 2: regulation and legislation < restricting car access F bus and cycle lanes F no entry to side streets F pedestrian-only areas < parking restrictions TRAFFIC CONGESTION AND TRANSPORT POLICIES

n Policy 3: changing market signals < extending existing taxes < road pricing F variable tolls F supplementary licences F electronic road pricing < subsidising alternative means of transport n Policy 3: changing market signals < extending existing taxes < road pricing F variable tolls F supplementary licences F electronic road pricing < subsidising alternative means of transport TRAFFIC CONGESTION AND TRANSPORT POLICIES

Applied Microeconomics Competition Policy

n Competition, monopoly and the public interest n The targets of policy < abuse of monopoly power n Competition, monopoly and the public interest n The targets of policy < abuse of monopoly power COMPETITION POLICY

AR = D MC MR £ Q O Q1Q1 P1P1 Monopoly Equilibrium of industry under perfect competition and monopoly: with the same MC curve

£ Q O MC ( = supply under perfect competition) Q1Q1 MR P1P1 P2P2 Q2Q2 AR = D Comparison with Perfect competition Equilibrium of industry under perfect competition and monopoly: with the same MC curve

£ Q O Q1Q1 MR P1P1 MC monopoly AR = D Equilibrium of industry under perfect competition and monopoly: with different MC curves

£ Q O MC ( = supply) perfect competition Q1Q1 MR P1P1 P2P2 Q2Q2 MC monopoly AR = D x Q3Q3 P3P3 AC monopoly Q4Q4 P4P4 Equilibrium of industry under perfect competition and monopoly: with different MC curves

n Competition, monopoly and the public interest n The targets of policy < abuse of monopoly power < mergers n Competition, monopoly and the public interest n The targets of policy < abuse of monopoly power < mergers COMPETITION POLICY

n Competition, monopoly and the public interest n The targets of policy < abuse of monopoly power < mergers < oligopolistic collusion: restrictive practices n Competition, monopoly and the public interest n The targets of policy < abuse of monopoly power < mergers < oligopolistic collusion: restrictive practices COMPETITION POLICY

n EU legislation < Article 81: restrictive practices < Article 82: monopolies and mergers < merger control measures < assessing EU policy n EU legislation < Article 81: restrictive practices < Article 82: monopolies and mergers < merger control measures < assessing EU policy COMPETITION POLICY

n UK competition policy < the OFT and the Competition Commission < restrictive practices policy F Chapter 1 prohibition F types of anti-competitive behaviour F powers of the OFT < monopoly policy F Chapter 2 prohibition F market-share criterion F market contestability F anti-competitive practices n UK competition policy < the OFT and the Competition Commission < restrictive practices policy F Chapter 1 prohibition F types of anti-competitive behaviour F powers of the OFT < monopoly policy F Chapter 2 prohibition F market-share criterion F market contestability F anti-competitive practices COMPETITION POLICY

n UK competition policy (cont.) < merger policy F role of OFT and Competition Commission F criteria for judgement < features of the 2002 Enterprise Act n UK competition policy (cont.) < merger policy F role of OFT and Competition Commission F criteria for judgement < features of the 2002 Enterprise Act COMPETITION POLICY

UK competition legislation

n Assessment of competition policy < focus on behaviour rather than market structure < prohibition of certain practices < tougher powers to identify secret collusion n Assessment of competition policy < focus on behaviour rather than market structure < prohibition of certain practices < tougher powers to identify secret collusion COMPETITION POLICY

Applied Microeconomics Privatisation

n Nationalisation and privatisation < history of nationalisation < forms and history of privatisation n Nationalisation and privatisation < history of nationalisation < forms and history of privatisation PRIVATISATION

Nationalisation and privatisation in the UK

n Arguments for privatisation < market forces F greater competition in the goods market F greater competition for finance F accountability to shareholders < reduced government interference < reducing the PSNCR < increased share ownership n Arguments for privatisation < market forces F greater competition in the goods market F greater competition for finance F accountability to shareholders < reduced government interference < reducing the PSNCR < increased share ownership PRIVATISATION

n Arguments against privatisation < natural monopolies n Arguments against privatisation < natural monopolies PRIVATISATION

Profit-maximising natural monopoly LRAC £ Q

£ Q LRMC Profit-maximising natural monopoly

LRAC £ Q LRMC D Profit-maximising natural monopoly

LRAC £ Q LRMC D MR Profit-maximising natural monopoly

QmQm LRAC £ Q LRMC D MR PmPm Profit-maximising natural monopoly

LRAC £ Q LRMC D MR PmPm QmQm LRAC m Profit-maximising natural monopoly

QnQn LRAC £ Q LRMC D MR PmPm QmQm LRAC m PnPn Profit-maximising natural monopoly

n Arguments against privatisation < natural monopolies < capital costs and entry barriers n Arguments against privatisation < natural monopolies < capital costs and entry barriers PRIVATISATION

n Arguments against privatisation < natural monopolies < capital costs and entry barriers < lack of co-ordination of industries n Arguments against privatisation < natural monopolies < capital costs and entry barriers < lack of co-ordination of industries PRIVATISATION

n Arguments against privatisation < natural monopolies < capital costs and entry barriers < lack of co-ordination of industries < externalities n Arguments against privatisation < natural monopolies < capital costs and entry barriers < lack of co-ordination of industries < externalities PRIVATISATION

n Arguments against privatisation < natural monopolies < capital costs and entry barriers < lack of co-ordination of industries < externalities < fairness and social justice n Arguments against privatisation < natural monopolies < capital costs and entry barriers < lack of co-ordination of industries < externalities < fairness and social justice PRIVATISATION

n Arguments against privatisation < natural monopolies < capital costs and entry barriers < lack of co-ordination of industries < externalities < fairness and social justice < problems with the PSNCR n Arguments against privatisation < natural monopolies < capital costs and entry barriers < lack of co-ordination of industries < externalities < fairness and social justice < problems with the PSNCR PRIVATISATION

n Arguments against privatisation < natural monopolies < capital costs and entry barriers < lack of co-ordination of industries < externalities < fairness and social justice < problems with the PSNCR n Ownership and the public interest n Arguments against privatisation < natural monopolies < capital costs and entry barriers < lack of co-ordination of industries < externalities < fairness and social justice < problems with the PSNCR n Ownership and the public interest PRIVATISATION

Applied Microeconomics Regulation

n Identifying short-run optimum price and output < industry has monopoly power F the first-best situation F second-best pricing rules < industry produces externalities < questions of fairness n Identifying long-run optimum price and output n Identifying short-run optimum price and output < industry has monopoly power F the first-best situation F second-best pricing rules < industry produces externalities < questions of fairness n Identifying long-run optimum price and output REGULATION

MSC Short-run and long-run marginal cost pricing O £ Q D = AR PSPS QSQS

O £ Q MSC D = AR PSPS QSQS LRMSC PLPL QLQL Short-run and long-run marginal cost pricing

n Regulation in practice: RPI – X formula n Advantages of UK regulation < discretionary; flexible < incentives n Disadvantages of UK regulation < disincentives of changes to X < excessive power of regulator? < playing ‘games’ with industry < alternatively, regulatory capture < complexity of regulation n Regulation in practice: RPI – X formula n Advantages of UK regulation < discretionary; flexible < incentives n Disadvantages of UK regulation < disincentives of changes to X < excessive power of regulator? < playing ‘games’ with industry < alternatively, regulatory capture < complexity of regulation REGULATION

n Increasing competition in the privatised industries < limited extent of true natural monopoly < allowing competition where there is no natural monopoly < allowing access to grids by competitors < forbidding suppliers from being grid owners < capping market share of established firms < competitive franchising to make monopolies contestable n Increasing competition in the privatised industries < limited extent of true natural monopoly < allowing competition where there is no natural monopoly < allowing access to grids by competitors < forbidding suppliers from being grid owners < capping market share of established firms < competitive franchising to make monopolies contestable REGULATION

Applied Microeconomics Privatisation in Transition Economies

n State ownership under communism < the system of central planning < problems of inconsistency < inappropriate success indicators and rewards < results n Transition to a market economy < forms of market liberalisation < degree of transition achieved n State ownership under communism < the system of central planning < problems of inconsistency < inappropriate success indicators and rewards < results n Transition to a market economy < forms of market liberalisation < degree of transition achieved PRIVATISATION IN TRANSITION ECONOMIES

n Privatisation < forms of privatisation < insider and outsider privatisation n Requirements for successful privatisation < supportive environment < price liberalisation < restructuring of firms < corporate governance n Privatisation < forms of privatisation < insider and outsider privatisation n Requirements for successful privatisation < supportive environment < price liberalisation < restructuring of firms < corporate governance PRIVATISATION IN TRANSITION ECONOMIES