Market, Policy, & Institutional Failures Session Objective: l Use environmental economics to identify economic root causes of environmental problems

Agenda l Market failure l Policy failure l Institutional failure l Add up MPI failures l Analytical framework l Discussions

Market Failure l Market fails to internalize externalities (spill-over effects) in market prices l Negative externalities: lost of habitats for endangered species due to logging l Positive externalities: improved air quality due to use of cleaner energy

Negative Externalities Illustration Price Quantity S’=MC’ D’=MB’ S’’=MC’’ Q’’ Q’ P” P’

Positive Externalities Illustration Price Quantity S’=MC’ D’=MB’ Q’ Q” P’’ P’ D’’=MB’’

Policy Failure l Government policy fails to let market price reflect actual production cost l Subsidy artificially reduces the cost of production l Low prices encourages excessive production and consumption

Policy Failure Illustration Price Quantity S’’=MC’’ D’=MB’ Q’ Q” P’ P’’ S’=MC’ subsidy

Institutional Failure l Broad definition: public institutions fail to correct market and policy failures l Narrow definition: public institutions fail to clearly define and protect property rights, leading to short-term behaviors at the cost of long-term resource use

Institutional Failure Illustration (narrow definition) Price Quantity S’=MC’ D’=MB’ Q” Q’ P” P’ S’’=MC’’ user cost

Adding up MPI Failures Price Quantity S0S0 D0D0 Q2 Q3 Q0 Q1 S3S3 P2 P3 P0 P1 S1S1 S2S2 externality user cost subsidy private cost

Analytical Framework env’tal problem resource users info, awareness, ethics, education, culture rules, regulations, enforcement, poverty, income distribution prices market failure inst. failure policy failure