Economics of sustainability

Prof.dr. Elbert Dijkgraaf

Erasmus School of Economics
 Contents
1. Introduction Sustainable Development Goals
2. Target setting
3. Markets and goals
4. Instruments to reach targets
1. Introduction Sustainable Development Goals

See
 1. Introduction Sustainable Development Goals

• Unique: target setting worldwide

• Essential in globalized world
• Example 1: agriculture in Netherlands
• Example 2: global warming
• Example 3: immigration
• Very broad: this course some elements
• Economics has its limits
• Next week more by Jan Peter Balkenende
 2. Target setting
• Clear rules to decide what is optimal outcome
• Efficiency: Pareto
– Consumption: MRUSA=MRUSB
– Production: MRTSX=MRTSY
– Product mix: MRTL=MRTK=MRUS
• No unique solution: utility possibility frontier
• SWF gives optimum:
– Often unknown
– But: Pareto criterion is generally enough
 2. Target and market

• Market guarantees efficiency

– Cost minimization
– Profit maximization
MC=S
Price, costs

CS
P
PS
MB=D

Q* Quantity
 2. Target setting
• Targets SDG’s not necessarily equal to economic targets:
– Zero poverty economic optimal?
– Equality economic optimal?
– Economics versus ethics
– Main contribution economics: given the goal, what is optimal solution
• Targets SDG’s not always precise:
– 13.1 Strengthen resilience and adaptive capacity to climate-related
hazards and natural disasters in all countries
– 13.2 Integrate climate change measures into
national policies, strategies and planning
– Economics can help to set more precise goals
 2. Target setting
€
Target for regulation
PMC+MEC

PMC

PY  Demand
t


0 Y* Y0 Y = production
 3. Problems with the market

• Markets guarantee efficiency

• Requirements for efficient market outcome:
– Markets exist: CO2
– Market is perfectly competitive: agriculture
– Utility and production function are well behaved: nature
– Private and not public goods: peace
– No externalities: environment, inequality
• Market outcomes can be unacceptable:
– Inequalities labor market, poverty
• If not:
– Target setting is not equal to pareto
– Policy instruments might be necessary
 3. Problems with the market: Literature

• Economics can help to determine what the problem of the

market exactly is and thus what possible solutions are
• Refresh knowledge from micro economic book:
– Externalities
– Public goods
– Discontinuities
 4. Solutions to market problems: Coase

• Create property rights and the market finds it optimal solution

by negotiation:
– CO2 tradable permits
– abolishment slavery
– labor rights
• Why externalities problem while Coase is possible?
– bargaining costly
– markets work not always perfect
– outcome of market not always acceptable
 4. Solutions to market problems: Taxation

• Often Coase does not work

• Tax equal to marginal external cost at optimum
• Polluter pays!
• Very effective
• Difficult for individual countries: competitive position
 4. Solutions to market problems: Other
instruments
• Subsidies: make better solution cheaper
• Command & control: set limits
• Innovation stimulation: new technologies help
• Information: improve utility function
• Mergers: integrate external effects
• International treaties:
– Global markets need global rules
– International problems need international solutions
– Countries do not always want to solve problems
– Countries can not always solve problems themselves
 4. Solutions: always act?

• Always governmental task to restore market failure?

– Costs
– Non-effective instruments
– Bias politicians
• Markets and governments fail!
 4. Solutions: Literature

• Economics can help to determine what optimal instruments are

• Refresh knowledge from micro economic book:
– Essence of Coase
– Tax as instrument to internalize external effects
– Command and control
 Literature

• Check micro-economics book related to Externalities, Public goods,

Discontinuities, Essence of Coase, Tax as instrument to internalize external effects,

Command and control.

• Read the site https://sdg.guide/.