Week 13.

1 International Business and Green Issues

Aims Develop framework for analysing environmental problems

Consider alternative approaches to environmental policy

Assess business response

Why environmental problems are of concern to business Production techniques have adverse environmental effects Goods produced may damage the environment or other people

The effects of pressure groups and policies

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Economic goods and free goods. Economic goods Scarce Alternative uses opportunity cost incurred in use Free goods Not scarce Zero opportunity cost

Green/environmental approach

Environment is a scarce resource opportunity cost Many costs not felt directly by producer/consumer = external costs

Implications

No incentive to limit effects

Costs shifted onto others

Over-use of environmental resources

Resources not allocated efficiently in free market system Market failure

Need for policy intervention

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Economic Efficiency Goods and services produced provide greatest benefit to society produced at least cost. Aim: maximise Net Social Benefit (NSB) NSB = Total Benefit Total Cost Requires Marginal Cost = Marginal Benefit
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Marginal Cost cost of an additional unit Marginal Benefit extra benefit from the consumption of an additional unit MB = price consumers willing to pay for the marginal unit measured by the demand curve.

Optimum output To maximise NSB MB = MC

MB, MC

Equilibrium in competitive market: Where S=D MC = Supply MB = Demand Therefore MB = MC

MC=S
Competitive market

produces optimum output

P* I.e. efficient allocation of

resources MB = D
Q*

Q
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Market failure and External costs

Market failure: conditions for an optimum are not met in a market economy External costs one possible cause MC to firms do not reflect costs to society Over- or under-production

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External Costs and Pollution

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Example A chemical plant pollutes a local river Private costs costs to the firm External costs 1. Extra payments e.g. cleaning up river 2. Loss of income, e.g. local fishermen 3. Loss of amenities, e.g. loss of leisure activities Social costs = Private costs + External costs
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Reason for pollution externalities Polluters treat the environment as a free good. Property rights not defined/costly to enforce Consumption (use of the environment) is not dependent on payment

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Effects of external costs

Decisions made on the basis of private costs Market prices do not reflect marginal social cost
Over-production/consumption Excessive pollution external costs imposed on the rest of society
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Example: pollution in the chemical industry (Assume competitive and profit maximising) MB, MC
MB = MCsocial

MCsocial

External cost at the margin P*

MCprivate
Pm

MB
Q* Qm

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Should pollution be reduced to zero? Environmental economics Pollution should be reduced if benefits of reduction exceed costs at the margin. optimum level of pollution

Green approach Environmental costs are paramount

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Pollution Policy

Externalities justify government policy Regulation Market-based incentives (MBIs)

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Regulation Quantitative restrictions on pollution Supported by sanctions, e.g. fines Problems Adjustment falls on all producers Quantitative limits become a norm Monitoring costs are high Regulations are subject to lobbying Penalties may be ineffective
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Market-based incentives (MBIs) polluter pays principle Polluter takes account of social costs when deciding output and prices internalise the externality Set a tax = external cost at the margin

E.g. landfill tax, climate change levy

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Pollution tax = external cost

MB, MC
MCs = MCp+ tax Tax = External cost

P*

MCp
Pc

MB = D

Q*

Qc

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Economic rationale for MBIs Least cost way of reducing pollution Clean firms avoid tax/dirty firms pay Tax is a permanent incentive Competitive advantage if reduce pollution Greater flexibility and less costly to administer Raises revenue for the government Double dividend
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Problems of pollution taxes Level of tax Effects on income distribution e.g. carbon tax is regressive Effects on competitiveness need for international agreements Uncertainty over benefits and costs Best policy depends on sensitivity of costs and benefits to reduction in pollution levels
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Other MBIs

Marketable pollution permits or cap and trade E.g. EU Emissions Trading Scheme
Subsidies

Creation of property rights

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Other policies

Capital allowances
Funding technological innovation

Government information and awareness programmes to change preferences

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Business Response Lobby governments Industry-based voluntary codes. Incorporating environmental concerns into business objectives Developing new products/processes R&D into new technologies Raising efficiency to offset the effects of green taxes PR, marketing, changing the corporate image
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