Saturday, February 11, 2012
The Solution to Some Externalities is in the Air
Today I was watching the movie Burlesque and it occurred to me that the central conflict of the movie was solved by considering externalities. For anyone who hasn't watched the movie (which I'm assuming many of you have not), the plot is essentially a small town girl begins to work at a burlesque club facing foreclosure. She dates a developer for a short period of time and learns about air rights. Finally, the day before the club is to be repossessed and that same developer is about to buy the club and turn it into a high-rise office building, she realizes that the owner of the club will be able to sell the air rights to a luxury condominium builder whose condo views would be obscured by the office building that would take the place of the club.
Though clearly a highly contrived fictional story, burlesque brings up an interesting point with regard to market solutions to externalities. Many non-economists seem to think that the only way to prevent externalities from occurring or reduce the effects of externalities is to have the government interfere. In this case the unintentional, non-market interdependence was between the builder of the luxury condos and whoever would own the space occupied by the Burlesque club. Should the high-rise office building be built in place of the burlesque club, the luxury condo builder would have a difficult time selling the condos in his building since the great view he expected would exist when he began construction on the building would be obscured.
The condo builder was able to trade the right to the air space above the burlesque club and keep the view for his condominiums clear for as long he owned the rights, thereby eliminating the market failure related to the externality of obscured views. In many cases defining property rights can allow for the prevention or elimination of externalities. Here, air space rights were defined and traded since views and lack of high buildings is valued in Los Angeles, at least by luxury condo builders and owners.
This lead me to think of a similar sort of situation that exists in downtown Colorado Springs. Zoning exists to prevent any builders from erecting buildings greater than 80' tall (limiting building height to approximately 8 stories). This is to prevent any building from obscuring the view of the mountains enjoyed by citizens and tourists alike. Zoning, however, is inefficient since it does not allow for market adjustments to the acceptable heights of buildings. All buildings have a set maximum height which is essentially a ceiling within the market model. Ceilings create shortages, and if the zoning restriction is the equivalent of a ceiling, the zoning policy creates a shortage of height inefficiency. This means that there is at least one person who is willing and able to pay an additional amount of money to construct a taller building.
Instead of simply limiting building height, the city could tax additional feet above the "efficient" height of different types of buildings, therefore causing the builders to internalize the negative externality of obscuring the view of the mountain. They could also choose to allocate the air rights to a certain level (not interfering with airspace use by comercial and military airplanes) above properties to the owners of the properties and allow the owners to sell the air rights separately from their property rights. By allowing the space above buildings to be traded separately from the buildings, you essentially commoditize views and allow the market to achieve the equilibrium balance of high buildings and unobscured views.
Labels: efficiency, externality, market failure
Friday, September 24, 2010
Efficiency in a Carbon Market
The U.N. has set up a market to regulate the production of greenhouse gases using cap and trade. The Clean Development Mechanism is a policy that focuses on reducing greenhouse gases. Also in developing countries that produce HCFC-22 as well as HFC- 23, two chemicals that developed countries have been banned from producing but developing countries can produce until 2030. As well those companies that destroy their HFC- 23 become eligible for Certified Emissions Credits(CERs), while reducing carbon production also grants you CERs it is much more profitable to reduce the production of HFC-23 in the same market.
Now the article also points to an interesting fact that in this market companies have found no incentive to reduce their emissions of HFC-23. The companies actually use the system, since you have to be eligible for the CERs to gain from destroying HFC-23 they do not when they are not eligible and do destroy it when they are. So while the U.N. may have been trying to achieve an efficient outcome where marginal social benefit might have been equal to marginal social cost it seems that very little was done to truly achieve it. In actuality the companies gained from the system by being able to trade those CERs when they received them and did not work on new methods to destroy the HFC- 23. The companies however were merely responding to the incentives presented to them.
This article presents interesting thought on what a cap and trade market might act like. It should be important when setting one up that incentives are made to have the actors actually reduce emissions and allow for them to research and develop technologies that reduce or completely eliminate them. In order to get an efficient outcome the incentives must be in line with the goal. Also it would be important to ensure that the rules are enforced. Clearly if a cap and trade market is set up it should be well thought out.
Now the article also points to an interesting fact that in this market companies have found no incentive to reduce their emissions of HFC-23. The companies actually use the system, since you have to be eligible for the CERs to gain from destroying HFC-23 they do not when they are not eligible and do destroy it when they are. So while the U.N. may have been trying to achieve an efficient outcome where marginal social benefit might have been equal to marginal social cost it seems that very little was done to truly achieve it. In actuality the companies gained from the system by being able to trade those CERs when they received them and did not work on new methods to destroy the HFC- 23. The companies however were merely responding to the incentives presented to them.
This article presents interesting thought on what a cap and trade market might act like. It should be important when setting one up that incentives are made to have the actors actually reduce emissions and allow for them to research and develop technologies that reduce or completely eliminate them. In order to get an efficient outcome the incentives must be in line with the goal. Also it would be important to ensure that the rules are enforced. Clearly if a cap and trade market is set up it should be well thought out.
Labels: carbon markets, efficiency
Friday, August 27, 2010
Beware Efficiency
Here is another economist, UWE E. REINHARDT, on efficiency. The Kaldor-Hicks criterion he writes about is like the idea of a "pareto improvement" we discussed in class. We will specifically use the Kaldor-Hicks criterion as the normative basis for our discussion of benefit-cost analysis. Please add comments or questions after reading his short essay.
Labels: efficiency, market failure
