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The five interesting elements from chapter 11:

Abatement across firms:

P286 – line 1 to 22

- It is really interesting that one of the reasons “economist tend to favor marketable
permits from among various polluter-pays policies” is due to the lack of transparence
in information between firms and the government. Indeed according to the book in order
to achieve optimal abatement across two firms by setting each firms abatement rate, the
government would have to know the cost situation of each firm. Linked to this situation,
the fact that this process would create an incentive for companies to exaggerate there
abatement cost, reflects well the competitiveness of markets and reveals that the
incentive given to the players should be creating profit and marginal benefits for the
firms. Finally the solution preferred by the economist’s is fascinating since it involves
the market returning to social efficiency (equilibrium) without regulation. Indeed, one
of the only regulation given by the government in the case of marketable permits, is the
choice of the optimal level of pollution and the right price, the market will then
determine the price.

Optimal level of pollution:

P280- “This result was…for government intervention”

- The Coase theory is interesting, once again the fact that bargaining between actors (here
polluter and pollutee) can bring us to attain an optimal level of pollution is a captivating
theory. This result who is permitted by a situation with no transaction cost and well
defined property rights, seems similar to direct contingent valuation where the two
actors ask them self how much would you pay or how much would you accept till you
are better off paying the other actor not to pollute one more unit. Finally I would add an
interesting limit to the explanation, “the Free Rider effect”, some agent who suffer the
externality (pollution of the firm), will not want to pay the compensation, but will take
advantage of the balance. We have a problem when the number of passengers exceeds
the number of agents who pay the compensation.

Regional Differences in Optimal pollution levels:

P282

- I Believe this section is quite interesting, in a policy making approach. Indeed, in a

general policy implementing it seems natural to pick a standard and technology and
apply it over the market to all the actors. Here the location variable which implies that
pollution cost aren’t uniform and the fact that benefits of pollution aren’t uniform across
firms, reminds the policy maker that policy making isn’t a one size fits all. Therefore
this approach should be kept in mind, to achieve an optimal pollution level.

Difficulties Measuring Costs and benefits of Pollution:

P288

- Finally I think that the direct contingent valuation of cost of pollution is an interesting
technique. Since it, concretizes the application of surveys in the economic world. By
having the population give a personal amount of their willingness to pay to avoid
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something unpleasant we are able to measure costs. More importantly the fact that the
actual actors of the market define the cost, increase accuracy is interesting and positive.

The fifth element isn’t an interesting element of the chapter but an interesting element
that could be added to the chapter:

The energy transition depends strongly on:

- costs of different types of energy

- the substitutability between the different types of energy

External costs are not internalized, so fossil fuels have an advantage in costs compared to
renewable energy alternatives. If external costs were internalized, the cost of renewable
energies would be lower than that of fossil fuels and the energy transition would be much more
advanced.

What kind of Policies could accelerate the energy transition ?

- Remove fossil fuel subsidies

- Internalize externalities with Pigouvian taxes
- Support research and development
- Subsidize renewable energies
- Improve energy efficiency