Chapter 10
Externalities
EXTERNALITIES
EXTERNALITIES
•• Recall:
Recall: Adam
Adam Smith’s
Smith’s “invisible
“invisible
hand”
of
the
marketplace
hand” of the marketplace leads
leads selfselfinterested
buyers
and
sellers
interested buyers and sellers in
in aa
market
market to
to maximize
maximize the
the total
total benefit
benefit
that
society
can
derive
from
that society can derive from aa
market.
market.
But
But market
market failures
failures can
can still
still
happen!
happen!
©
© 2002
2002 by
by Nelson,
Nelson, aa division
division of
of Thomson
Thomson Canada
Canada Limited
Limited
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
EXTERNALITIES
EXTERNALITIES
EXTERNALITIES
EXTERNALITIES
•• IfIf aa market
market system
system affects
affects
individuals
individuals other
other than
than buyers
buyers
and
sellers
of
that
market,
and sellers of that market, sidesideeffects
effects are
are created
created called
called
Externalities.
Externalities.
–– Externalities
Externalities cause
cause markets
markets to
to
be
inefficient,
and
thus
fail.
be inefficient, and thus fail.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 3
EXTERNALITIES
EXTERNALITIES
•• An
An externality
externality refers
refers to
to the
the
uncompensated
impact
uncompensated impact of
of one
one
person’s
actions
on
the
well-being
person’s actions on the well-being of
of
aa bystander.
bystander.
•• Externalities
Externalities cause
cause markets
markets to
to be
be
inefficient,
inefficient, and
and thus
thus fail
fail to
to maximize
maximize
total
total surplus.
surplus.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 4
EXTERNALITIES
EXTERNALITIES
•• In
In the
the presence
presence of
of externalities,
externalities,
society’s
society’s interest
interest in
in aa market
market
outcome
outcome extends
extends beyond
beyond the
the wellwellbeing
being of
of buyers
buyers and
and sellers
sellers in
in the
the
market.
market. .. ..
•• …
… the
the well-being
well-being of
of third
third parties
parties are
are
considered.
considered.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 2
Chapter 10: page 5
•• Positive
Positive Externality
Externality
•• The
The uncompensated
uncompensated benefits
benefits that
that are
are
received
received by
by individuals
individuals who
who are
are not
not
directly
directly involved
involved in
in the
the production
production or
or
consumption
consumption of
of goods.
goods.
•• The
The act
act of
of producing
producing or
or consuming
consuming
goods
goods sometimes
sometimes generates
generates benefits
benefits to
to
others
others who
who do
do not
not have
have to
to pay
pay for
for them.
them.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 6
EXTERNALITIES
EXTERNALITIES
EXTERNALITIES
EXTERNALITIES
•• Negative
Negative Externality
Externality
•• The
The uncompensated
uncompensated costs
costs that
that are
are
imposed
imposed upon
upon individuals
individuals who
who are
are not
not
directly
directly involved
involved in
in the
the production
production or
or
consumption
consumption of
of goods.
goods.
•• The
act
of
producing
The act of producing or
or consuming
consuming
goods
goods sometimes
sometimes generates
generates costs
costs to
to
others
others who
who are
are not
not paid
paid to
to endure
endure them.
them.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 7
Welfare
Welfare Economics:
Economics: A
A Recap
Recap
•• The
The Market
Market for
for Aluminum
Aluminum
––The
The demand
demand curve
curve for
for aluminum
aluminum
reflects
reflects the
the value
value to
to consumers
consumers of
of
aluminum
aluminum as
as measured
measured by
by the
the prices
prices
they
they are
are willing
willing to
to pay.
pay.
––The
The supply
supply curve
curve for
for aluminum
aluminum reflects
reflects
the
the costs
costs of
of producing
producing aluminum.
aluminum.
––Q
: the quantity produced and
Qmarket
market: the quantity produced and
consumed
consumed in
in the
the market
market equilibrium
equilibrium is
is
efficient
efficient in
in the
the sense
sense that
that itit maximizes
maximizes
the
the sum
sum of
of producer
producer and
and consumer
consumer
surplus.
surplus.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 9
Welfare
Welfare Economics:
Economics: A
A Recap
Recap
•• The
The Market
Market for
for Aluminum
Aluminum
––IfIf the
the aluminum
aluminum factories
factories emit
emit
pollution
(a
negative
pollution (a negative externality),
externality),
then
then the
the cost
cost to
to society
society of
of
producing
aluminum
producing aluminum is
is larger
larger than
than
the
the cost
cost to
to aluminum
aluminum producers.
producers.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 11
Negative
Negative Externality
Externality
•• Automobile
Automobile exhaust
exhaust
•• Cigarette
Cigarette smoking
smoking
•• Barking
Barking dogs
dogs
Positive
Positive Externality
Externality
•• Immunizations
Immunizations
•• landscaping
landscaping
•• Beekeepers
Beekeepers
•• Technology
Technology development
development
Chapter 10: page 8
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Figure
-1: The
10
Figure 1010-1:
The Market
Market for
for Aluminium
Aluminium
Price of
Aluminium
Supply
(private costs)
Equilibrium
Demand
(private value)
0
Quantity of
Aluminium
Qmarket
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 10
Negative
Negative Externalities
Externalities in
in
Production
Production
•• The
The Market
Market for
for Aluminum
Aluminum
––For
For each
each unit
unit of
of aluminum
aluminum produced,
produced,
the
the social
social cost
cost includes
includes the
the private
private
costs
costs of
of the
the producers
producers plus
plus the
the cost
cost to
to
those
those bystanders
bystanders adversely
adversely affected
affected by
by
the
the pollution.
pollution.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 12
Figure
-2: Pollution
10
Figure 1010-2:
Pollution and
and the
the Social
Social
Optimum
Optimum
Negative
Negative Externalities
Externalities in
in
Production
Production
•• The
The Market
Market for
for Aluminum
Aluminum (cont’d)
(cont’d)
––What
quantity
What quantity of
of aluminum
aluminum should
should
be
be produced?
produced?
•• Where
Where the
the demand
demand curve
curve crosses
crosses the
the
social-cost
social-cost curve.
curve.
•• Below
the value of the
Below Q
Qoptimum
optimum the value of the
aluminum
aluminum to
to consumers
consumers exceeds
exceeds rgw
rgw
social
social cost
cost of
of producing
producing it.
it.
•• Above
the social cost of
Above Q
Qoptimum
optimum the social cost of
producing
producing additional
additional aluminum
aluminum
exceeds
exceeds the
the value
value to
to consumers.
consumers.
Chapter 10: page 13
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Figure
-3: Deadweight
10
Figure 1010-3:
Deadweight Loss
Loss of
of aa Negative
Negative
Production
Production Externality
Externality
Price of
Aluminium
At QMarket
At QOptimum
Change
Consumer surplus
A+B +C +D
D
- (A + B + C)
Producer surplus
E - (B + C + H)
A+E
D+A +E-H
D+A +E
Total surplus
A+B +C +H
H
Social costs
a
D
Poptimum
H
A
Pmarket
B
C
Price of
Aluminium
Social costs
Cost of
pollution
Supply
(private costs)
Optimum
Equilibrium
Demand
(private value)
0
Qoptimum
Quantity of
Aluminium
Qmarket
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 14
Negative
Negative Externalities
Externalities in
in
Production
Production
•• The
The market
market equilibrium
equilibrium quantity
quantity exceeds
exceeds
the
the social
social optimum.
optimum.
•• Reducing
Reducing aluminum
aluminum production
production and
and
consumption
consumption below
below the
the market
market
equilibrium
equilibrium level
level raises
raises total
total economic
economic
well-being.
well-being.
b
E
G
F
Demand
(private value)
0
Qoptimum Qmarket
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Quantity of
Aluminium
Chapter 10: page 15
Negative
Negative Externalities
Externalities in
in
Production
Production
•• The
The Market
Market for
for Aluminum
Aluminum
––How
How can
can the
the social
social optimum
optimum of
of
aluminum
aluminum production
production be
be achieved?
achieved?
––Internalizing
Internalizing an
an externality
externality involves
involves
altering
altering incentives
incentives so
so that
that people
people take
take
account
account of
of the
the external
external effects
effects of
of their
their
actions.
actions.
•• Integrating
Integrating the
thebusiness
businessof
of polluter
polluter and
and the
the
business
businessof
of those
thoseaffected
affected
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 17
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 16
Negative
Negative Externalities
Externalities in
in
Production
Production
•• The
The Market
Market for
for Aluminum
Aluminum
––How
How can
can the
the social
social optimum
optimum of
of
aluminum
aluminum production
production be
be achieved?
achieved?
•• Tax
Taxthe
theproducers
producersof
of aluminum
aluminumthus
thusshifting
shifting
the
theprivate
privatesupply
supplycurve
curveup
up by
bythe
theamount
amount
of
of the
thetax
taxso
so that
that itit coincides
coincideswith
withthe
the
social-cost
social-cost curve.
curve.
––Pigovian
Pigovian taxes
taxes are
are taxes
taxes enacted
enacted to
to
correct
correct the
the effects
effects of
of negative
negative
externalities.
externalities.
––In
In Figure
Figure 10-3,
10-3, the
the Pigovian
Pigovian tax
tax is
is equal
equal
to
to the
the distance
distance ab.
ab.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 18
Positive
Positive Externalities
Externalities in
in
Production
Production
•• When
When an
an externality
externalitybenefits
benefitsthe
thebystanders,
bystanders,aa
positive
positiveexternality
externalityexists.
exists.
–– The
Thesocial
socialcost
cost of
of the
thegood
good is
isbelow
belowthe
the
private
private cost.
cost.
•• Example:
Example:
–– Beekeeper
Beekeeper business
business
–– AAtechnology
technologyspillover
spillover is
isaatype
typeof
of positive
positive
externality
externalitythat
that exists
existswhen
when aafirm’s
firm’sinnovation
innovation
or
or design
design not
not only
onlybenefits
benefitsthe
thefirm,
firm,but
but enters
enters
society’s
pool
of
technological
knowledge
society’s pool of technological knowledgeand
and
benefits
benefitssociety
societyas
asaawhole.
whole.
Figure
-4: Technology
10
Figure 1010-4:
Technology Spillovers
Spillovers and
and the
the
Social
Social Optimum
Optimum
Price of
Robots
Value of
technology
spillover
Social costs
Pmarket
Equilibrium
Poptimum
Optimum
b
Deadweight
loss
0
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 19
Positive
Positive Externalities
Externalities in
in
Production
Production
•• The
The intersection
intersection of
of the
the supply
supply curve
curve and
and
the
the social-value
social-value curve
curve determines
determines the
the
optimal
optimal output
output level.
level.
––The
optimal
The optimal output
output level
level is
is more
more than
than
the
the equilibrium
equilibrium quantity.
quantity.
––The
The market
market produces
produces aa smaller
smaller quantity
quantity
than
than is
is socially
socially desirable.
desirable.
––The
The social
social value
value of
of the
the good
good exceeds
exceeds
the
the private
private value
value of
of the
the good.
good.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 21
CASE
CASE STUDY:
STUDY: The
The Debate
Debate Over
Over Technology
Technology
Policy
Policy
–– Government
Government intervention
intervention in
inthe
theeconomy
economythat
that
aims
aimsto
to promote
promotetechnology-enhancing
technology-enhancing
industries
industries
•• Patent
Patent laws
lawsare
areaaform
form of
of technology
technologypolicy
policy
that
that give
givethe
theindividual
individual(or
(or firm)
firm)with
with patent
patent
protection
protection aaproperty
propertyright
rightover
over its
its
invention.
invention.
•• The
Thepatent
patent is
isthen
then said
said to
to internalize
internalizethe
the
externality.
externality.
•• The
Thepatent
patent system
system gives
givesfirms
firms aagreater
greater
incentive
incentiveto
to engage
engagein
in research
research and
and other
other
activities
activitiesthat
that advance
advancetechnology.
technology.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 23
Supply (private costs)
a
Qmarket
Demand
(private value)
Quantity of
Robots
Qoptimum
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 20
Positive
Positive Externalities
Externalities in
in
Production
Production
•• Internalizing
Internalizing Externalities:
Externalities: Subsidies
Subsidies
––Used
Used as
as the
the primary
primary method
method for
for
attempting
attempting to
to internalize
internalize positive
positive
externalities.
externalities.
––e.g.
e.g. Integrating
Integrating the
the business
business of
of the
the
beekeepers
beekeepers and
and apple
apple growers
growers
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 22
Externalities
Externalities in
in Consumption
Consumption
•• Some
Some externalities
externalities are
are associated
associated with
with
consumption.
consumption.
•• Figure
Figure 10-5
10-5 (a)
(a) shows
shows aa market
market with
with aa
negative
negative consumption
consumption externality
externality such
such as
as
the
the market
market for
for alcoholic
alcoholic beverages.
beverages.
•• Figure
Figure 10-5
10-5 (b)
(b) shows
shows aa market
market with
with aa
positive
positive consumption
consumption externality
externality such
such as
as
the
the market
market for
for education.
education.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 24
Externalities
Externalities in
in Consumption
Consumption
Figure
-5: Consumption
10
Figure 1010-5:
Consumption Externalities
Externalities
(b) Positive Consumption Externalities
(a) Negative Consumption Externalities
•• In
In the
the case
case of
of negative
negative consumption
consumption
externality,
externality, the
the social
social value
value of
of the
the good
good is
is
below
below the
the private
private value
value of
of the
the good.
good.
•• In
In the
the case
case of
of positive
positive consumption
consumption
externality,
externality, the
the social
social value
value of
of the
the good
good
exceeds
exceeds the
the private
private value
value of
of the
the good.
good.
Price of
Alcohol
Supply (private
cost)
Price of
Education
Supply (private
cost)
Demand
(private value)
Social
value
Social value
Demand
(private value)
0
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 25
PRIVATE
PRIVATE SOLUTIONS
SOLUTIONS TO
TO
EXTERNALITIES
EXTERNALITIES
•• Government
Government action
action is
is not
not always
always needed
needed
to
to solve
solve the
the problem
problem of
of externalities,
externalities,
which
which cause
cause markets
markets to
to be
be inefficient.
inefficient.
•• People
can
develop
private
People can develop private solutions.
solutions.
––Moral
Moral codes
codes and
and social
social sanctions
sanctions
––Charitable
Charitable organizations
organizations
––Integrating
Integrating different
different types
types of
of
businesses
businesses
––Contracting
Contracting between
between parties
parties
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 27
Qoptimum Qmarket
0
Quantity of
Alcohol
Qmarket
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Qoptimum
Quantity of
Education
Chapter 10: page 26
The
The Coase
Coase Theorem
Theorem
•• The
The Coase
Coase Theorem
Theorem is
is aa proposition
proposition that
that ifif
private
private parties
parties can
can bargain
bargain without
without cost
cost
over
over the
the allocation
allocation of
of resources,
resources, they
they can
can
solve
solve the
the problem
problem of
of externalities
externalities on
on their
their
own.
own.
•• Private
Private bargaining
bargaining can
can internalize
internalize the
the
external
external effects,
effects, resulting
resulting in
in efficient
efficient
solutions.
solutions.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 28
Why
Why Private
Private Solutions
Solutions Do
Do Not
Not
Always
Work
Always Work
PUBLIC
PUBLIC POLICIES
POLICIES TOWARDS
TOWARDS
EXTERNALITIES
EXTERNALITIES
•• In
In the
the real
real world
world bargaining
bargaining does
does not
not
always
always work.
work.
––Transactions
Transactions Costs
Costs
•• When
When externalities
externalities are
are significant
significant and
and
private
private solutions
solutions are
are not
not found,
found,
government
government may
may attempt
attempt to
to solve
solve the
the
problem
problem through
through .. .. ..
––Command-and-control
Command-and-control policies
policies that
that
regulate
regulate behaviour
behaviour directly.
directly.
––Market-based
Market-based policies
policies that
that provide
provide
incentives
incentives so
so that
that private
private decisions
decisions
makers
makers will
will choose
choose to
to solve
solve the
the problem
problem
on
on their
their own.
own.
•• Transaction
Transaction costs
costs are
are the
the costs
costs that
that
parties
parties incur
incur in
in the
the process
process of
of
agreeing
agreeing to
to and
and following
following through
through on
on
aa bargain.
bargain.
––Bargaining
Bargaining breaks
breaks down.
down.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 29
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 30
PUBLIC
PUBLIC POLICIES
POLICIES TOWARDS
TOWARDS
EXTERNALITIES
EXTERNALITIES
PUBLIC
PUBLIC POLICIES
POLICIES TOWARDS
TOWARDS
EXTERNALITIES
EXTERNALITIES
•• Command-and-Control
Command-and-Control Policies
Policies
––Usually
Usually take
take the
the form
form of
of regulations:
regulations:
•• Market-Based
Market-Based Policies
Policies
––Government
Government can
can internalize
internalize an
an
externality
externality by
by using
using taxes
taxes and
and subsidies
subsidies
to
to align
align private
private incentives
incentives with
with social
social
efficiency.
efficiency.
––Pigovian
Pigovian taxes
taxes are
are taxes
taxes enacted
enacted to
to
correct
correct the
the effects
effects of
of aa negative
negative
externality.
externality.
•• Forbid
Forbid certain
certain behaviors.
behaviors.
•• Require
Requirecertain
certain behaviors.
behaviors.
––Examples:
Examples:
•• Requirements
Requirementsthat
that all
allstudents
studentsbe
be
immunized.
immunized.
•• Stipulations
Stipulationson
onpollution
pollution emission
emissionlevels
levelsset
set
by
bythe
theEnvironmental
EnvironmentalProtection
Protection Agency
Agency
(EPA).
(EPA).
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 31
PUBLIC
PUBLIC POLICIES
POLICIES TOWARDS
TOWARDS
EXTERNALITIES
EXTERNALITIES
CASE
CASE STUDY:
STUDY: Why
Why Is
Is Gasoline
Gasoline Taxed
Taxed So
So
Heavily?
Heavily?
•• Market-Based
Market-Based Policies
Policies
––Tradable
Tradable pollution
pollution permits
permits allow
allow the
the
voluntary
voluntary transfer
transfer of
of the
the right
right to
to pollute
pollute
from
from one
one firm
firm to
to another.
another.
––A
A market
market for
for these
these permits
permits will
will
eventually
eventually develop.
develop.
––A
A firm
firm that
that can
can reduce
reduce pollution
pollution at
at aa low
low
cost
cost may
may prefer
prefer to
to sell
sell its
its permit
permit to
to aa
firm
firm that
that can
can reduce
reduce pollution
pollution only
only at
at aa
high
high cost.
cost.
•• Why
Why are
are gasoline
gasoline taxes
taxes so
so common?
common?
•• They
They are
are aa Pigovian
Pigovian tax
tax aimed
aimed at
at
correcting
correcting three
three negative
negative externalities:
externalities:
––Congestion
Congestion
––Accidents
Accidents
––Pollution
Pollution
•• The
The tax
tax makes
makes the
the economy
economy work
work better.
better.
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 33
Figure
-6: The
10
Figure 1010-6:
The Equivalence
Equivalence of
of Pigovian
Pigovian
Taxes
Taxes and
and Pollution
Pollution Permits.
Permits.
Chapter 10: page 35
(b) Pollution Permits
(a) Pigovian Tax
Price of
Pollution
Supply of
pollution
permits
P
Pigovian
Tax
P
1. A Pigovian
sets the price of
pollution…
2. … which
together with
the demand
curve,
determines the
price of
pollution…
Demand for
pollution rights
Demand for
pollution rights
2. … which together with the demand
curve, determines the quantity of
pollution…
0
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Chapter 10: page 34
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
PUBLIC
PUBLIC POLICIES
POLICIES TOWARDS
TOWARDS
EXTERNALITIES
EXTERNALITIES
•• Market-Based
Market-Based Policies
Policies
–– Reducing
Reducingpollution
pollution using
using permits
permitsis
isquite
quite
similar
similar to
to imposing
imposing aaPigovian
Pigovian tax.
tax.
–– In
In both
both cases
casesitit is
isthe
thefirm
firm who
who pays
paysits
its
pollution.
pollution.
–– With
With Pigovian
Pigovian taxes,
taxes,polluting
pollutingfirms
firmsmust
must pay
pay
the
thegovernment.
government.
–– With
With pollution
pollutionpermits,
permits,polluting
polluting firm
firm must
must pay
pay
to
to buy
buythe
thepermit.
permit.
–– See
SeeFigure
Figure10-6
10-6for
for an
an illustration
illustrationof
of the
the
similarities.
similarities.
Chapter 10: page 32
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Q
0
Quantity of
Pollution
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
1. … Pollution permits set the
quantity of pollution…
Q
Quantity of
Pollution
Chapter 10: page 36
Case: Kyoto Protocol
Case: Kyoto Protocol
The Kyoto Protocol is an agreement
made under the United Nations
Framework Convention on Climate
Change (UNFCCC).
Countries that ratify this protocol
commit to reduce their emissions
of carbon dioxide and five other
greenhouse gases, or engage in
emissions trading if they maintain
Mankiw
et al. Principles of
or increase
emissions
of these
Microeconomics, 2nd Canadian
Edition
37
gases.
Mankiw et al. Principles of
Microeconomics, 2nd Canadian
Edition
Case: Kyoto Protocol
Another main reason:
Encouraging developing economies to
reduce greenhouse gas emissions
through sustainable development, since
doing so is now economically viable
because of the investment flows from
the sale of Carbon Credits.
Mankiw et al. Principles of
Microeconomics, 2nd Canadian
Edition
38
Case: Kyoto Protocol
"flexible mechanisms" allows developed
countries to meet their greenhouse gas
emission limitation by purchasing GHG
emission reductions from elsewhere.
These can be bought either from
financial exchanges, from projects which
reduce emissions in LDCs under the
Clean Development Mechanism (CDM),
Kyoto established this Bonn-based Clean
Development Mechanism Executive
Board to assess and approve projects
Mankiw et al. Principles of
("CDM Projects")
in developing
Microeconomics,
2nd Canadian
39
economies prior toEdition
awarding CERs.
Case: Kyoto Protocol
The Kyoto Protocol now covers more
than 170 countries globally and more
than 60% of countries in terms of global
greenhouse gas emissions.
As of December 2007, the US and
Kazakhstan are the only signatory
nations not to have ratified the act.
This treaty expires in 2012, and
international talks began in May 2007 on
a future treaty to succeed the current
one
41
Kyoto mechanisms are for two main
reasons:
There were fears that the cost of
complying with Kyoto would be
expensive for many developed countries,
especially those countries already home
to efficient, low greenhouse gas emitting
industries, and high prevailing
environmental standards. Kyoto
therefore allows these countries to
Mankiw et al. Principles of
purchase (cheaper)
credits on the
Microeconomics,carbon
2nd Canadian
Edition
40
world market instead of reducing