Marginal Social Cost Research Articles

Black carbon and other pollutants from brickfields country-wise: Impact assessment and policy guidance under welfare analysis

The brick industry in developing world is a vast, coal burning and polluting industry. Nearly 1,500 billion bricks are produced globally each year where 87% are from Asia. China dominates the world in producing bricks using coal combustion and woods as fuels where Australia placed the last. Bangladesh placed the 5th in the world, and it mostly uses woods as fuels. These industries are owned privately. It is a type of industry that is mostly driven with business mentality without emphasizing the hygiene and health aspects where government laws are barely active in practices where rapid urbanization has been increasing demand of bricks. But, in most cases, this industry uses inefficient and dirty technology that causes environmental externalities. Brick-kilns inject huge volume of effluent gases. It causes depletion of atmospheric O2 level. Addressing the issue for policy guidance, this study first analyzes the consequences of these externalities in terms of marginal damage (MD) under neoclassical partial equilibrium demand & supply theory. It further analyzes the reasons of disparity between social-cost and private-cost by conventional marginal damage analysis. Findings show that due to gases emission from brickfields, the marginal social-costs are higher than marginal private-cost. In this economic dilemma, brick-kilns are benefiting with the expense of human-society country-wise. As it has been going on, the rises of brick-prices have been causing upward trends of welfare losses where producer surplus is dominating the total surplus. This consequential economic situation has been causing higher deadweight loss year after year. The reason is that the bricks-customers distribute this expenditure away from now more expensive bricks. Now there is an urgency for national policy actions for ensuring cleaner & sustainable brick production. On this aspect, reforestation efforts can be achieved in multi-faucets including brickfields’ charity and govt. policies on planting trees and for motivational efforts inspiring citizens of this country. These motivational efforts can be in multi-faucets: (a) inspiring “birthday celebration by planting trees”, (b) forcing to use green Tech in brick kilns and (c) conducting research in both phases of govt. and academicians where financial supports can be inspirational.

Can Environmental Tax Reduce Dilapidated Motor Vehicles Importation and Pollution? Insights from Dar-es-Salaam, Tanzania

The influence of tax regime in reducing dilapidated vehicles’ demand and attendant pollution is puzzling global south cities. This article provides an assessment on how environmental tax is or is not curbing down the importation of the Dilapidated Motor Vehicles (DMVs) with a view to reduce vehicular emissions in the city of Dar es Salaam, Tanzania. A multilevel perspective employing mixed methods of data collection was used to collect qualitative and quantitative data through document review, group discussions, in-depth interviews from selected Members of Parliament, policymakers, government officials, and brand new as well as DMVs dealers. Content, trend and discourse analysis enabled to interpret qualitative data. Findings reveal that taxing importation of DMVs is not significantly reducing air pollution. The side effects of the increased DMVs import in polluting the environment are increasing due to the rise in income levels, population increase and technical challenges of estimating marginal social cost. As DMVs tax was not reflected in the exporter’s cost schedule, the non-inclusion gives a market failure scenario a la Pigou Theorem. Rethinking of an optimal environmental tax remains a complex sociopolitical issue calling for research and policy attention.

Dynamic system optimal traffic assignment with atomic users: Convergence and stability

In this study, we analyse the convergence and stability of dynamic system optimal (DSO) traffic assignment with fixed departure times. We first formulate the DSO traffic assignment problem as a strategic game wherein atomic users select routes that minimise their marginal social costs, called a ‘DSO game’. By utilising the fact that the DSO game is a potential game, we prove that a globally optimal state is a stochastically stable state under the logit response dynamics, and the better/best response dynamics converges to a locally optimal state. Furthermore, as an application of DSO assignment, we examine characteristics of the evolutionary implementation scheme of marginal cost pricing. Through theoretical comparison with a fixed pricing scheme, we found the following properties of the evolutionary implementation scheme: (i) the total travel time decreases smoother to an efficient traffic state as congestion externalities are perfectly internalised; (ii) a traffic state would reach a more efficient state as the globally optimal state is stabilised. Numerical experiments also suggest that these properties make the evolutionary scheme robust in the sense that they prevent a traffic state from going to worse traffic states with high total travel times.

Dynamic parking charge–perimeter control coupled method for a congested road network based on the aggregation degree characteristics of parking generation distribution

Homogeneous traffic density is the precondition of macroscopic fundamental diagrams (MFDs) that exist in a regional road network. However, traffic density may be transformed by the effects of traffic flow transmission and parking generation in a dynamic system. Once the homogeneous and uniform traffic density is changed, the shape of the MFD curve is likely affected, and thus, the output efficiency of the road network decreases.Based on the existing research of the aggregation evaluation model of parking generation in a regional road network, the study analyses the relationship between the variation in parking generation aggregation and the variation ratio in the trip completion flow of the network through further analysis. On this basis, a dynamic parking charge–perimeter control coupled (DPCPCC) method in a macro road network is proposed to balance the traffic flow density in a dynamically congested sub-region that exists in multiple public parking lots and to improve the efficiency of traffic flow for the entire road network. Furthermore, the method optimizes the entire parking charge rate of each MFD sub-region, aiming for the lowest generalized cost, reduces the delay time of the road network by adjusting the perimeter control rate, and changes the traffic aggregation index by dynamic charging strategies to improve the congested sub-region outflow efficiency. Finally, the regional road network in the Binhu New District of Hefei is taken as an example, and three control scenarios consisting of the DPCPCC method, the static parking charge–perimeter control coupled (SPCPCC) method, and the proportional–integral (PI) method are analysed and compared.According to the analysis of the relationship between the parking generation aggregation index and MFD changes and the application of this relationship to verify the regional road network dynamic charging model, the results reveal that the DPCPCC method can reduce the marginal social cost and improve the operation efficiency of the road network compared with the SPCPCC and PI control methods.

Comparative Mathematical Study of the Relationship Between Marginal Social Cost and Pigouvian Tax in the Presence of Commodity and Wage Taxes: Putting Ramsey Theorem into Practice

The aim of this paper is to examine the relationship between the Pigouvian tax and marginal social cost in the presence of distortionary taxes such as commodity and wage taxes in a Ramsey setting. The Ramsey theory highlights the amount of tax required to raise a given revenue for the government which also maximizes household utility. Previous research in this regard has been carried out either under homogeneous household preferences or a constant marginal social cost. In this paper we go further by analyzing the relationship between Pigouvian tax and marginal social cost in the presence of commodity taxes when households have heterogeneous preferences as opposed to being assumed homogeneous. In addition, we also consider the relationship between Pigouvian tax and marginal social cost in the presence of wage tax when the marginal social cost is considered as a variable depending on Pigouvian tax as opposed to being considered a constant in previous literature. The results indicate that the Pigouvian tax in the presence of wage tax is higher when the marginal social cost was considered a variable as opposed to a constant. Under certain conditions, in the presence of commodity taxes it was observed that the value of the Pigouvian tax is higher when households have heterogeneous preferences as opposed to homogeneous preferences. The mathematical models used in this study enable to see the factors, such as homogeneity/heterogeneity of household preferences and marginal social cost assumed as a variable as opposed to a constant, that impact the dynamics in determining the optimal Pigouvian tax.
 Keywords: Distortionary tax, Ramsey theory, Pigou tax, Marginal social cost, Lagrange multiplier

Environmental costs estimation and mathematical model of marginal social cost: A case study of coal power plants

An increase in electricity production is proportional to environmental risks due to continuous energy production. The paper aims to quantitatively estimate the environmental costs and mathematically model the marginal social cost associated with the lifespan of the coal power plants. Results revealed South Africa Tier 1 company optimum level of electricity production per annum at around 2.15 gigawatts, considering the emission costs and reasonable profit. 85% of the total emissions during the combustion phase average cost of the C02 emission discharged by coal is calculated as 0.23c/KWh, 0.085c/kWh is calculated for NO2, while SO2 is 0.035c/KWh. Total emission cost represents 69.2% of the total cost of producing 1 MGW of electricity. The results confirmed the company losses to be insignificantly considerable to the evaluated environmental costs and capital investment. However, the use of this newly developed mathematical model depends on the source of energy production to confirm the feasibility and profitability of investment in coal-powered stations using environmental management accounting and marginal social cost approaches. AcknowledgmentThe authors would like to acknowledge the National Research Foundation and Durban University of Technology for financial support.

Are consumers attentive to local energy costs? Evidence from the appliance market

We estimate whether consumers respond to local energy costs when purchasing appliances. Using a dataset from an appliance retailer, we compare demand responsiveness to a measure of energy costs that varies with local energy prices versus purchase prices. We cannot reject that consumers respond to lifetime energy costs in the same way they respond to purchase prices under a wide range of assumptions. These findings run counter to the popular wisdom, which motivates energy standards, that energy costs are systematically undervalued due to various behavioral phenomena. They imply that electricity pricing that deviates from social marginal costs, due to failure to incorporate pollution externalities or due to other features in rate design, can have substantial distortionary effects on demand.

Efficiency and Equity Impacts of Energy Subsidies

Economic theory suggests that energy subsidies can lead to excessive consumption and environmental degradation. However, the precise impact of energy subsidies is not well understood. We analyze a large energy subsidy: the California Alternate Rates for Energy (CARE). CARE provides a price reduction for low-income consumers of natural gas and electricity. Using a natural field experiment, we estimate the price elasticity of demand for natural gas to be about −0.35 for CARE customers. An economic model of this subsidy yields three results. First, the natural gas subsidy appears to reduce welfare. Second, the economic impact of various policies, such as cap-and-trade, depends on whether prices for various customers move closer to the marginal social cost. Third, benefits to CARE customers need to increase by 6 percent to offset the costs of the program. (JEL C93, D61, H24, L94, L95, L98, Q48)

The Economics of Electric Vehicles

Electric vehicles (EVs) powered by renewable electricity are a centerpiece of efforts to decarbonize transportation. EV advocates also claim benefits from local pollution reductions, lower life-cycle costs to consumers, and improved energy security. We examine the theory and evidence behind these claims and evaluate when the market will produce the optimal path of EV adoption. Optimal EV policy is nuanced. While EVs driven in some locations reduce pollution, they increase pollution in others. While many consumers enjoy cost savings from EVs, some experience net benefits from choosing gasoline-powered cars, even after accounting for EV subsidies. And depending on the dynamic benefits of stimulating EV adoption today, optimal policy might front-load stimulus, even though the environmental benefits of EV adoption are likely to increase over time as electricity grids become cleaner. Reflecting these nuances, the policy landscape is complicated and often creates conflicting incentives for EV adoption in regions with ambitious adoption goals. We highlight several themes for policy design, including 1) promoting regional variation in EV policies that align private incentives with social benefits, 2) pursuing a time-path of policies that follows the trajectory of marginal benefits, and 3) rationalizing electricity and gasoline prices to reflect their social marginal cost. On the extensive margin, purchase incentives should ramp-down as learning-by-doing and network externalities that may exist diminish; on the intensive margin, gasoline should become relative more expensive than electricity (per mile traveled) to reflect cleaner marginal emissions from electricity generation.

Tax Competition with Two Tax Instruments - and Tax Evasion

We consider a world in which countries apply optimal taxes on mobile capital and savings (like in Bucovetsky and Wilson, 1991). Firms and savers may underreport income in order to avoid or evade taxation. We show that, even in the presence of underreporting, the equilibrium under tax competition may still be constrained-efficient (in the sense that there is no scope for welfare enhancing tax coordination). This is the case if the marginal social costs of underreporting savings and investment income are equal. The model demonstrates that, if source-based taxes on capital are inefficiently low, as is often assumed, taxes on savings must be inefficiently high. Constrained-efficient tax policy minimizes the social cost of underreporting. The results are robust to introducing taxes on profit or on labor income, if these types of income can be underreported as well. We conclude that commonly held assumptions on the need for coordination under tax competition need to be revised or qualified.

Analysis of Externalities of Economic Activity of the Enterprise

The problems of research of internalities and externalities with the further development of the general classification of externalities of economic activity of the enterprise are defined. The influence of negative and positive externalities on society and enterprise is considered. The concept of negative externalities differs from transaction costs. It is noted that transaction costs can be reflected in cash and can be offset by market inclusion in the price of the products, but this is not possible for externalities. It is emphasized that the purpose of economic activity of any enterprise is to exceed the positive externalities over the negative and achieve the maximum difference between them. The different time duration of the impact of the enterprise on third parties is given. The sign of externalities on the scale of action is emphasized. The externalities of the enterprise are considered in their essence according to the principles of sustainable development, highlighting economic, social and environmental externalities. It is emphasized that economic externalities can arise in the course of the whole business cycle of full-fledged work of all parts of the enterprise. In contrast to economic, social externalities affect people both within the enterprise, that is workers and citizens of the society in which the enterprise operates. And when it comes to environmental externalities, the mediator between the source and recipient of externalities is the environment. Externalities are distinguished according to the means of accounting and the degree of influence on the subject of perception. The necessity of regulation of externalities through internalization and actions of the enterprise with the help of state and market instruments is substantiated. It is emphasized that internalization is the transformation of negative externalities into positive ones in terms of convergence of marginal costs and benefits of the enterprise to marginal social costs and utility.

Efficiency and Equity Impacts of Energy Subsidies

Economic theory suggests that energy subsidies can lead to excessive consumption and environmental degradation. However, the precise impact of energy subsidies is not well understood. We analyze a large energy subsidy: the California Alternate Rates for Energy (CARE). CARE provides a price reduction for low-income consumers of natural gas and electricity. Using a natural field experiment, we estimate the price elasticity of demand for natural gas to be about -0.35 for CARE customers. An economic model of this subsidy yields three results. First, the natural gas subsidy appears to reduce welfare. Second, the economic impact of various policies, such as cap-and-trade, depends on whether prices for various customers move closer to the marginal social cost. Third, benefits to CARE customers need to increase by 6% to offset the costs of the program. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Norm-Based Feedback on Household Waste: Large-Scale Field Experiments in Two Swedish Municipalities

We conduct separate randomized controlled trials of norm-based feedback nudges on house-hold waste in two municipalities in western Sweden. Our main treatment presents recipients with accurate, household-specific feedback highly similar to the standard Home Energy Report design, but with residual (unsorted) waste as the object of comparison. We also test a novel ‘dynamic’ norm design informed by psychological research. Post-experimental reductions are on the order of 7-12% in both municipalities, substantially larger than inmost previous studies. We estimate that the reduction corresponds to a 30-60% increase in unit-based waste fees. Effect differences between our main treatment and the dynamic-norm treatment are not significant. We find that feedback nudges are highly cost-effective compared to alternative means for reducing household residual waste. However, net social benefits depend on whether existing waste fees internalize the marginal social cost of residual waste. Our results have implications for the usefulness of feedback interventions as well as for unit-based pricing of waste, on which our feedback materials rely.

The coronavirus trade-off - Life vs. economy: Handling the trade-off rationally and optimally.

The recent coronavirus outbreak has made governments face an inconvenient trade-off choice, i.e. the choice between saving lives and saving the economy, forcing them to make immensely consequential decisions among alternative courses of actions without knowing what the ultimate results would be for the society as a whole. This paper attempts to frame the coronavirus trade-off problem as an economic optimization problem and proposes mathematical optimization methods to make rationally optimal decisions when faced with trade-off situations such as those involved in managing through the recent coronavirus pandemic. The framework introduced and the method proposed in this paper are on the basis of the theory of rational choice at a societal level, which assumes that the government is a rational, benevolent agent that systematically and purposefully takes into account the social marginal costs and social marginal benefits of its actions to its citizens and makes decisions that maximize the society's well-being as a whole. We approach solving this trade-off problem from a static as well as a dynamic point of view. Finally, we provide several numerical examples clarifying how the proposed framework and methods can be applied in the real-world context.

Traffic and Welfare Impacts of Credit-Based Congestion Pricing Applications: An Austin Case Study

This study seeks smart credit-based congestion pricing (CBCP) solutions for maximally improving travelers’ welfare by varying toll levels and locations across the Austin, Texas network. Scenarios evaluated include selecting links with maximum delays by variably tolling bridges and by recognizing congestion externalities across all links. Travel demand models deliver inputs for normalized logsum differences to quantify and compare consumer surplus changes across traveler types, around the region. Results suggest limited tolling locations under four broad times of day can do more harm than good, unless travelers shift out of the PM and AM peak periods or revenues are returned to travelers as credits. When using CBCP across all congested links at congested times of day (with 10% of revenues retained to cover system administrative costs), an average net benefit of $1.61 per licensed driver per weekday is estimated, with almost all travelers benefiting. For example, 95% of the traffic analysis zones’ lowest value of travel time (VOTT) group (VOTT1 = $5/hour) are expected to benefit from the CBCP policy. Tolling at twice the difference between marginal social cost and average travel cost (on each subset of congested links) appears to benefit more people, although tolling high on various links adds to congestion elsewhere. For example: tolling Austin’s highest-delay-producing or “top 500” links is estimated to benefit 98.5% of the zones’ highest VOTT (VOTT5 = $45/hour) travelers, while raising vehicle-miles traveled by just 0.8% (as a result of more circuitous, congestion- and toll-avoiding travel).

Dynamics of pollutants’ shadow price and its driving forces: An analysis on China’s two major pollutants at provincial level

The rapid change in environmental protection in China raises our interests in evaluating the shadow price of sulfur dioxide (SO2) and chemical oxygen demand (COD), and in developing a framework for analyzing the association between pollutants’ shadow prices and their driving forces: technological change, scale efficiency change, and pure efficiency change. The imbalance across the provinces also draws our attention to a provincial-level analysis. The results show that the national average shadow prices of SO2 and COD showed a substantial upward trend during 2001 and 2015, with the mean value being $2582.67/ton and $1639.79/ton, respectively. In most eastern provinces, the shadow prices of both pollutants were relatively higher than those in the central and western regions. For the eastern region, technological change, scale efficiency change, and pure efficiency change that brought about by a variety of measures impacted the social marginal abatement cost of SO2 significantly. For the western region, these three factors significantly impacted the marginal abatement cost of COD. For the central region, a change in scale efficiency brought about by the adjustment of production scale and/or industrial structure significantly impacted the marginal abatement cost of SO2, and the other two factors significantly impacted the marginal abatement cost of COD. The results suggest the importance of establishing a regionally differentiated policy framework, emphasizing on the measures that previously have not impacted the social marginal abatement cost, and setting up better coordination of synergies between multiple pollutants.

A Duration Approach for Estimating the Marginal Renewal Cost at German Motorways

We estimate the marginal costs of road renewals as part of a social marginal cost scheme for road user charging. Within an analytical approach that mirrors the relationship between road deterioration, traffic load and road renewal, we use an accelerated failure time model for road pavement with the purpose to derive the effect from traffic increase on the length of road renewal cycles. Based on a comprehensive dataset for German motorways we fit a Weibull duration model with covariates such as traffic load from heavy vehicles as well as various control variables and derive the road deterioration elasticity with respect to heavy traffic. Similar to available studies for Sweden we find a deterioration elasticity below one, implying that Newbery’s (1985) fundamental theorem does not hold for the German motorway network. The shape parameter of the Weibull function indicates that there is an ageing or weathering effect, and higher traffic loads are not the sole factor impacting on shorter pavement lifetimes. Our estimations yield a marginal renewal cost, which makes up approximately 40% of the average renewal cost. It implies that road user charges based on marginal costs will not yield a sufficient revenue to cover total costs.

The potential of carbon neutral labeling to engage coffee consumers in climate change mitigation

Carbon neutral labeling of food products is a market-based approach to reduce carbon footprints in the agri-food sector. To better understand consumers’ preferences and attitudes towards a carbon neutral label on globally traded agri-food products, the willingness to pay (WTP) of German consumers for a carbon neutral label on specialty coffee was examined. A discrete choice experiment was conducted in Germany, where coffee is often sold with multiple labels or claims, in order to examine the WTP for alternative combinations of a carbon neutral label with either a Fair Trade label or a claim of direct trade coffee sourcing. Choice data were analyzed using random parameter logit models which determined a positive WTP for the carbon neutral label. This estimate exceeds the corresponding marginal costs of certification and the marginal social cost of carbon, yet it is relatively lower than the estimated WTP for the Fair Trade label and the direct trade claim. A positive synergy effect on utility was also determined for the combination of a carbon neutral label and a direct trade claim. If no additional information was provided, consumers often perceived coffee as a “natural product” that does not generate any greenhouse gas emissions. Thus, awareness-building policies are needed to make carbon neutral labels an effective market-based tool to reduce greenhouse gas emissions in the agri-food sector.

Optimal choice of capacity, toll, and subsidy for build-operate-transfer roads with a paid minimum traffic guarantee

Abstract Government sectors often provide guarantees in build-operate-transfer (BOT) roads to attract private investments. Since a fiscal burden would be incurred from the contingent liability of issuing a guarantee, charging a fee for the guarantee is considered an effective remedy for management of contingent liabilities in practice. This study incorporates the charge mechanism for minimum traffic guarantee (MTG) into consideration, and proposes a method to choose the optimal concession contract variables with a paid MTG. We find that the government sector will specify a lower toll and a higher capacity for a BOT road with a paid MTG. As a result, the society suffers a social welfare loss when providing a paid MTG. Meanwhile, both the charging fee of an MTG and the guaranteed traffic volume would increase the loss of social welfare, which means the incentive mechanism of private participation and the management of contingent liabilities (charging fee for MTG) are all at the expense of social welfare. Moreover, since the welfare loss is magnified under a high marginal social cost condition, the government should set the charging fee and guaranteed traffic volume according to the marginal social cost level. In addition, to obtain more insights, this paper has made two extensions to further investigate the effects of a paid MTG (1) when contracting with a risk averse private investor; (2) when the concession period is an endogenous variable. Based on our model results, this paper derives several policy implications regarding BOT contract design when a paid MTG is provided.

Endogenous public and private leadership with diverging social and private marginal costs

AbstractWe investigate endogenous timing in a mixed duopoly with price competition and different social versus private marginal costs. We find that any equilibrium timing patterns—Bertrand, Stackelberg with private leadership, Stackelberg with public leadership, and multiple Stackelberg equilibria—emerge. When the foreign ownership share in a private firm is less than 50%, public leadership is more likely to emerge than private leadership. Conversely, private leadership can emerge in a unique equilibrium when the foreign ownership share in a private firm is large. These results may explain recent policy changes in public financial institutions in Japan. We also find there is a nonmonotonic relationship between the welfare advantage of public and private leadership and the difference between social and private marginal costs for a private firm. A nonmonotonic relationship does not emerge in profit ranking. Similar results are obtained under quantity competition, although some properties are different.