Outstanding article, and the analysis is and should be by no leans limited to the environmental arena. Anyone addressing economic forces in any sector of the world should understand and make use of the tools outlined in this article. I have just one quibble, and it’s one only a wonk would see: The authors say, “The relevant thing about monopolists, for our purposes, is that they can control overall supply and, therefore, prices. The only checks on monopoly power are anti-trust action…and public utilities commissions…” This is incorrect; as long as there is any elasticity of demand, at all, a monopolist’s power and ability to set prices are limited, and those limits are substantial. See, for example, my article (which has nothing to do with the environment, but is only about the limits of monopoly power): “The Economic Case for the Coexistence of Monopoly Power and Goodwill in the Cable Television Industry,” published in the Winter 1994 edition of the Hastings Communications and Entertainment Law Journal, http://heinonline.org/HOL/LandingPage?handle=hein.journals/hascom16&div=16&id;=&page;=
Joshua thanks for the correction. Indeed the monopolist’s market power isn’t limitless. The important idea for our purposes is that there is some degree of market power and scope for internalizing environmental costs of production without compromising the competitiveness of the firm. But your point is worth keeping in mind when looking at markets for basic needs like energy and transportation, compared to those for commodities like corn and cotton, which have more substitutes. I haven’t looked up the demand elasticities for all these goods, but suspect it’s greater for the latter ones. Thanks again for the insight.
One has to be very careful in doing these analyses that the correct relevant market is chosen. For example, comparing “energy and transportation” to “corn and cotton” isn’t really fair. Energy and transportation should be compared to food and textiles, and corn and cotton to natural gas and buses. The demand for energy may be inelastic, but if you redefine the relevant market as, for example, natural gas for the generation of energy, then there is substantial elasticity of demand because there are readily available substitutes, such as coal or solar photovoltaics, for the generation of energy (albeit with substantial costs of changing from one input to the other and wide variances in externalities).
COMMENTS
BY Joshua Genser
ON February 28, 2015 02:55 PM
Outstanding article, and the analysis is and should be by no leans limited to the environmental arena. Anyone addressing economic forces in any sector of the world should understand and make use of the tools outlined in this article. I have just one quibble, and it’s one only a wonk would see: The authors say, “The relevant thing about monopolists, for our purposes, is that they can control overall supply and, therefore, prices. The only checks on monopoly power are anti-trust action…and public utilities commissions…” This is incorrect; as long as there is any elasticity of demand, at all, a monopolist’s power and ability to set prices are limited, and those limits are substantial. See, for example, my article (which has nothing to do with the environment, but is only about the limits of monopoly power): “The Economic Case for the Coexistence of Monopoly Power and Goodwill in the Cable Television Industry,” published in the Winter 1994 edition of the Hastings Communications and Entertainment Law Journal, http://heinonline.org/HOL/LandingPage?handle=hein.journals/hascom16&div=16&id;=&page;=
BY John Reid, Conservation Strategy Fund
ON March 2, 2015 02:40 PM
Joshua thanks for the correction. Indeed the monopolist’s market power isn’t limitless. The important idea for our purposes is that there is some degree of market power and scope for internalizing environmental costs of production without compromising the competitiveness of the firm. But your point is worth keeping in mind when looking at markets for basic needs like energy and transportation, compared to those for commodities like corn and cotton, which have more substitutes. I haven’t looked up the demand elasticities for all these goods, but suspect it’s greater for the latter ones. Thanks again for the insight.
BY Joshua Genser
ON March 2, 2015 03:24 PM
One has to be very careful in doing these analyses that the correct relevant market is chosen. For example, comparing “energy and transportation” to “corn and cotton” isn’t really fair. Energy and transportation should be compared to food and textiles, and corn and cotton to natural gas and buses. The demand for energy may be inelastic, but if you redefine the relevant market as, for example, natural gas for the generation of energy, then there is substantial elasticity of demand because there are readily available substitutes, such as coal or solar photovoltaics, for the generation of energy (albeit with substantial costs of changing from one input to the other and wide variances in externalities).