Table Of ContentLecture Notes in Economics
and Mathematical Systems 534
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Marco Runkel
Environmental and
Resource Policy
for Consumer Durables
Springer
Author
Dr. Marco Runkel
Department of Economics
University of Munich
LudwigstraBe 28/V gb'/III
80539 Munich
Germany
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ISSN 0075-8442
ISBN 978-3-540-20569-2 ISBN 978-3-642-17011-9 (eBook)
DOl 10.1007/978-3-642-17011-9
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To Nicole
Preface
For many years, the economic analysis of environmental problems proceeds
on the assumption that the quantity of consumption goods is the main vari
able determining the extent of pollution caused by these goods. Only recently,
some economists took into account that certain product characteristics like
biodegradability, recycIability or durability play an important role in designing
an efficient environmental policy. To get a better understanding of this topic,
the research project 'Economic Analysis of Product-Related Environmental
Policy' was established in June 1998 at the University of Siegen, Germany.
The present book was written during my time as collaborator in this research
project. It is identical to my doctoral thesis which the Department of Eco
nomics at the University of Siegen accepted in June 2002.
I am extremely grateful to Rudiger Pethig who was the supervisor of the
above research project and my doctoral thesis. He introduced me to this ex
citing research field and steadily supported my work with a host of excellent
ideas and suggestions. By his comprehensive guidance and advice, he created
a stimulating atmosphere in which scientific research is a pleasure. I am also
indebted to my second supervisor Karl-Josef Koch. He was always open for
discussion and gave useful comments which improved my work. My sincere
thanks are due to Bernd Huber from the L'niversity of Munich for allowing
me to finish the doctoral thesis during the first months of my time at his
chair and to Walter Buhr who kindly agreed to act as the chairman of my
dissertation committee.
The present study has also benefited from the help of my colleagues. The
first and foremost thanks go to Thomas Eichner, my colleague in the above
research project. He not only provided patient support in fixing ideas, but
additionally wrote joint papers with me and became a very good friend. I
received helpful comments also from Andreas Wagener, Thomas Steger, Sao
Wen Cheng, Heike Johannes and Daniel Weinbrenner. Furthermore, the finan
cial support ofthe Deutsche Forschungsgemeinschaft DFG (German Research
Foundation) is gratefully acknowledged.
VIII Preface
My special thanks go to my family, in particular my parents who gave me,
at all times, the freedom to do those things I am really interested in. The most
important person, however, is my wife Nicole. Although she had to invest a
lot of time in her own education, she always supported me and gave me the
motivation and power to work on my doctoral thesis. I thank her for her love
and her unwavering confidence in me.
Munich, Marco Runkel
October 2003
Contents
1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2 Definitions, Assumptions and Basic Model. . . . . . . . . . . . . . . .. 11
2.1 Modeling Consumer Durables . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 11
2.1.1 Durable versus Nondurable Goods. . . . . . . . . .. . . . . . . .. 11
2.1.2 Decay Function of Consumer Durables ............... 13
2.1.3 Vintage Durable Goods ............................ 23
2.2 Basic Oligopoly Model without Pollution. . . . . . . . . . . . . . . . . .. 23
2.2.1 Model Description and Market Equilibrium ........... 23
2.2.2 Stationary State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 35
2.2.3 Comparative Statics of the Long Run Market
Equilibrium ...................................... 42
3 Regulating Production Emissions of Consumer Durables ... 47
3.1 The Model of Goering and Boyce (1999) .................... 48
3.1.1 Model Description and Market Equilibrium ........... 48
3.1.2 Market Equilibrium Revised. . . . . . . . . . . . . . . . . . . . . . .. 54
3.1.3 Second-Best Emissions Taxation. . . . . . . . . . . . . . . . . . . .. 57
3.1.4 Second-Best Emissions Taxation Revised. . . . . . . . . . . .. 60
3.2 Modified Model with Production Emissions. . . . . . . . . . . . . . . .. 67
3.2.1 Model Description and First-Best Welfare Optimum ... 67
3.2.2 Market Equilibrium and Laissez Faire . . . . . . . . . . . . . . .. 71
3.2.3 First-Best Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 78
3.2.4 Second-Best Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 81
3.3 Practicability of Durable Goods Regulation. . . . . . . . . . . . . . . .. 83
4 Regulating Solid Waste of Consumer Durables. . . . . . . . . . . .. 87
4.1 Durable Goods Markets with Commitment Ability of Producers 88
4.1.1 Model and Social Welfare Optimum ................. 88
4.1.2 Market Equilibrium and Laissez Faire . . . . . . . . . . . . . . .. 95
4.1.3 First-Best Regulation .............................. 101
X Contents
4.1.4 Second-Best Taxation .............................. 104
4.2 Durable Goods Markets without Commitment Ability of
Producers .............................................. 106
4.2.1 Model and Social Welfare Optimum ................. 106
4.2.2 Market Equilibrium and Laissez Faire ................ 110
4.2.3 First-Best Regulation .............................. 121
4.2.4 Second-Best Taxation .............................. 125
4.3 Implications for Practical Waste Policy ..................... 132
5 Recycling Policies for Consumer Durables ................. 139
5.1 Durable Goods Markets with Exogenous Product Durability .. 140
5.1.1 Model and Efficient Allocation ...................... 140
5.1.2 Benchmark Market System ......................... 149
5.1.3 Market Failure and its Correction ................... 154
5.2 Durable Goods Markets with Endogenous Product Durability. 156
5.2.1 Model and Efficient Allocation ...................... 156
5.2.2 Benchmark Market System ......................... 167
5.2.3 Market Failure and its Correction ................... 172
5.3 Summary and Practical Considerations ..................... 180
6 Conclusion ................................................ 185
References ..................................................... 189
List of Figures ................................................. 195
List of Tables .................................................. 197
1
Introduction
In the last decades, environmental problems have received increasing atten
tion. Eminent examples are global warming, pollution of the world oceans
and deforesting of the tropical rain forest. From an economic point of view,
environmental problems are externality problems leading to market failure. In
order to illustrate this, consider a producer who manufactures a consumption
good. On the one hand, this economic activity causes production costs as, for
example, costs of material, labor and capital inputs. On the other hand, pro
duc ing the consumption good usually generates emissions like smoke, waste
water or solid waste. The emissions cause environmental damage which leads
to environmental costs. A market economy typically comprises markets for
material, labor and capital. Hence, the producer has to pay for these produc
tion inputs and accounts for marginal production costs in her manufacturing
decision. In contrast, the market economy usually fails to provide price signals
for environmental assets. The producer pollutes the environment for free and
does not account for marginal environmental costs in her production decision.
Therefore, the price of the consumption good is inefficiently low since it does
not reflect full social costs. The inefficiently low price leads to an inefficiently
high quantity of the good with the consequence that the production process
of the good is too environmental intensive. This argumentation can be found,
for example, in Baumol and Oates (1988) or Tietenberg (1996).
Market failure is typically considered a justification of governmental regu
lation of the economic activity which generates emissions. The first regulatory
approach in economic literature was Pigouvian taxation considered by the
seminal work of Pigou (1938). The idea of the Pigouvian approach is to tax
the emissions generating activity by its marginal environmental costs. This
internalizes the environmental externality, i.e. the tax induces producers to
account not only for marginal production costs, but also for marginal envi
ronmental costs. The consumption good becomes more expensive such that
fewer units are produced and sold and such that the amount of emitted pol
lutants is reduced. In sum, Pigouvian taxation renders the production of the
consumption good efficient.
Of course, the economic analysis of environmental policy is more compre
hensive. Economic literature additionally inquires into the efficiency properties
