6. Explain how the public good problem of environmental services, where SMB>PMB,

Question

6. Explain how the public good problem of environmental services, where SMB>PMB, is due to nonrivalry and nonexclusion (otherwise called "free riding"). Using Ch. 3 (Markets and Ecosystems), Ch. 4 (Ecotourism), and Ch. 6 (Biodiversity) in Heal, explain how each of Heal's examples show how to establish exclusion or eliminate free riding. Explain the environmental service being commercialized or marketed by pointing out who are the buyers of the public good; who are the providers (sellers) of the environmental service; and how the suppliers are compensated for supplying the environmental service.

Explanation / Answer

Environment consists of sir , water , soil etc . We can thus see that these are natural resources which are found in abundant and available everywhere . We do not pay to breathe or we do not pay to use river water . Hence there is a problem of nonexclusion . Someone's consumption of air does not reduce another person's consumption for oxygen . On the other hand there is no marginal cost involved in consuming excess of such resurces . So they are non-rivalrous also . So private agencies do not bother about envirnmental problems . They are public goods because of this nature . If one private agency tries to invest in environmental problems the positive externalities are enjoyed by others too without paying for it . This is called the free-rider issue .

Elimination of free-riding problem can only be done by the public ownership of such endeavours like environmental problems . Taxation of the private sector based on amount of pollution is a way to control the problem .

Commercialization of environmental service can be done by laws where by pollution permits or pigouvian tax is levied . pollution permits are marketable in nature . So here for production firms have to buy these permits . Government is the seller of these permits . There permits have a certain price , hence they are tradeable .

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