Transcript No Slide Title

Mr. Massimo M Beber
Fellow in Economics
Sidney Sussex College
Cambridge CB2 3HU
[email protected]
people.pwf.cam.ac.uk/mb65/mpes
European Economics
Lecture 5
ADDRESSING MARKET FAILURE:
NATURAL MONOPOLIES AND ENVIRONMENT
(Provisional Version: last updated 7th November 2007)
M.Phil. in Contemporary European Studies 2007/8
©Massimo M Beber 2007
Lecture Outline
• Market failures occurs whenever the standard governance
framework of property rights, contract and competition law
fails to ensure the efficiency of economic activity
• Market failures characterized by increasing spill-overs from the
national to the EU-level;
– I: integrated networks – the cross-border availability of utilities and other
services characterized by elements of natural monopoly.
– II: environmental externalities – the “collateral damage” of economic
activity.
• But public or government failure may be even more costly to
society, than the market failure which had appeared to justify it.
European Networks/Public Utilities
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Gas, electricity, water
Telecoms
Postal services
Railways
Air transport
Natural monopolies, or areas of political
interference - “national exclusive rights”?
EU Networks Regulation
Historical Background
• Art 86(1-3) TEC (ex 90(3) EEC) provides the
contested legal basis
• Only in the 1990’s did a “new competition
policy” emerge from within the “1992” agenda
• Additional pressure from privatized utilities
• Yet political constraints (of patronage,
unionisation, distribution) are heavy
• A lot of smoke, but still a relatively small fire
Restricted Competition
• The rationale
– natural monopoly (technical efficiency requires
single operator)
– Universal/Public Sector Obligations
• The techniques of restricted competition
– Nationalization
– Legal monopoly
– Regulatory regime preventing/restricting
competition
Network Regulation
The Basic Principles
• “Old” policy
– existence of exclusive national rights justified by its
necessity in order that the utility could perform
“services of general economic interest” assigned to
it;
– exercise could be challenged as disproportionate
• The new regulation
– necessity test
– reversed burden of proof test
EU Networks - Current Issues
• How much in-built redundancy? (Brown-outs etc.)
• Completing the shift from sectoral battles to an
integral part of the single market framework
• Get down to work, beyond the Lisbon rhetoric and the
Carrdiff process, OMC only horizontal forum:
ultimately address the “independent agency” issue,
currently preventing a EU regulator
• Significant potential gains (greater competition,
renewed and expanded infrasructure, choice
EU Environmental Policy
Historical Background
• A post-Rome policy area – “continuous and
balanced expansion” (1957);
• 1972 European Council Declaration (1972)
• 1986 Art 130r SEA (1986)
• “sustainable growth respecting the
environment” (1992)
• “sustainable development” (1997)
A Natural European Policy Area
• “Environmental dumping” skews the level playing
field in high-polluting industries;
• National liberalization and privatization did add to the
pressure for EU-wide action
• But this will in turn feed back on national laggards
• Single market and competition rules apply naturally to
the network industries
• Potential for a significant contribution to the EU’s
economic performance (“common concern” per Art. 99
TEC)
Three Phases of EU Policy-Making
• Pre-SEA (1987): “Incidental policy-making”
• SEA to Nice (2003): Commission activism and
“treaty games”
• Post-Nice: from policeman to consultant?
EU environmental policy I
• 1972 Heads of State Declaration->EAP I (1973)
–
–
–
–
–
–
–
–
Prevention
Action at source
Polluter pays
Environmental impact assessment in the early stage of policy
design
Ban on environmental dumping
Subsidiarity
Co-ordination of national environmental policies to avoid
competitive distortions
Single EEC negotiating stance
EU environmental policy II
• SEA (1986): Title “The Environment”:
– To preserve, protect and improve the quality of the
environment;
– To contribute to the protection of human health;
– To ensure a prudent and rational utilisation of natural
resources;
• Maastricht Treaty (TEU 1992)
– Pervasiveness
– Precaution
• Amsterdam Treaty and Consolidated Treaty (TEC
1997)
– Pro-active role in international negotiations
Environmental Economics - EE
The Basic Analysis
Price, marginal
cost and
benefit
Supply
(social cost)
Supply
(private cost)
P (social)
P (private)
Demand
Q (social)
Q (private)
Quantity
EE - The Implications
• A marginal choice - some pollution is desirable;
• A market failure requiring institutional
intervention
– Collective bargaining
– Public, administrative regulation
– Market creation
The bargaining route
• The lack of established environmental property
rights implies “bribes” rather than “prices”
• Non-excludability and free-riding a major
objective difficulty
• “Polluter pays” vs “sufferer pays”
– normally an additional ethical difficulty, given the
power asymmetry between polluter and sufferers;
– but some exceptions arise where the polluter is
poorer than the sufferer
ENVIRONMENTAL POLICY:
A CLASSIFICATION
Quantified objective
Yes
C&C
Prescribed
Technology-
Yes
behaviour
No
based standards
Standard-setting MBI’s,
No
and
negotiated suasion
agreements
moral
Environmental Policy Instruments
• Command and Control (quantity/process focus)
– Output cap
– Ambient-based standards
– Technology-based standards
• Market Based Instruments - MBI’s (price focus)
– Pigouvian Taxes
– Other environmental Taxes
• Moral Suasion
Command and Control
• The “old” approach to environmental policy
– does not require economic analysis of the industry
– typically did not include cost-benefit analysis
• Trusts government bureaucracy
Cost-Benefit Analysis (CBA)
• Requirement under 130R(3) Maastricht Treaty
alongside
– scientific data
– regional circumstances
– the Union’s overall economic and social
development, and its regional balance
Market-Based Instruments (MBI)
• The “new” approach to environmental policy
• Reflects changes in intellectual consensus
– “public-choice theoretical ” scepticism of the
motives of bureaucratic regulation
– “neoliberal” optimism about the feasibility of
designing and regulating a system of market
incentives
MBI I: Environmental Taxes
• “Pigouvian taxes”
– at the socially optimum output, the tax should be
equal to the externality
– informationally demanding: only some national
examples
• Ad hoc environmental taxes
– often the result of bargaining rather than CBA
– still a lowest-cost solution to achieve a given cut in
pollution
MBI II: Pollution Markets
• Directive 2004/35/EC: establishes liability in
respect of the prevention and remedying of
environmental damages
• Directive 2003/96/EC Framework Directive on
energy taxation
• Directive 2003/87/EC: the European
Greenhouse Gas Emission Allowance Trading
Scheme
MBI III?: Moral Suasion
• Directive 90/313/EEC and 2003/4/EC: freedom
of environmental information
• Regulation 761/2001: Eco-Management and
Audit Scheme (EMAS)
• Regulation 1980/2000: EU eco-labelling
Current Issues in EU Environmental Policy
• A “policy under siege”:
– stagnation
– enlargement
– loss of policy credibility
• “Theme-oriented” vs “medium-specific” approach
• Operationalizing the “Precautionary Principle”
• The distributional dimension
– Already present in the Maastricht reform of the Structural
Funds;
– a resented “structural imperative” in the 2004 Eastern
enlargement