Question

Draw the demand curve for an environmental service, for example carbon sequestration (process of capture and long-term storage of atmospheric carbon-dioxide) from tree planting and discuss what its slope means as a measure of willingness to pay for the service (explain the direction of slope). Label the axes on your graphs clearly. Draw the supply curve for the service and discuss its slope and how it measures the marginal costs of providing increasing levels of the service (explain the direction of slope). Identify the price, P*, and quantity, Q*, that would satisfy the static efficiency/equilibrium condition. Label the area of net benefit to society, i.e., consumer surplus (CS) and producer surplus (PS)

Answer 1

As we know that marginal cost are the additional cost for providing an additional unit of carbon sequestration service while ,

the marginal benefit represents the subsequent benefits following consumption of an additional unit of this service .

In the above figure , MC1 represents the marginal costs if the value of SIC stocks based on SC-CO₂ are not identified. The intersection between the MB and MC should represent the optimal amount that is set to pay for carbon sequestration service or the climate control cost , however at point A that is the point of intersection between MB and MC1 the value of SIC stocks based on SC- CO₂ are not identified.

Now the MC2 represents the marginal costs when these values of SIC stocks are identified. Thus the MC2 curve falls below MC1 curve and cut MB curve at point B with optimal quantity of Q2 and price of P2

It must be noted that :-

1) MC2 is lower than MC1 because overall climate control costs are decreasing because now the SIC stocks possess the benefit of Carbon sequestration which automatically decreases carbon emissions.

2) The shifting of MC1 to MC2 produces a positive effect where the socially optimal amount is greater than the current amount and prices are lower than before.