Market-based policies in General and Partial Equilibrium

An issue in scale.

Content

TBD.

Transcript

Appendix

Learning objectives

After this chapter, you should be able to:

  • Distinguish partial equilibrium from general equilibrium reasoning.
  • Explain why environmental policies often fail when analyzed in isolation.
  • Describe how prices, incomes, and land use interact across sectors.
  • Identify common sources of leakage, rebound, and distributional effects.
  • Explain why Earth–economy modeling requires a general equilibrium core.
  • Recognize when “local” intuition breaks down in a connected economy.

Why isolation is misleading

Most policy debates begin with a narrow question:

  • “What happens if we tax carbon in electricity?”
  • “What happens if we protect this forest?”
  • “What happens if we subsidize electric vehicles?”

These are partial-equilibrium questions.
They hold “everything else” constant.

But in the real world:

  • prices change,
  • incomes shift,
  • trade responds,
  • land reallocates,
  • behavior adapts.

There is no “everything else.”

Environmental policy acts on a web.

Partial versus general equilibrium

Partial equilibrium

  • Focuses on one market.
  • Holds others fixed.
  • Useful for:
    • intuition,
    • local mechanisms,
    • first-order effects.

Example: - “A carbon tax raises electricity prices and reduces demand.”

True—and incomplete.

General equilibrium

  • Considers all markets simultaneously.
  • Allows:
    • prices,
    • wages,
    • land rents,
    • and trade flows to adjust.

Example: - “A carbon tax changes electricity prices, which shifts production, which changes wages, which alters consumption, which affects land demand, which feeds back into emissions.”

Both perspectives are valid.
Only one is sufficient for Earth–economy systems.

The three classic surprises

Environmental policies routinely generate effects that surprise partial analysis.

1) Leakage

A policy reduces harm in one place,
but activity shifts elsewhere.

  • Forest protection in one region → deforestation in another.
  • Carbon pricing in one country → production moves abroad.

The planet does not care where emissions occur.

2) Rebound

Efficiency lowers cost, which increases use.

  • Efficient cars → more driving.
  • Efficient irrigation → more water-intensive crops.
  • Efficient energy → more total energy services.

Rebound is not failure—it is behavior.

3) Distribution

Policies change:

  • prices,
  • wages,
  • land rents,
  • and returns to capital.

A carbon tax:

  • raises energy prices,
  • burdens low-income households,
  • benefits clean-energy owners.

Ignoring distribution invites backlash.

A land–energy example

Suppose a country:

  • subsidizes biofuels,
  • taxes fossil fuels,
  • and rewards carbon sequestration.

Partial view:

  • cleaner energy,
  • lower emissions.

General view:

  • crop prices rise,
  • farmers expand acreage,
  • forests are cleared,
  • food prices increase,
  • imports grow,
  • land shifts abroad.

The net climate effect becomes ambiguous.

The equity effect becomes central.

Why Earth–economy models are GE models

Earth–economy models embed:

  • production,
  • consumption,
  • trade,
  • factor markets,
  • land allocation,
  • and environmental stocks

in a single system.

They allow:

  • every price to move,
  • every sector to respond,
  • every region to interact.

This is not academic excess.

It is the minimum structure needed to ask:

  • Does this policy actually reduce global harm?
  • Who bears the cost?
  • Where does activity relocate?
  • What happens to land and ecosystems?
  • Does inclusive wealth rise or fall?

A conceptual picture

Think of the economy as:

  • households supplying labor,
  • firms demanding inputs,
  • sectors competing for land,
  • regions trading goods,
  • ecosystems providing services.

A policy shock:

  • changes one node,
  • ripples through all others,
  • and feeds back.

General equilibrium is the language of those ripples.

The Doughnut perspective

Partial policies often:

  • fix one boundary,

  • while worsening another.

  • Biofuels help climate but harm biodiversity.

  • Cheap food helps hunger but harms water and soil.

  • Protection saves species but raises prices.

The Doughnut is multi-dimensional.

Only system-wide analysis can test:

Are we moving into the safe-and-just space,
or just shifting the pressure?

Open resources you can remix for this chapter

All are compatible with a CC BY-NC-SA Quarto book.

  • Principles of Economics (UMN Libraries Publishing, CC BY-NC-SA)
    Use for: market interaction, trade, and equilibrium logic.
    https://open.umn.edu/opentextbooks/textbooks/principles-of-economics

  • Natural Resources Sustainability: An Introductory Synthesis (CC BY-NC-SA)
    Use for: systems framing and sustainability tradeoffs.
    https://uen.pressbooks.pub/naturalresourcessustainability/

  • InTeGrate teaching materials (many CC BY-NC-SA)
    Use for: multi-sector and systems-based exercises.
    https://serc.carleton.edu/integrate/teaching_materials/index.html

Exercises

  1. Partial vs general.
    For each policy, list one effect a partial analysis would miss:

    • a carbon tax,
    • a forest protection program,
    • a water efficiency subsidy.

  2. Leakage chain.
    Describe a plausible chain of events by which a local conservation policy could increase pressure elsewhere.

  3. Equity lens.
    Choose an environmental policy.
    Identify one group that benefits and one that bears cost.