Environmental EconomicsEnvironmental Economics

Sedef AkgüngörSedef Akgüngör

Lecture 5Lecture 5

Measuring CostsMeasuring Costs

CBA aims to translate all impacts into CBA aims to translate all impacts into monetary values. monetary values.

‘‘translating’ environmental and social translating’ environmental and social costs into a single unit of measure – costs into a single unit of measure – money – that they already use to make money – that they already use to make decisions. In theory this allows all decisions. In theory this allows all impacts to be put on the same footing.impacts to be put on the same footing.

Measuiring Costs of Environmental Measuiring Costs of Environmental Clean UpClean Up

Expected expenditures by firms on Expected expenditures by firms on pollution control equipment.pollution control equipment.

Engineering approach to measuring costsEngineering approach to measuring costs

These are predicted costs. They require These are predicted costs. They require making assumptions about future making assumptions about future behavior.behavior.

Opportunity cost- value of resources in Opportunity cost- value of resources in their best alternative use.their best alternative use.

Forest fires in Indonesia and elsewhere in Forest fires in Indonesia and elsewhere in Southeast Asia are being deliberately lit by Southeast Asia are being deliberately lit by agricultural firms, causing serious health and agricultural firms, causing serious health and environmental damage”environmental damage”UN’s food and agriculture bodyUN’s food and agriculture body

This should not come as a surprise to anyone. This should not come as a surprise to anyone. That is what happens when you have laws that That is what happens when you have laws that give land to those that clear the forest and turn it give land to those that clear the forest and turn it into agriculturally productive land. Yet many into agriculturally productive land. Yet many people wonder why deforestation continues to people wonder why deforestation continues to be a big problem in many parts of the world.be a big problem in many parts of the world.

Opportunity CostOpportunity Cost

Mandatory costs of pollution control.Mandatory costs of pollution control.

Cost-benefit analysisCost-benefit analysis

Engineering costs: An approach for Engineering costs: An approach for measure of environmental protection.measure of environmental protection.

Efficiency of resource use.Efficiency of resource use.

Efficient level of pollution / clean up.Efficient level of pollution / clean up.

The optimal level of an externalityThe optimal level of an externality

The market for SUVs in Canada.

Unregulated.

P

QQ1

D

S

The optimal level of an externalityThe optimal level of an externality

So, the market left alone will lead to the So, the market left alone will lead to the sale of Q1 SUVs. But this is too high. sale of Q1 SUVs. But this is too high. The optimal level, the level that takes The optimal level, the level that takes into account ALL COSTS of SUVs is into account ALL COSTS of SUVs is Q2. Q2.

How do we get there?How do we get there?

1. 1. RegulationRegulationA limit on production directly – a quota on the A limit on production directly – a quota on the number of SUVs that can be produced.number of SUVs that can be produced.A regulation that forces car manufacturers to install A regulation that forces car manufacturers to install technology that will reduce emissions. This raises technology that will reduce emissions. This raises the firm’s MC curve. Ideally, would want to set the firm’s MC curve. Ideally, would want to set enough regulations so the firm’s MC curve enough regulations so the firm’s MC curve increases by exactly the amount of the externality. increases by exactly the amount of the externality.

2. 2. TaxesTaxesSet a tax equal to the cost of pollution. Applied to Set a tax equal to the cost of pollution. Applied to producers, this raises the MC curve by exactly the producers, this raises the MC curve by exactly the right amount, and leads to an efficient outcome. right amount, and leads to an efficient outcome.

3. 3. Market for Externality RightsMarket for Externality Rights

The optimal level of an externalityThe optimal level of an externalityRegulation:

1. Determine the optimal amount of SUVs in the economy. Here, this would be at Q2. Then,

2. Quotas

P

QQ1

P*

D

S

S + EXT

Q2

The optimal level of an externalityThe optimal level of an externalityRegulation:

1. Determine the optimal amount of SUVs in the economy. Here, this would be at Q2. Then,

2. Quotas or technology regulation

P

QQ1

P*

D

S

S2

Q2

The optimal level of an externalityThe optimal level of an externalityThe market for SUVs in Canada.

Rather than requiring technology, the government could just impose a tax = X that the firm must pay a tax=X for each SUV it produces. This shifts the supply curve to the left (reduces supply due to higher costs of production).

P

QQ1

P*

D

S

S+TAX

Q2

Spillover costs=vertical

distance

What about a positive externality?What about a positive externality?

Goods that create positive externalities Goods that create positive externalities tend to be underproduced in the tend to be underproduced in the market. market.

Why? Why? The benefit accrues to someone (or some The benefit accrues to someone (or some

firm) other than the person who bought firm) other than the person who bought the product. Since the benefits of the the product. Since the benefits of the benefit does not have to pay for the benefit does not have to pay for the benefit, their benefit is not considered benefit, their benefit is not considered in the market. in the market.

Example: The Flu Shot. When you get a flu Example: The Flu Shot. When you get a flu shot, it benefits me. But I don’t have to shot, it benefits me. But I don’t have to contribute to your flu shot, nor to anyone contribute to your flu shot, nor to anyone else’s, so the number of people who get a else’s, so the number of people who get a flu shot would be inefficiently low if the flu shot would be inefficiently low if the government was not involved. government was not involved.

The optimal level of an externalityThe optimal level of an externality

The market for flu shots in Manitoba

Unregulated – no government involvement

P

Number of PeopleQ1

D

S

The optimal level of an externalityThe optimal level of an externalityTo find the optimal level, we want to consider not just the value for each person of that person getting a flu shot, but the value to everyone of that person getting a flu shot.

Suppose that the spillover benefit =B. Here, B varies with Q, since the externality of flu shots is not uniform. The more people innoculated, the higher the benefit to others.

P

Number of People

Q1

D

S

D+B

Q2

What about a positive externality?What about a positive externality?

How do we get to Q2 with a positive externality?How do we get to Q2 with a positive externality?

A. A. Subsidize the providersSubsidize the providers. Provide a . Provide a subsidy for the producers of flu shots. This subsidy for the producers of flu shots. This lowers their costs, moves the supply curve lowers their costs, moves the supply curve out, until the optimal level is reached. out, until the optimal level is reached.

The optimal level of an externalityThe optimal level of an externality

P

Number of People

Q1

D

S

D+B

Q2

S2

What about a positive externality?What about a positive externality?

How do we get to Q2 with a positive externality?How do we get to Q2 with a positive externality?

A. A. Subsidize the providersSubsidize the providers. Provide a . Provide a subsidy for the producers of flu shots. This subsidy for the producers of flu shots. This lowers their costs, moves the supply curve lowers their costs, moves the supply curve out, until the optimal level is reached. out, until the optimal level is reached. B. B. Subsidize the purchasersSubsidize the purchasers. Provide a . Provide a rebate for flu shots. Then, for any given rebate for flu shots. Then, for any given market price, people will buy more flu shots. market price, people will buy more flu shots. This shifts demand up.This shifts demand up.

Implementing the Efficiency Implementing the Efficiency StandardStandard

Efficiency criteria: Hıw much pollution is Efficiency criteria: Hıw much pollution is acceptableacceptable

Benefit cost studiesBenefit cost studies

Safety standardsSafety standards– For example: The Stockholm Convention on For example: The Stockholm Convention on

Persistent Organic PollutantsPersistent Organic Pollutants

TURKEY’S DRAFTNATIONAL IMPLEMENTATION PLAN

FORTHE STOCKHOLM CONVENTION

ONPERSISTENT ORGANIC POLLUTANTS

UNIDO-POPs PROJECT(Project No. GF/TUR/03/008)

This document is Turkey’s draft National Implementation Plan (NIP) under the Stockholm Convention on Persistent Organic Pollutants (POPs). It includes a review of current and proposed actions related to Turkey’s obligations under the Convention.

The Stockholm Convention is a global treaty to protect The Stockholm Convention is a global treaty to protect human health and the environment from persistent human health and the environment from persistent organic pollutants (POPs).  organic pollutants (POPs).  POPs are chemicals that remain intact in the POPs are chemicals that remain intact in the environment for long periods, become widely distributed environment for long periods, become widely distributed geographically, accumulate in the fatty tissue of living geographically, accumulate in the fatty tissue of living organisms and are toxic to humans and wildlife.  organisms and are toxic to humans and wildlife.  POPs circulate globally and can cause damage POPs circulate globally and can cause damage wherever they travel.  In implementing the Convention, wherever they travel.  In implementing the Convention, Governments will take measures to eliminate or reduce Governments will take measures to eliminate or reduce the release of POPs into the environment. the release of POPs into the environment.

Regulatory Impact Analysis: Regulatory Impact Analysis: Example of Lead StandardsExample of Lead Standards

Lead: Lead is a heavy, soft, toxic, gray-blue metal Lead: Lead is a heavy, soft, toxic, gray-blue metal present in some insecticides, auto exhaust, industrial present in some insecticides, auto exhaust, industrial emissions, and a variety of products. emissions, and a variety of products. For example, lead is found in automotive and storage For example, lead is found in automotive and storage batteries and is used in the manufacture of paint, batteries and is used in the manufacture of paint, enamel, ink, glass, rubber, ceramics, and chemicals. enamel, ink, glass, rubber, ceramics, and chemicals. In the human body, lead inactivates the sulfhydryl (SH) In the human body, lead inactivates the sulfhydryl (SH) groups of enzymes necessary for the synthesis of heme, groups of enzymes necessary for the synthesis of heme, which is the oxygen-carrying pigment in the blood. Lead which is the oxygen-carrying pigment in the blood. Lead may also interfere with other metabolic systems of cells.may also interfere with other metabolic systems of cells.

History suggests that along with the valuable History suggests that along with the valuable uses of lead for weapons, containers, and other uses of lead for weapons, containers, and other items, the toxicity of lead was also known. items, the toxicity of lead was also known.

Some believe, for example, that the fall of the Some believe, for example, that the fall of the Roman Empire was based in part on the Roman Empire was based in part on the common use of lead for drinking vessels. common use of lead for drinking vessels.

Native Americans conscripted as miners by the Native Americans conscripted as miners by the Spanish also suffered from lead exposure Spanish also suffered from lead exposure

Regulation of LeadRegulation of Lead

Safe Drinking ActSafe Drinking Act

Standards to Lead ConcentrationStandards to Lead Concentration

Option A: Most stringent (5 micrograms Option A: Most stringent (5 micrograms per liter)per liter)

Option B: Loose standard (5-15 Option B: Loose standard (5-15 micrograms depending on per capita cost)micrograms depending on per capita cost)

Option C: Least stringent (15 micrograms)Option C: Least stringent (15 micrograms)

Need to estimate the costsNeed to estimate the costs

Which of the existing systems nationwide Which of the existing systems nationwide would require remedial action and the would require remedial action and the level necessary to achieve three different level necessary to achieve three different targets.targets.

Benefits coming from lower lead exposure: Benefits coming from lower lead exposure: Health benefitsHealth benefits

Need to quantify benefits for hypertension, Need to quantify benefits for hypertension, chronic heart disease, stroke data..chronic heart disease, stroke data..

Dose-response functionsDose-response functions

Reduction of mitigating costs as well as Reduction of mitigating costs as well as mitigating costs; screening costs.mitigating costs; screening costs.

Annual Estimated Benefits and Annual Estimated Benefits and CostsCosts

A B C

Total Benefits 68,957 63,757 24,325

Total Costs 6,722 4,156 3,655

B/C ratio 11.0 15.3 6.7

Marginal Benefits

5,192 39,440 24,325

Marginal Costs 2,117 500 3,655

Marginal B/C Ratio

2.5 78.8 6.67

Selection CriteriaSelection Criteria

Choose the option that will maximize net Choose the option that will maximize net monetary benefits.monetary benefits.

A: 62 685A: 62 685

B: 59 601B: 59 601

C: 20 670C: 20 670