the basics: is water an economic good? fundamentals of

1

Slide 1

Economics, Water Use, and the Environment © 2011

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Slide 2 Lessons 1 & 2

• The basics: Is water an economic good?

– Fundamentals of economic reasoning:

• Scarcity, Choice & Cost

• Incentives

Lessons 3, 4,& 5

• Water Issues and economic reasoning

– Institutions shape incentives

• Property rights

• Rule of law

Lessons 6 & 7

• Transfer: econ. of water to econ. of environmental issues

– Dealing with externalities: Gov’t & markets?

– Solutions are found at the marginEconomics, Water Use, and the Environment ©2011

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Slide 3

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2

Slide 4 Role Play: How Much Water Do You Need?

Parent of Triplets

Car Nut

Gardener

Busy Executive

Economics, Water Use, and the Environment ©2011

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Slide 5

Policy Would Your water

usage change ?

If so, How?

What substitutions

would you make?

How would this

policy change your

water bill?

New Water Policies

Role __________ Current Water Bill $10 - $25/month

The mayor asks

everyone to conserve

water.

The city changes

all water bills to a

flat $20 fee/mo.

The city changes all

water bills to a flat

$100 fee/mo.

You are billed $1

per 1000 gal. used

You are billed 1¢

per gallon used


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Slide 6

When is a basketball a substitute for water?

When is a basketball a substitute for water?


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3

Slide 7

When is coal a substitute for water?

When is safflower a substitute for water?

When is a broom a substitute for water?


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Slide 8

Unit Goals:

demonstrate the power of the economic way of thinking in

the context of environmental studies

elevate the level of discourse on the environment from

accusation to analysis, from sin to issue

Economics, Water Use and the Environment

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Slide 9

Is Water an Economic Good?

• Is Water Scarce ?

• Does people’s use of water reflect

rational choice?

• Does people’s use of water

respond to incentives ?


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Slide 10


Scarcity:

limited resources to satisfy unlimited wants and

needs forces choice

choice is necessary and imposes opportunity

costs

Rational Choice:

People choose the alternative THEY believe

offers the greatest benefits over costs

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Slide 11

Economics, Water Use, and the Environment ©2011FTE

Incentives:

rewards or punishments for behavior

Positive

Negative

Perverse

may be monetary, but frequently are not

price IS an extremely strong incentive

changing incentives changes behavior in

predictable ways

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Slide 12 Review


Water IS an economic good:

– It’s scarce

• it has multiple uses, and one use entails giving up another (opportunity cost)

– people’s use of water responds to incentives

• price is an extremely powerful incentive for people to find and use substitutes for water

How much water do you “NEED” ?

– It depends:

• on the circumstances

• on personal interests, tastes, and values

• On the price of water

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5

Slide 13


Why Would Anyone DO That?

QUIZ:

• A farmer in central California grows rice. Rice is grown in flooded paddies.

• (Central California is a desert!)

• The water the farmer uses to flood the paddies is delivered by a huge, expensive irrigation and canal system.

• Typical crop irrigation is less than 50% efficient. Rice growing in California is far less efficient than “typical” U.S. agricultural irrigation.

• Other crops, requiring much less water, could be grown in central California.

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Slide 14


Categorize the following statements as:

Likely to be TRUE

We don’t know

• The farmer’s father grew rice and that’s all he knows how to do.

• The farmer isn’t very smart.

• The farmer is likely to agree to change crops when approached by

protestors from the “Keep Our Canals Full” committee.

• The farmer is worried about getting enough water to flood the fields.

• The farmer is a wasteful person.

• The farmer grew up near a lake and likes having water around.

• The farmer makes more money growing and selling rice than he

pays for the water to grow it.

• If getting water to grow rice became more expensive, the farmer

would be more likely to consider doing something different to make

a living.

What do we know about the farmer?

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Slide 15

Economics, Water Use, and the Environment 2011

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Slide 16


Property RightsKey to Avoiding Environmental Conflict

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Slide 17

• Property Rights are human rights to resources that enable owners to

– use

– transfer

– exclude others from access


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Slide 18 Property Rights . . .

. . .are established by formal and informal rules

about the privileges and limitations on the

ownership, use, and transfer of goods and

resources.

• These rights are specified in statue, ordinance,

other legislation, court decisions (common law),

tradition, and custom


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Slide 19

Sort: What are the rules governing the privileges and limitations of

ownership, use, and transfer?

How “Ownership” Differs

idea

air

view

water

Air in

here

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Slide 20


well-defined

exclusive

transferable

enforceable

Characteristics of Full Property Rights

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Slide 21 Well-defined

?

Exclusive

?

Transferable

?

Enforceable

?

Skateboard

Playground ball

Water park or ski

lift ticket

Gun

Library book

Hamburger

Bottled water

Water in a

stream

Yes Yes Yes Yes

???

Yes

Yes

Some-

times

NO


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8

Slide 22

BREAK . . .

BUT First

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Slide 23 M&Ms Activity

Rules:

1. “Claim” any number of M&Ms by writing the

number on your sticky note.

2. You will receive the number of M&Ms you claim IF

the total claims do not exceed the number in the

bag.

3. If the claims do NOT exceed the # in the bag, the

following prizes will be awarded:

• $20 for the biggest claim

• $15 for the 2nd biggest claim

• $10 for the 3rd biggest claim


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Slide 24


InstitutionsThe ‘rules of the game’ shape

incentives and behavior

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Slide 25 United States (surface) water law

Riparian (roots in English common law)

Typical in the East

People who own land along streams, lakes, springs, etc., have a right to “reasonable use” of the water.

Historical use protected by (common) law from new uses


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Slide 26 United States (surface) water law

Prior appropriation (first-in-time, first-in-right)

Typical in the West - spontaneous response to conditions)

The first person to divert water (take it out of the stream) and use it, has the first right.

People who come after may claim water that is left after the first user has fulfilled his right.

“Ownership” of water rests with the state

Water right is a use right only, and is measured in cubic feet/second (C) or acre-feet (MT)


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Slide 27 United States (ground) water law

• Origins again in English common law

• Variations state by state, but common themes

– Most often tied to land above

– Extraction for beneficial use

– Sometimes limited to “reasonable” use

– Extraction by one raises extraction costs of others

– “Ownership” achieved only via extraction (rule of capture)


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Slide 28 Water is scarce – and becoming more so

• Use-It-or-Lose-It (Forfeiture)

• Salvaged Water Rule

• Beneficial Use

• Public Interest


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Slide 29 Property rights issues

• Limited transferability

– Sharply hampers environmental protection

– Stops H2O from going to most productive use

• Limited exclusion with groundwater

– Yields race to extract

– Overuse/early use of water

– Later, higher-valued uses ignored


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Slide 30

Gold Miners

Abe and Bob are gold miners. Abe sets up his camp on a stream,

builds a sluice, and diverts water at 10 cfs (cubic feet per second)

through the sluice. Bob arrives one month later and builds his camp

upstream from Abe. His sluice uses 5 cfs of water.

• What if water rights are riparian? prior appropriation?


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Slide 31

Farmers

Anna is Abe's granddaughter. The family has expanded its holdings from

Abe's original claim along the stream to include 640 acres of cropland. Anna

grows alfalfa in her irrigated fields, and she could grow hay without irrigation.

Connie lives downstream and grows hay, but she wants to experiment with

vegetable crops. Vegetables require more water than is left in the stream

below Anna's farm.

1. What if water rights are prior appropriation and use-it-or-lose-it?

2. How would a salvaged water law affect the situation?


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Slide 32

.

1. What if the use-it-or-lose-it rule is in effect?

2. What if the salvaged water rule is in effect?

3. What if neither the use-it-or-lose-it or

salvaged water rules are in effect?

Conservation

Unable to buy water from Anna, Connie sells most of her land and

experiments with a few vegetable beds. Connie's son Cameron tells

Connie that she could use one third less water if she would let him install

a drip irrigation system.


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Slide 33

Environmental Amenities

A local environmental group is concerned because in dry years the stream

is so low that fish die by the thousands. They want both Connie and Anna

to leave more water in the stream. Suppose that the state has eliminated

its use-it-or-lose-it and salvaged water laws but defines "beneficial uses"

as mining, commercial, irrigation, electricity generation, and household.

1. What is the likely relationship between Connie and Anna and

the environmentalists?

2. How might the relationship change if the state adds

“conservation and recreation” to the list of beneficial uses?Economics, Water Use, and the Environment ©2011

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Slide 34 Ground WaterConnie's cousin David lives in a different part of

the country. While most of his neighbors are

farmers, he has no fond memories of his

childhood on the farm, so he started a bottled

water company, pumping water from a huge

underground aquifer to his bottling plant. His

neighbors irrigate from the aquifer, and the

nearby town draws its water from the same

source. Recent studies show that 5 percent

more water is being taken from the aquifer

each year than returns from rainwater and

other natural sources. The city council has

asked all users to cut back their water use by

10 percent, voluntarily.


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Slide 35 1. If none of the rules on the chart is in effect—in other words, no

property rights to the water in the aquifer are defined—will David

abide by the voluntary cut-backs?

2. Suppose the city council puts a limit on the amount of water that can

be drawn from each well. What might David do?

3. Suppose a salesman offers to show David a way to reduce his use of

water by purchasing some new equipment for his plant. Is David likely

to buy? Explain.

4. Suppose the city council offers to sell David a portion of the aquifer.

What other property rights rules would encourage David to buy the

aquifer? What rules would discourage him from buying it?

5. Suppose David buys water rights to 15 percent of the aquifer. An

inventor offers to sell him a technology that will reduce his water

usage by 10 percent. What rules would encourage David to buy this

water-saving technology? What rules would discourage him from

buying it?

Ground Water


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Slide 36 The Ruby River Mystery

• In May, 1987, a 1.5-mile stretch of the Ruby River in Montana virtually dried up. A

winter of little snow, a dry spring, and heavy demand for irrigation reduced the river

flow.

• Trout were stranded and eventually dried in pools that overheated.

• Meanwhile, farmers apparently had plenty of water; up to six inches of water stood

in fields along the river banks.

• The water necessary to save the trout was worth about $4,000. A large fishing and

conservation organization was willing to raise the money from its 50,000 members.

• But in spite of an outcry in the media and the expression of concern by anglers and

environmentalists, nothing was done and thousands of trout died.

Why did trout die when it would have cost so little to save them?


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Slide 37 Clues:

• Under the rule of prior appropriation, the water rights clearly belong to the farmers.

• Three of the farmers with land along the Ruby River are avid anglers, but the rest are not.

• The conservation organization is NOT headquartered in Montana.

• Water law in Montana defined beneficial use in such a way that water must be diverted (taken from) the stream in order for the user to claim a right.

• There was a severe drought in the northern Rocky Mountain region in 1987-88.

• In the western U.S., the technology for agricultural irrigation is, on average, only about 50% efficient (meaning that up to 50% of the water diverted for irrigation never gets to the crops; it is lost to evaporation, leakage, etc.)

• Montana water law included a use-it-or-lose-it rule.

• Alfalfa, corn, and sugar beets are high water-use crops.Economics, Water Use, and the Environment ©2011

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Slide 38


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Slide 39 Scenario A small town lies at

the lower end of a

valley in which five

farmers raise some

market crops and hay

to feed their livestock.

The farmers, whose

families settled the

area in the 19th

century, irrigate their

fields with water from

a stream that flows

from the snowfields of

the mountains at the

head of the valley.

Most of the people in the town work for the farmers or supply goods and

services related to farming.

The exception is the Outfitter, a family-owned business that serves big game

hunters during the fall hunting season and bird hunters throughout the winter.

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Slide 40

Everything was great . . . untilEconomics, Water Use, and the Environment ©2011

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Slide 41 After a beautiful, dry winter

(which everybody loved –

not a single football game

was canceled at the high

school!), the river was low.

When the farmers opened

up the head gates to

irrigate their hay fields, the

river below town all but

dried up, and the water got

very warm. Soon, more

fish were floating belly-up

than swimming.


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Slide 42 Word spread and fishermen

began to cancel their vacations.

The Outfitters were panicky; it

looked like they would lose most

of their yearly income!

And then they got mad. “The

farmers didn’t have to irrigate,”

they thought. “Their hay would

still grow.” True, they would only

get 2 cuttings instead of 3, but

that wouldn’t hurt them as much

as the low water was hurting the

Outfitters! It didn’t seem fair.


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Slide 43 Town Meeting

Roles: You will be either a farmer or an outfitter. (It is up to you

whether or not to share the information on your role card.)

•The challenge to your group is to solve the problem that is threatening

to disrupt your community.

•If you come up with a solution that I cannot improve upon, you get to

keep the prize I’ve put on your table. If I can improve on your solution,

your group forfeits the prize.

•The problem is immediate – now, this summer, here, in this town!

Don’t waste time with pie-in-the-sky solutions to fix the world for all

time.


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Slide 44

“Rules of the Game”

• The farmers have the water rights under prior appropriation.

• There is NO use-or-lose it provision in the law.

• There is NO salvaged water provision in the law.

• Beneficial uses include: diversion for agriculture, industrial, mining, and domestic water supplies; and in-stream use for recreation and conservation

(See handout)


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Slide 45 A “Better” Solution Is One That:

• Makes the farmers better off without hurting the fishermen

• Makes the fishermen better off without hurting the farmers, or

• Makes both the farmers and the fishermen better off


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Slide 46 Farmers

$75,000

HIGH

Water

yrs.

Outfitters

$100,000

WATER Farmers

$75,000

Farmers

irrigate

Outfitters

$20,000

LOW

Water

yrs.

Farmers

$50,000

irrigate

Outfitters

$100,000

The range of possibilities

Farmers DON’T


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Slide 47

WATER Farmers

$75,000

Farmers

irrigate

Outfitters

$20,000

LOW

Water

yrs.

$50,000

irrigate

Outfitters

$100,000

The Range of Mutually Beneficial Solutions

$25,000difference

$80,000difference

Farmers DON’T


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Slide 48 Relying on property rights & the market

• Advantages include

– Reduce wasteful use of resource (air, water, view)

– Encourage “production” of more amenities

– Create information about values and costs of environmental amenities

– Ensure allocation to highest valued use

• Some problems cannot (yet) be solved by markets, e.g., large scale climate change

• But emerging markets for water, fisheries, and air pollution demonstrate huge potential gains.


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Slide 49 New Demand: In-stream Flows


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Slide 50


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Rules:

1. “Claim” any number of M&Ms by writing the

number on your sticky note.

2. You will receive the number of M&Ms you claim IF

the total claims do not exceed the number in the

bag.

3. If the claims do NOT exceed the # in the bag, the

following prizes will be awarded:

• $20 for the biggest claim

• $15 for the 2nd biggest claim

• $10 for the 3rd biggest claim


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18


Questions:

1. What was your thinking in making your “claim”?

2. Why did the total claim exceed the number of “fish”?

3. What incentives are created by the “rule of capture”?

4. Suppose the fishermen know that the fish stock is

declining and the fishery will collapse. How will they

change their behavior?

5. What is the cost of conserving?

6. How could we change the rules of the game to provide

incentives for conservation?Economics, Water Use, and the Environment ©2011

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Slide 53 “Tragedy of Commons”

• Common property resource will be over-exploited

because:

– Incentive for individual to capture value before someone

else does

– Individual can’t prevent others from capturing value

• Attempts to mitigate tragedy of the commons will impose

different costs and confer different benefits on individuals

and groups

Garrett Hardin, ecologist, 1969


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Slide 54

http://vimeo.com/23564293Economics, Water Use, and the Environment ©2011

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Slide 55 the not-always-tragic commons


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Slide 56

Western Water Law

A Very Short Course

June 15, 2011

Bozeman Montana

Laura Ziemer, Director

Trout Unlimited’s

Montana Water Project

Bear Creek -

Above Irrigation

DiversionEconomics, Water Use, and the Environment ©2011

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Slide 57

Bear Creek - Below Irrigation DiversionEconomics, Water Use, and the Environment ©2011

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Slide 58


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Slide 59


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Slide 60


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Slide 61


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Slide 62


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Slide 63 The Pearl River – Water In or Water Out?•Five farmers live along the upper reaches of the Pearl

River in the Oyster Valley.

•Each uses 10 acre feet of water, annually, for

irrigation. No flow is returned to the river.

•Water is appropriated under the prior appropriations

doctrine.

•Each farmer grows a variety of different crops under

different production methods. Assume that farmers

have no costs and no revenue if they cannot divert

water to irrigate.

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22

Slide 64 Farmer Adams Brown Chavez Jones Smith

Water Right

(10AF)

Established

1800 1810 1820 1830 1840

Irrigation

Value of

10AF water

$40,000 $10,000 $20,000 $30,000 $50,000

Water Rights to 10AF - Year Established

Year 1980 1982 1984 1986 1988 1990water

flow (AF)70 50 40 30 20 10

Oyster River – Annual Flow, Selected Years (Acre-Feet, AF)

•Assume that each farmer’s goal is to maximize his income.


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Slide 65 year

annual

AF

Farmer

Adams

1800

Farmer

Brown

1810

Farmer

Chavez

1820

Farmer

Jones

1830

Farmer

Smith

1840

Total

Farmer

Use

Lower

Reach

Flow

Total

Farm

Revenue

1980

70

water

allocation

annual

revenue

1982

50

water

allocation

annual

revenue

1984

40

water

allocation

annual

revenue

1986

30

water

allocation

annual

revenue

1988

20

water

allocation

annual

revenue

1990

10

water

allocation

annual

revenue

Water Allocation by Seniority

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Slide 66 year Farmer

Adams

1800

Farmer

Brown

1810

Farmer

Chavez

1820

Farmer

Jones

1830

Farmer

Smith

1840

Total

Farmer

Use

Lower

Reach

Flow

Total

Farm

Revenue

1980

70

water

allocation 10 10 10 10 10 50 20 $150,000

annual

revenue 40,000 10,000 20,000 30,000 50,000

1982

50

water

allocation10 10 10 10 10 50 0 $150,000

annual

revenue40,000 10,000 20,000 30,000 50,000

1984

40

water

allocation10 10 10 10 0 40 0 $100,000

annual

revenue40,000 10,000 20,000 30,000 0

1986

30

water

allocation10 10 10 0 0 30 0 $70,000

annual

revenue40,000 10,000 20,000 0 0

1988

20

water

allocation10 10 0 0 0 20 0 $50,000

annual

revenue40,000 10,000 0 0 0

1990

10

water

allocation10 0 0 0 0 10 0 $40,000

annual

revenue40,000 0 0 0 0

Water Allocation by Seniority

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Slide 67

• Is the outcome of prior appropriation fair?

• Is the outcome of prior appropriation desirable?

• Are there other methods of allocation that you

think would produce “better” (fairer, more

desirable??) outcomes?

• Why aren’t the other methods in use?

– (Hint: What are the current “rules of the game”?)


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Slide 68 year

annual

AF

Farmer

Adams

1810

Farmer

Brown

1820

Farmer

Chavez

1830

Farmer

Jones

1800

Farmer

Smith

1840

Total

Farmer

Use

Lower

Reach

Flow

Total

Farm

Revenue

1980

70

water

allocation

10 10 10 10 10

50 20 $150,000

annual

revenue

$40,000 $10,000 $20,000 $30,000 $50,000

1982

50

water

allocation

10 10 10 10 10

50 0 $150,000

annual

revenue

$40,000 $10,000 $20,000 $30,000 $50,000

1984

40

water

allocation

annual

revenue

1986

30

water

allocation

annual

revenue

1988

20

water

allocation

annual

revenue

1990

10

water

allocation

annual

revenue

Water Allocation by Market (Assume Least-Cost Trade)

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Slide 69

1. What is your water worth to you? ________

2. What would it be worth to other farmers to have your

water? (Hint: Does it matter what year it is?)

• Farmer Adams ___: $__________

• Farmer Brown ___: $__________

• Farmer Chavez ___: $__________

• Farmer Jones ___: $__________

• Farmer Smith ___: $__________

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24

Slide 70 year

water

Farmer

Adams

1800

Farmer

Brown

1810

Farmer

Chavez

1820

Farmer

Jones

1830

Farmer

Smith

1840

Total

Farmer

Use

Lower

Reach

Flow

Total Farm

Revenue

1982

50

water

allocation10 10 10 10 10 50 0 $150,000

annual

revenue$40,000 $10,000 $20,000 $30,000 $50,000

1984

40

water

allocation10 10 0 10 10 0 10 40 0 $100,000

annual

revenue

BEFORE

trade

$40,000 $10,000

0

$20,000 $30,000 0

50,000

low cost

trade$10,000 -$10,000 $140,000

annual

revenue

AFTER

trade

$40,000 $10,000 $20,000 $30,000 $40,000

1986

30

water

allocation10 10 10 0 0 30 0 $70,000

annual

revenue

BEFORE

trade

$40,000 $10,000 $20,000 0 0

low cost

trade(s)

annual

revenue

AFTER

trade

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Slide 71





• Beneficial uses include: diversion for agriculture, industrial, mining, and domestic water supplies


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• Makes some farmers better off without hurting the other farmers

• Makes all the farmers better off


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25

Slide 73 year

water

Farmer

Adams

1800

Farmer

Brown

1810

Farmer

Chavez

1820

Farmer

Jones

1830

Farmer

Smith

1840

Total

Farmer

Use

Lower

Reach

Flow

Total Farm

Revenue

1982

50

water

allocation10 10 10 10 10 50 0 $150,000

annual

revenue$40,000 $10,000 $20,000 $30,000 $50,000

1984

40

water

allocation10 10 0 10 10 0 10 40 0 $100,000

annual

revenue

BEFORE

trade

$40,000 $10,000

0

$20,000 $30,000 0

50,000

low cost

trade$10,000 -$10,000 $140,000

annual

revenue

AFTER

trade

$40,000 $10,000 $20,000 $30,000 $40,000

1986

30

water

allocation10 10 0 10 0 0 10 0 10 30 0 $70,000

annual

revenue

BEFORE

trade

$40,000 $10,000

0

$20,000

0

0

30,000

0

50,000

low cost

trade(s)$10,000

20,000 $20,000

-$10,000 $120,000

annual

AFTER

trade

$40,000 $10,000 $20,000 $10,000 $40,000

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Slide 74 year

water

Farmer

Adams

1800

Farmer

Brown

1810

Farmer

Chavez

1820

Farmer

Jones

1830

Farmer

Smith

1840

Total

Farmer

Use

Lower

Reach

Flow

Total

Farm

Revenue

1986

30

water

allocation

10 10 10 0 0 30 0 $70,000

annual

revenue

BEFORE

trade

$40,000 $10,000 $20,000 0

$30,000

0

$50,000

trade(s) +10,000 +20,000 -$20,000 -$10,000 $120,000

annual

revenue

AFTER

trade

$40,000 $10,000 $20,000 $10,000 $40,000

1988

20

water

allocation

10 10 0 0 0 20 0 $50,000

annual

revenue

BEFORE

trade

$40,000 $10,000 0 $0 0 $50,000

trade(s) ??????? +$10,000 ??????? -$10,000 $90,000 ??

annual

revenue

AFTER

trade

$40,000 $10,000 0 $?????? $40,000

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Slide 75 New players in the game

Environmentalists Recreational users


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26

Slide 76





• Beneficial uses include: diversion for agriculture, industrial, mining, and domestic water supplies; and in-stream use for recreation and conservation


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• Makes any farmers or non- farmers better off without hurting the others

• Makes both farmers and non-farmers better off


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Slide 78 year

water

Farmer

Adams

1800

Farmer

Brown

1810

Farmer

Chavez

1820

Farmer

Jones

1830

Farmer

Smith

1840

Total

Farmer

Use

Lower

Reach

Flow

Total

Farm

Revenue

water

allocation

0

annual

revenue

BEFORE

trade

trade(s)

annual

revenue

AFTER

trade

Seller Buyer Price

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27

Slide 79


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Slide 80

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Slide 81


Property RightsPollution & the Power of Marginal

Analysis

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28

Slide 82 Water: Who Owns It?


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Slide 83

• Markets usually allocate resources to their “best” uses.

– “Best” is the use with the greatest excess of benefits over costs.

• But sometimes, they don’t.

– A.C. Pigou called these instances“market failure.”

• The Economics of Welfare (1920): market failure occurs when all the benefits or costs of an exchange are not captured in the exchange.

– Ronald Coase - The Problem of Social Cost (1960)

• If property rights are well-defined, enforced and transferable, the affected parties will reach a mutually agreeable outcome

• The presence of “externalities” must reflect a failure to define, enforce, or permit transfer of property rights.

Externalities:

Market Failure or Property Rights Problem?


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Slide 84


Negative Externalities

Costs of producing & consuming that spill over onto people who don’t receive the benefits.

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29

Slide 85


Positive Externalities

Benefits of producing & consuming that spill over onto people who don’t bear the costs.

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Slide 86


Marginal AnalysisMargin = Additional or Next

• Marginal cost = the cost of the next unit of production

• Marginal benefit = the benefit received from the next unit of production

Propositions:

• Real life is an exercise in marginal thinking. We rarely make “all-or-nothing” decisions.

• We tend to forget marginal analysis in public discourse.

• Pollution is NOT and all-or-nothing problem

– How much is the next unit of cleanliness worth to us?

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Slide 87


Pollution Clean-Up Problems

Background concepts:

• Externality: pollution is a negative externality. It’s difficult to clean up when property rights are unclear. Once property rights are clear, then the question for the owner of those rights is: “How clean is clean enough?”

• “No pollution” isn’t an acceptable or realistic answer. – Pollution is the result of production

– There’s a cost to NOT polluting

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30

Slide 88


Activity: Would YOU Swim There?

• The pond belongs to the Homeowners Association.

• Homeowners Association members will bear the cost and reap the benefits of any clean-up of the pond.

• Every family in the community pays homeowners association dues. Dues are charged per lot, and are not dependent upon the size and location of the lot, nor the value of the home.

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Slide 89


Bid Stage 1: Improving the ViewCost: $1 million:

• Remove the junk – vehicles, construction debris, leaking barrels, etc.

• Replace the fence with better and more attractive barrier

• Restrict access to shoreline to entice birds and other wildlife

Anticipated benefits:

• Lower insurance for homeowners association (est. -$500,000)

• Increased property values in entire community by $2.5 to $3 million

• Increase recreational and aesthetic values by about $10,000 - $20,000

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Slide 90


Stage 5: Clean Enough to Drink

Additional cost over stage 4: $1 million

• Install filtration system

• Install pump

Additional benefits: (notice that these are marginal benefits – in addition to . . . )

• Reduced dependence on city water supply and potential rebate from city of $50,000 - $150,000

• Increased property values in entire community by $0 -$.25 million

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31

Slide 91

Project

stage

% pollution

removed

Total

cost

(in $)

Results: Possible Uses $ Estimate of

Total Benefits

1 40% $1 m Walking, picnics, wildlife

viewing, dog run

$3-4 m

($3.5 m. avg.)

2 65% $2 m Skating, hockey, boating $5-6 m

3 80% $3 m Fishing and ice fishing,

greenbelt irrigation, garden

irrigation

$6-7 m

4 90% $4 m Swimming $7-7.5 m

5 95% $5 m Drinking water $7.25 - $7.5 m

Total Cost = $ 5 million Total Benefit = approx. $7.5 million

Bid for complete clean-up:


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Slide 92


Interest Groups

• Homeowners Association Board

• The Fish

• TP2― (Tired of Teen-Agers Tee-Peeing)

• Boosters

• PPP – Pond Perimeter Property Owners

• KPK ― (Keep Our Property Kleen)

• Out-of-Sight, Out-of-Mind

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Slide 93


Discussion Questions

(remember your role)

For each proposed level of the project:

1. How much additional cost does the community pay for each level of clean-up?

• Who bears this additional cost? (do you ?)

2. How much additional benefit does the community gain by paying for this level of clean-up? (Look both at the $ amount of the benefits AND check the project description to see what the benefits actually are.)

• Who gets the benefit? (Do you? How much?)

3. Is your group willing to support this level of cost in return for this benefit? Why or why not?

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32

Slide 94


Marginal Analysis

Project

stage

%

pollution

removed

Additional

Pollution

removed

Total

cost

(in $)

Marginal

Cost

$

Estimate

of

Total

Benefits

Marginal

Benefit

1 40% 40% $1 m $1 m $3-4 m $3.5 m

2 65% $2 m $5-6 m

3 80% $3 m $6-7 m

4 90% $4 m $7-7.5 m

5 95% $5 m $7.25-

$7.5 m

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Slide 95 Marginal Analysis


Project

stage

% pollution

removed

Additional

pollution

removed

Total cost

(in $)

Marginal

Cost

$Estimate

of

Total

Benefits

Marginal

Benefit

1 40% 40% $1 m $1 m $3-4 m $3.5 m

2 65% 25% $2 m $1 m $5-6 m $2 m

3 80% 15% $3 m $1 m $6-7 m $1 m

4 90% 10% $4 m $1 m $7-7.5

m

$.75 m

5 95% 5% $5 m $1 m $7.25 -

$7.5 m

$.25 m

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Slide 96 How do we

prevent

externalities?

Institutions matter: Property Rights are the rules of the game

Role for government:

1. Clearly define property rights

2. Enforce property rights and secure them through the common law

• private tort law in which those who inflict harm on others must

stop and make whole

3. Create an enabling legal framework in which property rights are

exchangeable

(government failure ????)


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33

Slide 97

It’s not the people; it’s the system.

Unit Goals:

demonstrate the power of the economic way of thinking in

the context of environmental studies

elevate the level of discourse on the environment from

accusation to analysis, from sin to issue

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the basics: is water an economic good? fundamentals of

Documents