Download RYERSON UNIVERSITY Envrionmental Applied Sciences and

RYERSON UNIVERSITY
Environmental Applied Sciences and Management
ES 8926
ENVIRONMENTAL ECONOMICS
Notes for Class # 5
October 12, 2011
CHAPTERS 5, 6 , 7, 8
NOTES AND ANNOUNCEMENTS
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Review Quiz #1
Topics for Term Project
Articles for Mid Term Essay
REVIEW
DISTORTIONS & MARKET FAILURES
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Monopoly, Oligopoly Market Structure
Government Interventions
◦ Price Controls
◦ Barriers to Entrance or Exit
◦ Subsidies
Externalities, Social Costs
◦ Pollution
◦ Destruction of Habitat & Open Space
Public Goods Issues & Characteristics
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Open Space, Access to Waterfront, Parks
National Defence, Local Security
Light houses, Broadcast Media, Education
Health Care
(Lack of) Property Rights
◦ Depletion of Un-owned, Open Access Resources
REVIEW
DISTORTIONS & MARKET FAILURES
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Public Goods
◦ Demand Expresses Marginal WTP
◦ Derive Aggregate Demand for Public Good by Vertical
Adding MWTP at Given Quantities
◦ Env. Quality Improvements are Public Benefits
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Producers of Pub. Goods Cannot Extract Full
WTP From Users Because
◦ Free-rider Effect
◦ WTP Values Not Revealed in a Market
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Typically Private Production of Public Goods
Less Than Socially Desirable and Efficient.
NORMATIVE vrs POSITIVE
ECONOMICS
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Positive Economics – Study,
Description, Evaluation of How
Economic Systems, Firms, Institutions
and Individuals Behave and Operate –
How do the work? – Objective
Observations and Conclusions,
Supposedly “Value Free”
Normative Economics - How Should
an Economy, Firms Institutions or
Individuals Operate or Behave Subjective Views and Opinions Based
on Individual Values and Biases.
Measures of Efficiency
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Social Efficiency – Competitive Markets
◦ Private and Public, Market and Non-market Costs and
Benefits Included in Demand and Supply (Cost)
Factors, and
◦ D (MR) = S (MC) = Max Net Social Value/Surplus
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Allocative Efficiency - Value of Benefits Equal to
or Greater Than Value of Costs
Cost-efficiency - Implement the least-cost method
or means to achieve a given end, objective or benefit.
Productivity - Units of Output / Unit of Input
(Labour)
TARGET LEVELS OF POLLUTION OR
ENVIRONMENTAL PROTECTION
No Release, Pristine Pure – eg.Virtual
Elimination, Zero Discharge, Bans
 Threshold Ambient Concentration/Exposure
Criteria
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◦ No Known Adverse Effects
◦ Lowest Possible Risk Levels, eg. 1: 100,000 or better
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Technical/Engineering Criteria
◦ LAER
◦ BAT; BAT,EA; BPT
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Economic Criteria - Balance Benefits and Costs
ECONOMIC MODEL FOR
NORMATIVE TARGET-SETTING
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Balance Environmental Damages With Abatement
Costs
Environmental Damages
◦ Pollution Releases -> Ambient (Air, Water, Soil)
Concentrations -> Marginal Dose-Damage/Response
Relationships -> Populations Exposed -> Environmental,
Biological, Human Health Effects -> Monetary Value
Estimates
◦ Cumulative, Non-accumulative pollutants
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Marginal Damage Functions Fig 5-1
◦ Total Damage = Area Under Marginal Damage Curve
◦ Some Reveal Thresholds
ABATEMENT COST FUNCTIONS -1
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“Abatement”
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End of Pipe/Stack Treatment
Process Changes
Input Substitutions/Changes
Energy, Materials Conservation and Efficiency
Recycling
Production Reduction
Pollution Loadings = Mass/Time (kg per day)
 Pollution Concentrations = Mass/Vol (gram/M3,
mg/l)
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ABATEMENT COST FUNCTIONS - 2
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Aggregating Marginal Abatement Costs =
Application of Equimarginal Principle
◦ Each Plant Abate to Same Marginal Cost
Levels to Achieve Desired Pollution Reduction
◦ Figure 5-5 Horizontally Add Pollutant
Reductions at Equal Marginal Cost Levels
SOCIALLY EFFICIENT LEVELS OF
POLLUTION RELEASES
Marginal Damage Function = Marginal
Abatement Cost Function
 Figure 5-6
 Socially Efficient Levels of Pollution are
Seldom Zero Pollutant Releases
 Value of Benefits (Damages
Avoided/Reduced) =/> Abatement Costs
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ABATEMENT COSTS & PROFITS
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Competitive Firms and Markets
Pollution Damages (External, Public Costs) Result in
Excess Outputs/Production (Fig. 5-7)
Abatement Costs + Operating Costs = >
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Pollution Damages Internalized =>
Higher Operating Costs =>
Reduced Output/Production =>
Foregone Profits
“Competitiveness Issue”
◦ Competitive Market => Reduced Profits => Plant Closures
=> Lay-offs
◦ Monopoly/Oligopoly => Higher Prices => Cheaper Imports
FACTORS THAT MITIGATE ADVERSE ECONOMIC,
FINANCIAL AND COMPETITIVENESS EFFECTS
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Ability to Raise Prices
Ability/Opportunities to Reduce Input Costs
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Implementation Timing
Tax System, Tax Concessions
Magnitude of Abatement/Environmental Protection Costs Small
Relative to
◦ Reduce, Recover, Recycle
◦ Process Changes
◦ Pressure Suppliers
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Exchange Rate
Interest Rate
Labour Contracts
Raw Material, Energy Prices
BENEFIT-COST ANALYSIS
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Objectives = Value Benefits - Costs
◦ Economic Feasibility of Single Option
◦ Determine Socially Efficient Scale of Public Project
◦ Ranking of 2 or More Options
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Advantages
◦ Informs Public Expenditure Decisions
◦ Avoid Losers
◦ Encourage Efficiency of Public Expenditures
BENEFIT-COST ANALYSIS CRITICISMS
Justify larger budgets
Avoid political discussion and debate about Public Projects
Can’t Quantify or Value Benefits, Cut Public Programs
Environmental resources, benefits Unpriced, Unvalued
Future damages, benefits discounted
Monetary values alone hide important information and social issues
Env. benefits = intangible perceptions, difficult to quantify, value.
Uncertainties in natural science methods, data, human behaviour,
responses, methods to estimate economic values => estimates subject to
wide ranges, low credibility.
 BCA appropriate where consequences small relative to economy as a
whole. Large effects (extinctions, pollution of ocean, climate change) can
alter fundamental preferences & price sets => reduce reliability of BCA
for decision-making.
 Intergenerational sustainability of environmental resources.
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BCA - FRAMEWORK
Describe Project, Program, Scale,
Perspective
 Identify, Quantify,Value Inputs, Outputs,
Social/External Costs and Benefits
 Evaluate, Compare Quantities & Values of
Benefits and Costs
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BCA – EVALUATION & DECISION
CRITERIA
Evaluation Criteria – Compare Outputs, Results,
Consequences of Options, Projects, Policies
 Decision Criteria for Accepting, Rejecting,
Ranking
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◦ B-C = Net PV Benefits
◦ B/C ratio
◦ Capitalized Value, Asset Value, Internal Rate of Return
of Annual Benefits
BCA TOPICS
Discounting, Choice of Discount Rate
 Uncertainty
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◦ Expected Values
◦ Sensitivity Analyses
◦ Monte Carlo Techniques
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Distribution, Equity
◦ Horizontal, Vertical Equity
◦ Proportional, Regressive, Progressive Programs and
Policies