Transcript Chapter 27

Chapter 27
Dollars and
Environmental Sense:
Economics of
Environmental Issues
Learning Objectives:
When and how is it possible to put a
dollar value on the environment?
What is the “tragedy of the commons”
and how does it lead to
overexploitation of resources?
How does the perceived future value of
an environmental benefit affect our
willingness to pay for it now?
What are externalities and why is it
important to evaluate them in determining
the costs of actions that affect the
environment?
What factors may be involved in
determining a level of acceptable
environmental risk and risk to human life?
Why it is difficult, yet important, to
evaluate environmental intangibles, such
as landscape beauty?
Value of Environmental Spending
 The U.S. presently spends about $170 billion,
including spending by consumers, to deal with
pollution.
 This investment yields comparable health and
other benefits. Valuation of benefits involves
both tangible and intangibles, the latter being
far more difficult to quantify.
 The annual budget of the EPA (Environmental
Protection Agency)= $6 billion
Case Study: The Economics of
Mahogany
 Mahogany worth
$1500-$100,000 per
tree
 Roads must be built to
transport logging
 Loggers bring pollution
and disease
 Land turned to farm
lands- wiping out
forests
 America- biggest
consumer of Mahogany
Mahogany Imports 'Are Wiping
out Peru Tribes'
 Trees provide food,
shelter and resources
for people, animals and
plants that live in the
rainforests
 Loggers bring disease
and pollution previously
unknown to tribes (no
immunity)
The Environment as a Commons
Commons:
 Land or another resources owned publicly
with public access for private uses
Commons
Often people using commons do not seek
sustainability
People are selfish and think short-sided
Atmosphere and oceans are considered
commons
Recreation is a problem of the commonsovercrowding of National Parks
What is the appropriate public use
of public lands?
Should all public lands be open to all
public uses?
Should some public lands be protected
from people?
The United States has a policy of
different uses for different lands
Externalities
Externality (Indirect Cost)
 An effect not normally accounted for in the
cost-revenue analysis of producers and
often not recognized by them as part of
their costs and benefits
Direct Costs
 Those borne by the producer and passed
directly on to the user or purchaser
Direct Costs
(Nickel Ore)
Traditionally, the economic costs
associated with the production of
commercially usable Nickel from an ore
are the direct costs- costs of purchasing
the ore, buying energy to run the
smelter, building the plant and paying
employees (Cost included in price)
Indirect Costs
(Externalities)
Degradation of the environment from the
smelter plant- destroyed vegetation,
increase in erosion (loss of trees and
damage to overall ecosystems), air
pollution of the local area, and pollution
of the local water systems
 Evaluation of environmental intangibles is
becoming more common in environmental
analysis
 Losing “Public Service Functions” will
convert from indirect to direct costs
 Public Service Functions of Nature:
 Bees pollinate $20 billion worth of crops in the
United States yearly
 Bacteria fix Nitrogen in the oceans, lakes, rivers
and soil
 Bacteria clean water by decomposing toxins
 The atmosphere converts toxic Carbon Monoxide
to harmless Carbon Dioxide
Risk-Benefit Analysis
 Def: The riskiness of a present action in terms
of its possible outcomes
 The relation between risk and benefit affects
our willingness to pay for an environmental
good
 What is the future worth? How much are you
willing to risk for today?
Examples of Life/Death Risks:
Cigarette Smoke-
8 in 100 deaths
Automobiles -
1 in 100 deaths
Sunlight Exposure-
2 in 1000 deaths
Outdoor Air Pollution- 4 in 10,000 deaths
Airplane Passenger- 1 in 1,000,000 deaths
Pollution Risk
 Pollution directly affects more than just our
health
 Ecological and Aesthetic damage can also
indirectly affect human health
 We might want to to choose a slightly higher
risk of death in a more pleasant environment
rather than increase the chances of living
longer in a poor environment
Degree of Risk- Legal Processes
U.S. Toxic Substances Control Actrequires a new chemical to obtain
clearance from EPA.
EPA determines if it can be used based
on “reasonable risk”- what is considered
reasonable?
Example: DDT
Global Issues: Who Bears the
Costs?
Example: Fossil fuels- Global Climate
Change
The less developed countries did not
share in the economic benefits of the
burning of fossil fuels but they are
sharing in the disadvantages of this
activity
Who pays, and how?
It may be necessary to reduce the total
production of greenhouse emissionswho pays, and how?
Who is responsible for cleaning and
keeping clean our global commons?
Environmental Policy Instruments
Moral suasion- publicity, social pressure
Direct controls- regulations
Market processes- taxation, subsidies,
refundable deposits, allocation of
property rights
Environmental Policy Instruments
Government investments- damage
prevention facilities (treatment plants),
regenerative activities (reforestation),
dissemination of information (pollution
control, profitable recycling), research,
education (general public and
professional specialists)
Marginal Costs
In controlling pollutants, marginal cost is
the cost to reduce one additional unit of
pollutant.
With pollution control, the marginal cost
often increases rapidly as the
percentage of reduction increases
Summary
Economics of environmental issues are
complicated!
Future worth compared with present
worth can be important in determining
levels of exploitation of resources
Evaluation of intangibles is important in
environmental analysis