Economics of Environmental Quality Economics of Environmental Quality Different types of pollutants call for different types of policy Optimal pollution modeled as.
Download ReportTranscript Economics of Environmental Quality Economics of Environmental Quality Different types of pollutants call for different types of policy Optimal pollution modeled as.
Economics of Environmental Quality Economics of Environmental Quality Different types of pollutants call for different types of policy Optimal pollution modeled as simple tradeoff: Reducing emissions reduces damages Reducing emissions involves opportunity costs Environmental Damages All negative impacts that resource users experience from environmental degradation Greater the emissions, the greater the damages Examples: Lung diseases Contaminated water Loss of biodiversity Loss of recreational uses “defensive” expenditures Marginal Damage Function Emissions function: Damage = f(quantity of residual) Ambient function: Damage = f(concentration of pollutant) $ $ Emissions (tons/yr) $ Noise SO2 Toxic chemicals Emissions (tons/yr) $ “threshold” effects Ambient (ppm) Ambient (ppm) Marginal Damage Function $ MD2 MD1 $25 $10 50 150 Emissions Total Damages = sum of marginal damages TD1 = (10)(100)(.5) = $500 TD2 = (25)(100)(.5) = $1250 What accounts for differences in MD1 and MD2? Urban vs rural areas Different seasons Suppose the marginal damage function is given as MD = 8(E - 200), where E measures the emissions of gunk, measured in tons. What is the total damage if E = 260? a) b) c) d) $480 $14,400 $28,800 $62,400 0% a) 1 2 3 4 5 0% 0% 0% b) c) d) Abatement Costs Costs incurred to reduce pollution emissions Marginal Abatement Costs (MAC) rise as emissions are reduced $ MAC2 $50 MAC1 Unregulated Emissions $20 240 500 Emissions Total Abatement Cost = sum of marginal abatement costs TAC1 = (20)(260)(.5) = $2600 TAC2 = (50)(260)(.5) = $6500 What accounts for differences in MAC1 and MAC2? Different plant technologies (old vs new) Different time periods Suppose the marginal abatement cost function is given as MAC = 350 – 5E, where E measures the emissions of gunk, measured in tons. What is the total abatement cost if E = 30? a) b) c) d) $200 $4,000 $6,000 $12,000 0% a) 1 2 3 4 5 0% 0% 0% b) c) d) Optimal Emissions Optimal level is one which minimizes total social costs Occurs where MD = MAC $ $18 MD1 MAC1 $10 TD1 75 TAC1 200 TD1 = (10)(125)(.5) = $625 TAC1 = (10)(250)(.5) = $1250 Total Social Cost = TD + TAC = $1875 450 Emissions Optimal Gunk MD = .25(E – 100) MAC = 90 - 0.15E What What What What What is optimal emissions? are marginal damages at the optimal level? are TD? are TAC? is Total Social Cost? What is Total Social Cost if E = 0? What is Total Social Cost if emissions are unregulated? Optimal Emissions $ MAC1 + C MD2 MD1 MAC1 MAC2 E2 E1 E3 Emissions What happens to optimal emissions if: MD rises? MAC falls? E* falls E* falls What would the graph look like that shows E* = 0? What happens to optimal emissions if enforcement is costly? E* rises Problem Set 2 Question #3 Equimarginal Principle: Revisited Marginal Abatement Costs ($100/week) What is TAC of a uniform 50% reduction from the unregulated level? TAC = $14,900 What is TAC of the equimarginal reduction of 14 tons/week? TAC = $14,400 Emissions (tons/week) Plant A Plant B 14 0 0 13 2 3 12 4 6 11 6 9 10 8 12 9 10 16 8 13 20 7 16 24 6 19 28 5 22 33 4 26 38 3 30 48 2 40 63 1 55 83 0 85 113 $33,600 $49,600 Types of Analyses Impact Analysis Enviro IA: Economic IA: Identification and study of all enviro repercussions from actions; natural scientists Ramifications of enviro regulations for specific econ variable; economists Cost-effectiveness Analysis Estimate cost of alternatives with a certain objective in mind; benefits considered Ex:not Williamstown wetlands Damage Assessment and economic development Estimate value of damages to injured resource so that the amount can be recovered in court CERCLA (Superfund) Benefit-Cost Analysis Vilfredo Pareto Pareto improvement: A policy that makes one person better off and no one else worse off Benefit-Cost Analysis Specify clearly the project/program Location, timing, affected groups Describe quantitatively the inputs/outputs of project Involves engineers Estimate social benefits/costs of inputs/outputs Use monetary metric Compare benefits and costs Net benefits? Benefit-cost ratio? Benefit-Cost Analysis $ MD1 MAC1 d a c E* b E2 E0 Emissions E0 is current emissions Proposal to reduce emissions to E2 TB = a + b TC = b Net benefits = a Maximum net benefits occur at E* Net benefits = a + d B-C Ratio At E2: (a+b)/b At E*: (a+b+c+d)/(b+c) Benefit-Cost Analysis Benefits today time Costs Present Value Calculation Net PV = C0 Bt B1 B2 (1 r )1 (1 r ) 2 (1 r )t The higher the discount rate, r, the lower the PV What discount rate to use? Personal time preference? Interest rate on savings accounts Marginal productivity approach? Real or nominal interest rate? Interest rate on borrowing money OMB: r = 7% CBO: r = 2% Benefit-Cost Analysis today today Benefits Benefits Costs Costs time time Future generations? Discounting downgrades future damages Policies with short run benefits and long run costs are preferred by today’s generation Sustainability criteria as alternative Distributional concerns? Horizontal equity: treating similarly situated people the same way Vertical equity: treating people in different situations differently Risk Analysis? Uncertainty about the future makes for a probabilistic world Benefit-Cost Analysis Program A Net Benefits Program B Probability Net Benefits Probability $500,000 0.475 $500,000 0.99 $300,000 0.525 - $10,000,000 0.01 Expected Value: $395,000 Expected Value: $395,000 Measuring the Benefits of EQ Direct Damages Willingness-to-Pay Approach Revealed Preferences Stated Preferences Direct Damages Health damages Health = f(life style, diet, genetics, age, AQ) Medical expenditures Lost income due to illness/death “cost of illness study” Estimated Cost of Adult Asthma in the US Cost for Average Adult ($/Year) Direct Costs Drugs 1,605 Hospital Visits 805 Other 770 Subtotal 3,180 Indirect Costs Complete work cessation 1,062 Lost days but still employed 486 Other 184 Subtotal Grand Total 1,732 4,912 Source: M.G. Cisternas et al., “A Comprehensive Study of the Direct and Indirect Costs of Adult Asthma,” Journal of Allergy and Clinical Immunology, June 2003. Direct Damages Health damages Health = f(life style, diet, genetics, age, AQ) Medical expenditures Lost income due to illness/death “cost of illness study” Materials damages Increased maintenance costs Effect of pollution on production costs Reduced yields on crops Indirect WTP Methods Value of Health thru Averting Costs Expenditures made to avoid bad outcomes Value of Life thru Wage Rate Differentials “statistical life” Value of a Statistical Life How much would you be WTP to reduce probability of death by 1 ? 100, 000 If you are rational, you will take precautions up to the point where MB = MC. Suppose it will cost $30 to reduce the chance of your death by 100,1000 $30 = (V)( MC 1 100, 000 MB ) V = $3,000,000 Value of a Statistical Life Estimates Study Moore and Viscusi (1990) VSL in 2000 ($ millions) 20.8 Kniesner and Leeth (1991) 0.7 Gegax, Gerking, and Schulze (1991) 2.1 Leigh (1991) 7.1 – 15.3 Berger and Gabriel (1991) 8.6 - 10.9 Leigh (1995) 8.1 – 16.8 Dorman and Hagstrom (1998) 8.7 – 20.3 Lott and Manning (2000) Source: Table 7.2, p. 145, Field and Field (2006) 1.5 – 3.0 Fatality Risk in the US Source of Risk Annual Fatality Risk A. General Cigarette smoking (1.5 packs per day) 1 in 150 Cancer 1 in 300 Motor vehicle accident 1 in 5,000 Home accident 1 in 11,000 Poisoning 1 in 37,000 Fire 1 in 50,000 B. Occupational Mining 1 in 3,200 Manufacturing 1 in 2,400 Construction 1 in 4,300 Retail Sales 1 in 56,000 Finance, insurance, real estate 1 in 77,000 Source: Kip Viscusi, “The Value of Risks to Life and Health,” December 1993 Journal of Economic Literature (13):1912-1946. Cost of Risk-Reducing Regulations Agency, Year, and Status Initial Annual Risk Annual Lives Saved Cost per Life Saved* Unvented space heaters CPSC 1980 F 2.7 in 105 63.000 0.10 Passive restraints/belts NHTSA 1984 F 9.1 in 105 1,850.000 0.30 FAA 1984 F 1.6 in 107 37.000 0.60 Concrete & masonry construction OSHA 1988 F 1.4 in 105 6.500 1.40 Benzene OSHA 1987 F 8.8 in 104 3.800 17.10 Asbestos EPA 1987 F 2.9 in 105 10.000 104.20 Radionuclides EPA 1984 R 4.3 in 106 0.001 210.00 Arsenic/low-arsenic copper EPA 1986 R 2.6 in 104 0.090 764.00 Land Disposal EPA 1988 F 2.3 in 108 2.520 3,500.00 Formaldehyde OSHA 1987 F 6.8 in 104 0.010 72,000.00 Seat cushion flammability 104 105 106 107 108 = = = = = 10,000 100,000 1,000,000 10,000,000 100,000,000 * Millions of 1984 $ Source: Kip Viscusi, “Economic Foundations of the Current Regulatory Reform Efforts,” The Journal of Economic Perspectives 10 (1996): Tables 1 and 2, 124-125. Indirect WTP Methods Hedonic Pricing Value of EQ thru Housing Prices Value of EQ thru Intercity Wage Differentials Travel Costs for Amenities Time and travel costs represent “price” of access Problem Set 2: #11 Southold, Long Island, NY Property values next to: • Calculate of Snake preserving • Open Space: + 12.8% Hells Canyon value on the Riveropen spaces • 10 acre open parcel surrounded by 15 avg • Farmland: - 13.3% • Recreation vs Hydropower properties = $410,000 • Major Roads: - 16.2% • Cost savings of hydropower at Hells Canyon: $80,000 + 16.7% • Recreational value of Hells Canyon: $900,000 • Zoning: Direct WTP Methods Political Referendum Qualitative assessment only Contingent Valuation Survey method used to elicit use and non-use values Total WTP = Use value + Nonuse value + Option value Approach Choice scenario must provide accurate and clear description of the change in environmental services Open-ended or closed-ended choice format Must specify payment mechanism and opportunity costs Sample CV Questions There are less than 1,000 American Crocodiles left. Habitat necessary for the American Crocodile is rapidly being bought for development. The Nature Conservancy is considering buying land in an effort to save this species. What would you be willing to pay in the form of an annual donation in order to buy enough habitat to save 100 crocodiles? $_______________ If you said $0, please tell me why? (From: Environmental Economics & Policy (2007, 5e) by TomTietenberg.) Sample CV Questions First, let’s assume that visitors to the Glen Canyon National Recreation Area are to finance environmental improvements by paying an entrance fee to be admitted into the recreation area. This will be the only way to finance such improvements in the area. Let’s also assume that all visitors to the area will pay the same daily fee as you, and all the money collected will be used to finance the environmental improvements shown in the photos. Would you be willing to pay a $1.00 per day fee to prevent Situation C from occurring, thus preserving Situation A? $2.00 per day? [Increment by $1.00 per day until a negative response is obtained, then decrease the bid by 25 cents per day until a positive response is obtained, and record the amount.] _________$/day (From: Using Surveys to Value Public Goods: The Contingent Valuation Method. Mitchell, Robert Cameron, and Carson, Richard T. 1989. Resources for the Future, Washington, D.C. Pp 4-5.) Mono Lake, California LA water consumers vs nesting/migratory birds Average WTP on water bill was $13/mo (or $156/year) TB exceeded $26m cost of replacing water supply by a factor of 50 Wegge,T., W. Michael Hanemann, and John Loomis. 1996. "Comparing Benefits and Costs of Water Resource Allocation Policies for California's Mono Basin," in Advances In The Economics of Enviornmental Resources, (ed.) Darwin C. Hill, Volume 1, 1996. Exxon Valdez Oil Spill (1989) 11 million gallons Mean WTP for a program to reduce the risk of similar damage was a one-time tax payment of $31 per household Estimated TB = $2.8 billion Exxon paid $0.5 billion in damages + $2 billion in cleanup Direct WTP Methods Problems with CV Hypothetical nature of questions Truthfulness/free-rider problem Framing issues WTP vs WTA Value of a headache What is the maximum dollar amount you are willing to pay to avoid a headache? WTA is not constrained by income What is the minimum dollar amount you would accept to have a headache? Measuring Abatement Costs Level of analysis Single firm/community/project Industry/region National economy Global With/Without Principle Production costs: Before Regulation: $100m Future w/o Regulation: $120m Future w/ Regulation: $150m true marginal cost = $30m Concepts of Cost Social Costs = Private Costs + External Costs Explicit Cost Capital Costs: plant and equipment (replacement and expansion) Operating Costs: production, maintenance, abatement process (labor, materials, R&D) Enforcement Costs: monitoring, administration Implicit Costs Higher product prices/reduced consumption Inconvenience of using public transportation/carpools Media switching Illegal dumping US Pollution Control Expenditures: 2005 Abatement Expenditures (billions $) Capital Operating Total % of Total Air $3.88 $ 8.63 $12.51 47 Water $1.35 $ 6.73 $8.08 30 Solid Waste $0.68 $ 5.32 $6.00 23 Total $5.91 $20.68 $26.59 U.S. Census Bureau, Pollution Abatement Costs and Expenditures: 2005, MA200(05), U.S. Government Printing Office, Washington, DC, 2008. Online: http://www.census.gov/prod/2008pubs/ma200-05.pdf Single Projects Examples Waste treatment plants Flood-control Solid waste handling Beach restoration Public park Wildlife refuge Projected Costs of a Small Wastewater Treatment Plant ($1,000) Construction Costs Treatment Plant Conveyances Sludge Disposal Mitigation costs Initial Cost Life (years) Salvage Value 3,000 1,639 24 24 60 95 40 40 544 651 --- Annual Costs Operation and Maintenance Pumping Station Treatment Plant Sludge Disposal Total Environmental Costs Mitigation costs Unmitigated costs 21 131 4 156 8 46 Present Values Cost Item Total PV (r=8%) Construction Salvage Values Annual O&M Annual environmental Total 4,687 -1,195 156 54 4,687 - 6 1,860 644 $ 7,185 Costs of a Local Regulation $ S2 S1 P Market price q2 q1 Apples Costly regulation imposed on local apple grower Raises costs of production: supply shifts to S2 What does apple grower do? Continue producing same quantity? unlikely if apples are sold competitively Cut production to q2? lost income to grower, workers, community Why is the lost income not necessarily a social cost? Cost of Regulating an Industry Higher production costs are social costs when they cause CS to fall Estimate cost of “average” firm Rely on cost surveys Self-reported Uses past data $ P2 P1 a + b = lost consumer surplus = “true” social cost a b S2 c S1 D q2 q1 output Costs at the National Level Macroeconomic modeling Short Run PPF model suggests tradeoff between market output and EQ Long Run GDP = F(L, K, Tech) PACE diverts resources from these factors But, environmental degradation reduces resources Market Goods EQ PACE as Percent of GDP Country Portugal 1994 0.7 2000 0.8 Poland Canada Japan 0.9 1.2 1.3 2.0 1.1 1.4 France United States Austria 1.4 1.6 1.8 1.6 -2.4 Czech Republic 2.4 1.7 Source: OECD, “Pollution Abatement and Control Expenditure in OECD Countries,” ENV/EPOC/SE(2003)1, Paris, 17 July 2003, p32.