Economics 350

Environmental Economics Water pollution Air pollution Solid municipal waste Hazardous wastes Global warming Endangered species EPA Abatement costs Optimal pollution Cost-benefit analysis Tradable discharge permits Command and control Emission taxes

Why do people behave in ways that harm the environment?

Moral Approach Appeals to moral behavior

  Households: “give a hoot, don’t pollute” Firms: emission standards

Economic Approach Recognizes that people respond to incentives

  Households: “pay as you throw” garbage systems Firms: CO SO 2 2 taxes and tradable permits

Economic Way of Thinking

     Rationality Scarcity Marginal analysis Equilibrium Positive vs. normative analysis

Environmental Policy

   Objectives    Environmental quality Sustainable development Biodiversity Types of Policies   Command and Control Market Approaches Effectiveness  Cost/Benefit Analysis

Environmental Policy

 Politics   Special interests Fairness issues Bootleggers & Baptists ?

 Outlook  Pessimists  Thomas Malthus

Malthusian Model

Thomas Malthus Population Food production time

Environmental Policy

  Politics  Special interests  Fairness issues Outlook  Pessimists  Neo-Malthusians  “Limits to Growth”  Optimists  “cornucopians”  Technology and markets Julian Simon

Economy and Environment

resources

Nature Economy

residuals Natural Resource Economics Environmental Economics

Economy and Environment: PPC

Production Possibilities Curve

Environmental Quality

B ΔEQ A PPC   PPC shows all combinations of two goods that can be produced from given resources and technology Illustrates tradeoff between the two goods

Market Goods

ΔG Note: Environmental degradation may shift PPC inward over time.

a) b) c) d)

Assume a concave production possibility curve. Suppose that society decides to increase the production of market goods by 10,000 units, and that as a result environmental quality falls by 10 units. If a further increase of 10,000 units of market goods is sought, we can expect that environmental quality will:

fall by 10 units. fall by less than 10 units. fall by more than 10 units.

increase by less than 10 units.

a) 0% b) 0% 0% c) 0% d) 1 2 3 4 5

Fundamental Balance

Recycled: r R p Raw Materials M Residuals: R p

Producers

Goods: G

Consumers

Residuals: R c Discharged: d R p Discharged: d R c Recycled: r R c M = d R p + d R c M = G + R p – ( r R p + r R c )

Fundamental Balance

M = G + R p – ( r R p + r R c )  3 Ways of Reducing M    Reduce G  Reduce “consumerism”  Zero population growth?

Reduce R p  Reduce residual intensity of production  Sectoral shift Increase ( r R p + r R c )  Mandatory content requirements

Types of Pollutants

  Cumulative Noncumulative

Radioactive waste, plastics, many chemicals Noise

   Local Regional Global   Point Source Non-Point Source

Noise, visual SO 2 CO 2 , CFCs Smoke stacks, waste treatment plants Agricultural runoff

  Stationary Source Mobile Source

Factories Cars, planes, boats

  Continuous Emissions Episodic Emissions

Power plants, factories, waste treatment plants Oil and chemical spills

US Pollution Control Expenditures: 2005

Air Water Solid Waste Total

Abatement Expenditures (billions $)

Capital Operating Total % of Total $3.88

$1.35

$0.68

$5.91

$ 8.63

$ 6.73

$ 5.32

$20.68

$12.51

$8.08

$6.00

$26.59

47 30 23 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

Review of Microeconomic Theory

 Rational man model  An individual seeks to maximize his or her utility. Taking action until the marginal private cost of further action equals the marginal private benefit of that action.

 For social optimality the rule is: Taking action until the marginal social cost of further action equals the marginal social benefit of that action

Market Model

Price Supply P* Q*

  What Q is produced?

What Q should be produced?

Demand quantity Positive Normative

Market Model: Demand Side

Price $50 Buyer’s Marginal Benefit or WTP

Market price

$25 Consumer Surplus Total Expenditure 1 5 Demand quantity

  Consumer Surplus = ∑ (WTP – Price) Total Expenditure = P*Q

Market Model: Supply Side

Price Supply

Market price

$25 Producer Surplus Seller’s Marginal Cost $10 Total Cost 3 quantity

 Producer Surplus = ∑ (Price – Marginal Cost)

Market Model

Price Deadweight Loss Supply P*

CS PS Q

Q* Demand quantity

 Free Market Outcome: P*, Q*  Maximizes social welfare: SW = CS + PS

Market Model

  Problem Set 1, #8 Problem Set 1, #9

Output

0 1 2 3 4 5

Total Costs of Production Plant A Plant B Plant C

20 25 37 50 80 115 5 13 30 60 105 155 15 22 32 47 77 117 Define: MC = ΔTC ΔQ Suppose you wanted to produce Q = 11. How would you allocate output among the three plants if you wanted to minimize the costs of production?

Plant A: Q = 4 Plant B: Q = 3 Plant C: Q = 4 MC = $30 in all plants TC = 80 + 60 + 77 = $217 Allocate output such that MC A = MC B = MC C

Market Failures

    Imperfect competition Imperfect information Externalities Public goods/Common Resources

Externalities

  Occur when decision makers do not consider all costs (or benefits) of their actions Two views

A. C. Pigou Ronald Coase

Cashmere Externalities

Externalities: Pigou

Social Cost = Private Cost + External Cost $

S social S private

 

Free Market: P 1 , Q 1 Optimal Outcome: P 2 , Q 2 P 2 P 1 Marginal external cost

Free market

overproduces

goods that generate a

negative externality D 1 Q 2 Q 1 cashmere How can society achieve social optimum?



Impose tax = marginal external cost Internalize the externality!

M&M Experiment

Public Goods & Common Resources

  Rivalry: does my consumption hinder your consumption?

Excludable Non-Excludable Rival in consumption Private Goods Common Resources Non-rival in consumption Artificially Scarce Goods Public Goods

Tragedy of the Commons

  Commonly-owned resources tend to be over-exploited  Conflict between self-interest and the common good Examples Am I in danger of being over harvested?

Garrett Hardin

Sample Problems

  Problem Set 1: #20 (Externality) Problem Set 1: #18 (Public Goods)

140 120 100 80 $ 60 40 20 0 0

ΣMB MB H MB A MB S MC

200 400 600 800 SO 2 (μg/m 3 )

3

1000 1200

Dirtier air

 Social Optimum occurs where ΣMB = MC 1400 1600

70 60 50 40 30 20 10 0 0 d H d A d S D = Σd 500 1000 1500 2000 2500

Orange Juice

3000 3500 4000 4500

There are essentially three ways of reducing M (raw material usage) and, therefore, residuals discharged into the natural environment. These include all of the following except

a) b) c) d) reducing G (output of goods) increasing Rp (production residuals) increasing rRp + rRc (recycled production and consumption residuals) all of the above.

a) 0% 0% b) 0% c) 0% d) 1 2 3 4 5

All of the following are examples of point-source pollutants except one. Which one is not an example of a point-source pollutant?

a) b) c) d) municipal waste treatment plants agricultural chemical runoff electric power plants Eramet Metals manufacturing plant

a) 0% 0% b) 0% c) 0% d) 1 2 3 4 5

Public goods are distinguished by two primary characteristics. These are:

a) b) c) d) market failure; high prices government intervention; high prices nonrivalry; nonexclusivity rivalry; exclusivity

a) 0% 0% b) 0% c) 0% d) 1 2 3 4 5

The efficient output will be less than the free market output when:

a) b) c) d) Marginal social cost and marginal private cost are equal Marginal social cost is greater than marginal private cost Marginal social benefit and marginal private benefit are equal Marginal social benefit is greater than marginal private benefit

a) 0% 0% 0% 0% b) c) d) 1 2 3 4 5

The table below shows the marginal benefit from water quality for the only two citizens of a town. Water quality is a public good. If the marginal cost of water quality is $75 per quality unit, what is the efficient quantity of water quality?

a) b) c) d) e) f) 1 2 3 4 5 6 Fanting Marginal benefit of water quality 80 70 60 45 25 0 Water Quality 1 2 3 4 5 6 Gary Marginal benefit of water quality 100 85 60 35 15 0

0% 0% 0% 0% 0% 0% 1 2 3 4 5 6 1 2 3 4 5