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Erling Eide, ELE Day 2 2 Environmental issues (problems and goals)

Erling Eide, ELE Day 2 2 Environmental issues (problems and goals). 2.1 Examples of what might be thought to be a problem 2.2 What is the problem? 2.3 Goal analysis: Modeling priorities and policy choices. 2.1 Examples of what might be thought to be a problem. Environmental services

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Erling Eide, ELE Day 2 2 Environmental issues (problems and goals)

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  1. Erling Eide, ELEDay 22 Environmental issues (problems and goals) • 2.1 Examples of what might be thought to be a problem • 2.2 What is the problem? • 2.3 Goal analysis: Modeling priorities and policy choices U/ELE/H13 day 2.ptt

  2. 2.1 Examples of what might be thought to be a problem • Environmental services • Purification services (Nature as a purification plant) • Recreation services • Extraction of resources (animals, minerals,…) • Problems • Degradation/reduction in these services • Long list of what people consider as problems • Pollution damage • Damaged recreational services • Depletion of natural resources U/ELE/H13 day 2 rev3.ptt

  3. 2.1 (cont.) • Exhaustable resources (minerals, gas, oil, species…) • Depletion • Non exhaustable resources (fish stocks, pastures, forests, clean atmosphere, clean rivers,…) • Overuse, reduction of stocks, pollution… • STOP IT? • Pollution causes health problems. Stop it? • Waste causes degraded recreational services. Stop it? • Extraction of minerals reduces stock available to future generations. Stop it? • Stop it at which level of depletion/degradation? U/ELE/H13 day 2 rev3.ptt

  4. 2.2 What is the problem? Externalities • Decision makers’ behaviour: • Decision makers do not take into account the negative effect on others of their activity. • Damage costs to others (negative externalities) not included when producers and consumers are balancing benefits vs. costs. • In market equilibrium consumers pay for the scarce resources used in production (at the margin), -- but not for the external effects. • Products too cheap. • Production too high. U/ELE/H13 day 2 rev3.ptt

  5. Example: The tragedy of the commons • Definition of commons: • Resource that anybody can extract or use • Resource rent: The surplus value after all costs of extraction or use, and normal returns, have been accounted for. • The gift of nature • Competition to get hold of the gift • (Model) consequence: The tragedy of the commons: Resources depleted • Examples of commons • Fish stocks in oceans (whales, cod,…) • Pastures • Atmosphere U/ELE/H13 day 2 rev3.ptt

  6. 2.3 Goal analysis: Modelling priorities and policy choices • Alternative goals: • Welfare based optimal emissions • Other standards of emissions • 2.3.1 Optimal production: See section 1.5 U/ELE/H13 day 2 rev3.ptt

  7. 2.3.2 Optimal amount of emissions -- Emissions given level of production • Example: Pollution of a given activity (Production in a given plant is held constant) • Costs of pollution: • Reduced environmental quality • requires purification measures in adjacent plant • Causes health problems • Reduces recreation services in the neighborhood • Costs of reducing pollution • Higher quality of inputs • More air cleaners • Increased quality control of production • … U/ELE/H13 day 2 rev3.ptt

  8. 2.3.2 (cont.)Goal: Minimisation of total costs COSTS TOTAL COSTS DAMAGE COSTS ABATEMENT COSTS EMISSIONS FIG. 2.1 Determination of optimal emissions U/ELE/H13 day 2 rev3.ptt

  9. 2.3 (cont.) Goal: Minimisation of total costs MARGINAL COSTS MARGINAL DAMAGE COSTS MDC=MAC MARGINAL ABATEMENT COSTS EMISSIONS FIG. 2.2 MARGINAL COSTS AND OPTIMAL EMISSIONS U/ELE/H13 day 2 rev3.ptt

  10. COSTS TOTAL COSTS DAMAGE COSTS ABATEMENT COSTS EMISSIONS MARGINAL COSTS MDC MDC=MAC MAC EMISSIONS U/ELE/H13 day 2 rev3.ptt

  11. Internalizing Externalities • Allocation of ownership rights (property rights): • To the polluter • Contract on pollution reduction (”laissez-faire rule”) • To the damaged party • Contract on pollution increase (”polluter rule”) • Transferability of ownership rights • Allocation and transferability of ownership rights makes externalities into a marketable good. • The government set the rules • Actors act. U/ELE/H13 day 2 rev3.ptt

  12. COSTS TOTAL COSTS DAMAGE COSTS ABATEMENT COSTS EMISSIONS MARGINAL COSTS MDC MDC=MAC MAC EMISSIONS U/ELE/H13 day 2 rev3.ptt

  13. 2.3 (cont.) Internalisation of costs MARGINAL COSTS MARGINAL DAMAGE COSTS MDC=MAC MARGINAL ABATEMENT COSTS Elow Ehigh EMISSIONS FIG. 2.2 MARGINAL COSTS AND OPTIMAL EMISSIONS U/ELE/H13 day 2 rev3.ptt

  14. Internalizing Externalities (cont.) • Environmental liability • Pigouvian taxes • Regulations U/ELE/H13 day 2 rev3.ptt

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