Socio-Economic, Technical and Environmental Efficiency

1. Socio-Economic, Technical and Environmental Efficiency

2. Socio-Economic, Technical and Environmental Efficiency • We have already established that environmental and economic efficiency should converge • Sources of inefficiency: • Pollution means inefficiencies in the economic process • All inputs in the form of resources are not used optimally • Why do market failures and environmental problems persist?

3. The Answer: Information Problems • The analysis of Easter Island shows the importance of information with respect to the environment • Imperfect information by firms may lead to market failures about the environment • Porter and Van der Linden argue that regulation can remedy the problem

4. The Porter Hypothesis • Core propositions of the Porter Hypothesis • Environmental regulations are signals to firms which will lead them to innovate • Environmental efficiency and industrial competitiveness should not be seen as a trade-off • Regulation does not have to raise costs • Competitiveness not a function of regulatory costs, but rather of ability to increase productivity through innovation • Environmental regulations have to be flexible: regulate goals rather than technology, use flexible instruments

5. Regulation Can Influence Efficiency • Signalling opportunities to be more efficient • Provide previously unavailable information • Increase certainty, which has value in the market • Pressure induces innovation • Level the transitional playing field (no quick “buck” for non-compliance)

6. Innovation Offsets • Two ways innovation sparked by regulation • Companies do better in addressing environmental “bads” • Products and processes themselves improve with regulatory compliance • So innovation can have product and process effects • Also, first-mover advantages, green production and role of the consumer

7. Importance of Regulatory Design • Maximum opportunity for innovation, space for industry • Don’t tie regulation to given technology, focus on outcome • Minimize uncertainty • Product/process innovation, not mandated “end-of-pipe” adaptation • Regulate as late as possible in production chain to give more flexibility

8. What Kinds of Regulation? • Reliance on market incentives, not command and control where feasible in order to allow flexibility, reinforce resource productivity and foster incentives for innovation • Encourage pre-emptive private standards that could go further and be less costly [BUT what about anti-competitive behaviour?]

9. Market Instruments versus Command and Control • Uncertainty • Revenue • Governance • Distribution • Feasibility • Quantitative “steer” • Transparency 9

10. Selecting Appropriate Policy Instruments • Cost effectiveness • Long-run effects • Dynamic efficiency • Ancillary benefits • Equity • Dependability • Flexibility • Cost of use under uncertainty • Information requirements

11. Selecting Appropriate Policy Instruments • Cost effectiveness • Long-run effects • Dynamic efficiency • Ancillary benefits • Equity • Dependability • Flexibility • Cost of use under uncertainty • Information requirements

12. The Situation Might Be More Complex • The “market” for innovation is not efficient (public good aspect) • Innovations can have increasing return to scale aspects • If a free good is suddenly sold at some price, this will increase the costs to all firms, and not all will innovate equally effectively

13. Tasks of Regulators Particularly Difficult • They have to make sure the right signals are sent: prices not always the right signal -> scale effects, bubbles due to speculation • They have to avoid market take-overs by well placed firms (anti-trust concerns) • Difficult to get correct information from firms-> regulatory capture

14. The Neo-Classical Riposte • Porter/Van der Linde do not refer to social costs and benefits, only private • What about cost-benefit analysis? • Accusation of “static” mindset unfair, incentive-based regulations more important for dynamic than static efficiency (cost minimization) • But agree on market-based regulation, importance of attacking information asymmetries, and possible relation between regulation and discovery

15. Proving Porter Right $ MAC MAC* P1 H D B C P F O A A* Abatement level

16. Other Criticisms of Porter • No formal theory • Only case studies as empirical evidence • More broad-based empirical evidence suggests that innovation offset opportunities few and far between • Even if regulation sparks cost-reducing innovations, what are the opportunity costs of these investments?

17. Case Study: Societal Collapse

18. Some Reasons for Societal Collapse • Deforestation and habitat destruction • Soil problems (erosion, salinzation, fertility loss) • Water mismanagement • Overhunting and overfishing • Introduction of foreign species • Overpopulation • Increase in per capita impact of the population

19. Easter Island: A Illustration of Environmental Destruction

22. Easter Island • Upon its discovery by Westerners in 1722, was poor and had smaller population than vestiges indicated • Stone Age culture created monumental statues but had ceased to do so by time of European discovery • Why did system collapse?

23. Population • Archaeological evidence suggests settlement by small group of Polynesians around 400 AD, but perhaps as late as 900 AD • Population grew rapidly and probably peaked at about 7,000-10.000 around 1400-1500 AD • By arrival of first Europeans in 1722, population stood at around 3,000

24. Easter Island Statues

25. Production System • Farming: sweet potatoes, yams, taro, bananas, sugar cane • Chicken as only domestic animal • Fish and shellfish but smaller contribution to diet than elsewhere in Polynesia because of absence of coral reef • Evidence of intensification of production

26. Social Organization • Hierarchical chiefdom • Evidence from very different house types • Oral tradition talks about clans and lineages who had demarcated territories but nevertheless integrated as transport of statues and raw materials from one part of island to another indicate

27. Evidence of Decline • Labor no longer organized to undertake big projects like statue carving and their movement across the island • Island exchange and cooperation declined • No major ceremonial relations • Chiefs lost power, especially their access to surplus production Skeletal evidence of conflict, warfare and even cannibalism

28. Why Decline? • Deforestation: severe already by 1400 • Crucial dependence on palm tree • Palm nut provided food • Fronds for thatch roofs, baskets, mats, boat sails • Trunks for transport and raising of statues • But, this palm tree variety was very slow growing: 40-60 years. This is beyond a generation • If population overshoots, and overuses resources the recuperation time of palm is too long and population will crash

29. Consequences of Deforestation • Soil erosion: negative effects on agriculture • Lack of wood for canoes, then affects fishing ability • Bird life decimated • Up to half of plant life rendered extinct

30. Absence of Effective Response • Institutional failure based on inability to learn from environment in sufficient time • Lack of knowledge: had not put in place controls over rate of resource use and over-population • Remoteness obviously played a big part

31. Will History Repeat Itself? • Easter Island annexed by Chile in 1888 • In 1914, only 250 residents on the island • In 1960 population confined to a specific area and rest of island leased to a company to farm sheep • Island run by Chilean navy • In 1966 island opened up

32. Recent Developments • 70,000 tourists a year, up from 14,000 in mid-’90s • Population is 5,000, up from 3,300 in 2002, only half of whom of Rapa Nui descent • Food comes from Chile by ‘plane or sea • Lack of sewage system threatening underground water • Electricity from diesel engines • Rubbish is accumulating • Living standards at Chilean levels, but worries about the future

33. Possible Solutions • Chile wants to give more autonomy to control immigration, tourist influx, raise more tourist revenue • More radical group seeks independence and: • Expel Chileans with no Rapa Nui blood connections • Establish a Polynesian currency union • What property system to avoid another ecological collapse? • Government ownership? • Private property? • Common property?