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ECON 4910 Spring 2007 Environmental Economics Lecture 3, Chapter 7 -9

ECON 4910 Spring 2007 Environmental Economics Lecture 3, Chapter 7 -9. Lecturer: Finn R. Førsund. Micro environmental economics model. Costs of production and of reducing discharge of pollutants at source Dose - response relationship of natural environments, production of services.

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ECON 4910 Spring 2007 Environmental Economics Lecture 3, Chapter 7 -9

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  1. ECON 4910 Spring 2007 Environmental Economics Lecture 3, Chapter 7 -9 Lecturer: Finn R. Førsund Environmental Economics

  2. Micro environmental economics model • Costs of production and of reducing discharge of pollutants at source • Dose - response relationship of natural environments, production of services Environmental Economics

  3. Derivation of the cost function • Factorially determined multi output model of Frisch • Profit maximisation given prices with no pollutant restriction Environmental Economics

  4. Derivation of the cost function, cont. • Cost minimisation with restriction on emission • The Lagrangian Environmental Economics

  5. Derivation of the cost function, cont.1 • First-order conditions • Interpretation of shadow prices: • λ: cost of decreasing the emission constraint • γ: cost of increasing output • 4 equations to solve for x1,x2, λ, γ as functions of exogenous variables • Inserting in the factor outlay yields the cost function c(yo,q1,q2,eR) Environmental Economics

  6. Standard simplification of the model • Separating production costs and purification costs, dropping subscript i • g(y)= primary pollutant, e= secondary pollutant • Only one type of pollutant • End of pipe purification Environmental Economics

  7. Abatement and purification • Abatement: reduction of pollutants discharged to the environment with endogenous output level. • Purification: reduction of pollutants discharged to the environment with exogenous output. Environmental Economics

  8. Modelling options general case • “Damage” functions: evaluation of environmental services of type s provided by receptor j • Environmental standards Environmental Economics

  9. Social optimisation problem • Damage function and single environmental service, polluter, pollutant, and constant output: Environmental Economics

  10. Social optimisation problem, cont. • First-order condition • Marginal damage equal to marginal cost • Several polluters: must make assumption about nature of dose-effect relations • Damage from total sum of pollutants Environmental Economics

  11. Illustration of the social solution -c’, D’ D’ -c’ e d’=0 emin eo e* Environmental Economics

  12. The environmental standards approach • The social optimisation problem • The Lagrangian for the problem (problem written as a maximisation problem) Environmental Economics

  13. The environmental standards approach, cont • First-order condition • Interpretation of shadow price • Increasing environmental service increases the purification cost Environmental Economics

  14. Regulating pollution • Command and control • Technology standards • Economic incentives • Tax on pollutants, the Pigou tax • Subsidies • Refunds • Tradable permits Environmental Economics

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