Environmental Economics Sedef Akgüngör

1. Environmental EconomicsSedef Akgüngör Lecture 5

2. Measuring Costs • CBA aims to translate all impacts into monetary values. • ‘translating’ environmental and social costs into a single unit of measure – money – that they already use to make decisions. In theory this allows all impacts to be put on the same footing.

3. Measuiring Costs of Environmental Clean Up • Expected expenditures by firms on pollution control equipment. • Engineering approach to measuring costs • These are predicted costs. They require making assumptions about future behavior. • Opportunity cost- value of resources in their best alternative use.

6. Forest fires in Indonesia and elsewhere in Southeast Asia are being deliberately lit by agricultural firms, causing serious health and environmental damage” UN’s food and agriculture body • This should not come as a surprise to anyone. That is what happens when you have laws that give land to those that clear the forest and turn it into agriculturally productive land. Yet many people wonder why deforestation continues to be a big problem in many parts of the world.

7. Opportunity Cost • Mandatory costs of pollution control. • Cost-benefit analysis • Engineering costs: An approach for measure of environmental protection. • Efficiency of resource use. • Efficient level of pollution / clean up.

8. The optimal level of an externality P The market for SUVs in Canada. Unregulated. S D Q1 Q

9. The optimal level of an externality So, the market left alone will lead to the sale of Q1 SUVs. But this is too high. The optimal level, the level that takes into account ALL COSTS of SUVs is Q2. How do we get there?

10. 1. Regulation • A limit on production directly – a quota on the number of SUVs that can be produced. • A regulation that forces car manufacturers to install technology that will reduce emissions. This raises the firm’s MC curve. Ideally, would want to set enough regulations so the firm’s MC curve increases by exactly the amount of the externality. 2. Taxes • Set a tax equal to the cost of pollution. Applied to producers, this raises the MC curve by exactly the right amount, and leads to an efficient outcome. 3. Market for Externality Rights

11. The optimal level of an externality S + EXT • Regulation: • Determine the optimal amount of SUVs in the economy. Here, this would be at Q2. Then, • Quotas P S P* D Q2 Q1 Q

12. The optimal level of an externality S2 • Regulation: • Determine the optimal amount of SUVs in the economy. Here, this would be at Q2. Then, • Quotas or technology regulation P S P* D Q2 Q1 Q

13. The optimal level of an externality S+TAX The market for SUVs in Canada. Rather than requiring technology, the government could just impose a tax = X that the firm must pay a tax=X for each SUV it produces. This shifts the supply curve to the left (reduces supply due to higher costs of production). P S Spillover costs=vertical distance P* D Q2 Q1 Q

14. What about a positive externality? Goods that create positive externalities tend to be underproduced in the market. Why? The benefit accrues to someone (or some firm) other than the person who bought the product. Since the benefits of the benefit does not have to pay for the benefit, their benefit is not considered in the market.

15. Example: The Flu Shot. When you get a flu shot, it benefits me. But I don’t have to contribute to your flu shot, nor to anyone else’s, so the number of people who get a flu shot would be inefficiently low if the government was not involved.

16. The optimal level of an externality P The market for flu shots in Manitoba Unregulated – no government involvement S D Q1 Number of People

17. The optimal level of an externality To find the optimal level, we want to consider not just the value for each person of that person getting a flu shot, but the value to everyone of that person getting a flu shot. Suppose that the spillover benefit =B. Here, B varies with Q, since the externality of flu shots is not uniform. The more people innoculated, the higher the benefit to others. P S D+B D Q2 Q1 Number of People

18. What about a positive externality? How do we get to Q2 with a positive externality? A. Subsidize the providers. Provide a subsidy for the producers of flu shots. This lowers their costs, moves the supply curve out, until the optimal level is reached.

19. The optimal level of an externality P S S2 D+B D Q2 Q1 Number of People

20. What about a positive externality? How do we get to Q2 with a positive externality? A. Subsidize the providers. Provide a subsidy for the producers of flu shots. This lowers their costs, moves the supply curve out, until the optimal level is reached. B. Subsidize the purchasers. Provide a rebate for flu shots. Then, for any given market price, people will buy more flu shots. This shifts demand up.

21. Implementing the Efficiency Standard • Efficiency criteria: Hıw much pollution is acceptable • Benefit cost studies • Safety standards • For example: The Stockholm Convention on Persistent Organic Pollutants

22. TURKEY’S DRAFT NATIONAL IMPLEMENTATION PLAN FOR THE STOCKHOLM CONVENTION ON PERSISTENT ORGANIC POLLUTANTS UNIDO-POPs PROJECT (Project No. GF/TUR/03/008) This document is Turkey’s draft National Implementation Plan (NIP) under the Stockholm Convention on Persistent Organic Pollutants (POPs). It includes a review of current and proposed actions related to Turkey’s obligations under the Convention.

23. The Stockholm Convention is a global treaty to protect human health and the environment from persistent organic pollutants (POPs).  • POPs are chemicals that remain intact in the environment for long periods, become widely distributed geographically, accumulate in the fatty tissue of living organisms and are toxic to humans and wildlife.  • POPs circulate globally and can cause damage wherever they travel.  In implementing the Convention, Governments will take measures to eliminate or reduce the release of POPs into the environment.

24. Regulatory Impact Analysis: Example of Lead Standards • Lead: Lead is a heavy, soft, toxic, gray-blue metal present in some insecticides, auto exhaust, industrial emissions, and a variety of products. • For example, lead is found in automotive and storage batteries and is used in the manufacture of paint, enamel, ink, glass, rubber, ceramics, and chemicals. • In the human body, lead inactivates the sulfhydryl (SH) groups of enzymes necessary for the synthesis of heme, which is the oxygen-carrying pigment in the blood. Lead may also interfere with other metabolic systems of cells.

25. History suggests that along with the valuable uses of lead for weapons, containers, and other items, the toxicity of lead was also known. • Some believe, for example, that the fall of the Roman Empire was based in part on the common use of lead for drinking vessels. • Native Americans conscripted as miners by the Spanish also suffered from lead exposure

26. Regulation of Lead • Safe Drinking Act • Standards to Lead Concentration • Option A: Most stringent (5 micrograms per liter) • Option B: Loose standard (5-15 micrograms depending on per capita cost) • Option C: Least stringent (15 micrograms)

27. Need to estimate the costs • Which of the existing systems nationwide would require remedial action and the level necessary to achieve three different targets. • Benefits coming from lower lead exposure: Health benefits

28. Need to quantify benefits for hypertension, chronic heart disease, stroke data.. • Dose-response functions • Reduction of mitigating costs as well as mitigating costs; screening costs.

29. Annual Estimated Benefits and Costs

30. Selection Criteria • Choose the option that will maximize net monetary benefits. • A: 62 685 • B: 59 601 • C: 20 670