AGENCY & DISTRIBUTIONAL ISSUES (HIDDEN ECONOMICS)

1. AGENCY & DISTRIBUTIONAL ISSUES (HIDDEN ECONOMICS) Prof David K. Linnan USC LAW # 666 Unit Five

2. CONCEPTS BASIC CONCEPTS BEHIND ENVIRONMENTAL & NATURAL RESOURCE ECONOMICS 1. Property rights issues with “environment” as provider of services a. Definition, defense & transferability b. Public good problems (non-excludability & non-rivalrous consumption) c. Common property problems slightly different 2. Externalities & free riders a. Market failure arguments as justification for govt/int’l regulation & taxation as cost adjustment b. Agency cost issues once decision makers as agents do not bear full costs 3. Cost/benefit analysis at policy level a. Competing uses & differing social and private marginal costs (taxes to merge, etc.) b. Utilitarian ethics vs public choice approaches) 4. Economic instruments & idea can guaranty anti-pollution efficiency if problems resolved, but not distributive justice because most have hidden distributional consequences (plus prior allocation issues, for instance fishing quotas)

3. ECON INSIGHTS I EFFICIENCY VS DISTRIBUTIVE EFFECTS 1. Technical arguments about environmental or natural resource economics as neoclassical a. Efficiency-based exercise as traditional microeconomics b. Remember eco-development piece & chart including economic views (frontier economics & property rights)?

4. ECON INSIGHTS II EFFICIENCY VS DISTRIBUTIVE EFFECTS (CONT’D) 2. Sustainable development entails what economic view (“ecological economics”)? a. Not efficiency based, but rather systems approaches measuring non- depletion (inter-generational equity) b. Maximizing what, depleteable & non- depleteable effects? i. Non-declining well-being (capital stock) ii. Non-declining value of natural capital iii. Non-declining physical service flows

5. ECON INSIGHTS III EFFICIENCY VS DISTRIBUTIVE EFFECTS (CONT’D) 3. What should be anchor principle as to be maximized (back to issue of deep ecology, etc.) 4. Even staying with neo-classical microeconomic approaches, does not address distributional aspects a. Issues clear on economic instruments (taxes vs tradable permits, etc.) b. Both assigning property & wealth disparities in market mechanism

6. NAT’L RES ECON I NATURAL RESOURCE ECONOMICS AS NEO-CLASSICAL MICRO MODEL 1. Ultimately, conceive of environment as provider of goods/services (wetlands to filter water, clean air for O2, etc.) 2. Valuation issues on environment as “asset,” assuming ownership as with property rights a. Normal vs contingent (non-market) valuation b. Public goods question (who owns landscape vs the real property parcels) i. Non-excludability ii. indivisibility

7. NAT’L RES ECON II NATURAL RESOURCE ECONOMICS AS NEO-CLASSICAL MICRO MODEL (CONT’D) 3. Supply & demand calculation for efficiency purposes a. Static (single period) b. Dynamic (multiple period, incorporating present value methodology for comparisons) c. Marginal vs average calculations

8. NAT’L RES ECON III NATURAL RESOURCE ECONOMICS AS NEO-CLASSICAL MICRO MODEL (CONT’D) 4. Problem of uncaptured effects in property right terms (“externalities”) a. “Free” services (pouring untreated pollutants out of smoke stack) i. Benefit (external economy) ii. Detriment (external diseconomy) b Attendant issues re calculation & valuation of harm (remediation vs injury vs?)

9. NAT’L RES ECON IV NATURAL RESOURCE ECONOMICS AS NEO-CLASSICAL MICRO MODEL (CONT’D) 5. Concept of market failure as traditional basis for regulation (cannot rely on property rights to ensure efficient allocation decision) 6. Free rider issues (incentive questions) 7. Divergence of social & private discount rates

10. NAT’L RES ECON V NATURAL RESOURCE ECONOMICS AS NEO-CLASSICAL MICRO MODEL (CONT’D) 8. Cost-benefit analysis for policy planning purposes a. Primary vs secondary effects b. Tangible vs intangible benefits c. Treatment of risk i. Probability of particular outcome ii. Uncertainty of effect iii. Anchoring & misestimation (psych) iv. Individual differences re openness to risk vs risk aversion v. Private vs social discount rates in practice

11. NAT’L RES ECON VI NATURAL RESOURCE ECONOMICS AS NEO-CLASSICAL MICRO MODEL (CONT’D) 9. Impact analysis (like engineering study), typically in face of issues meaning no clarity on what to maximize so input/output study 10. Non-use or passive use (e.g., biodiversity), can treat as contingent valuation kind of problem too, but issue hidden is multiple possible uses, and change over time 11. Information assymetry problems

12. ECONOMIC ACTIVITY WHAT DOES THE BELOW MAP TELL YOU ABOUT COUNTRIES AND ENVIRONMENTAL ECONOMICS/ACTIVITY? http://www.lfip.org/laws666f06/index.htm NOTE THAT THIS IS ALL IN EFFECT MACRO, WHILE MUCH OF NATURAL RESOURCE ECONOMICS MICRO BUT WHAT ARE CONNECTIONS INTERNATIONALLY?

13. ECON INSTRUMENTS I CONCEPT OF ECONOMIC INSTRUMENTS’ ROLE 1. Idea of alternative to “inefficient” command & control approach 2. Typical alternatives are taxes or tradable permits a. Green taxes may allow assigning costs otherwise skipped as externalities (e.g., excise taxes on tires to pay for recycling them later, carbon taxes to pay for GCC abatement costs) b. Tradeable permits allow producers with different remediation costs to remediate vs buy right to pollute (to create which someone else remediates)

14. ECON INSTRUMENTS II CONCEPT OF ECONOMIC INSTRUMENTS’ ROLE (CONT’D) 3. Distributional aspects are introduced in two ways a. Taxation discourages lower income groups’ consumption (income elasticity) i. Preference for income over clean air, treat as legitimate? ii. Environmental justice problem writ large, exacerbating effects of income distribution

15. ECON INSTRUMENTS III CONCEPT OF ECONOMIC INSTRUMENTS’ ROLE (CONT’D) 3. Distributional aspects are introduced in two ways (cont’d) b. Permitting requires a prior assignment of property i. Grandfathering vs outright auction, with the difference whether benefit to government or private party ii. Then creates its own externalities, as with those residing near highly polluting facility that buys its way out of remediation in buying permit to pollute; unequal remediation locally beyond lowest cost global efficiency arguments c. Differing long & short term impacts on employees, consumers, etc. via adjustment cost concept

16. AGENCY AGENCY AS ECONOMIC CONCEPT 1. Problem of incentives, assymetric information & control by principal (agency costs analysis focusing on conflicts of interest, costs of monitoring, etc.) 2. Who does the agent represent, and in environmental setting how do you apply agency concept to competing candidates (government & NGOs both claiming to represent people or public interest)?

17. PROB CONCEPTS HIDDEN ECONOMIC CONCEPTS IN PROBLEMS How to apply the various economic concepts to the readings and problems?