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Assessing Costs for Environmental Decision Making

Assessing Costs for Environmental Decision Making. Chapter 8. Environmental Costs Conceptual Issues. Incremental costs are the change in costs arising from an environmental policy initiative Economic costs include Explicit (or monetary) costs Implicit (or nonmonetary) costs

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Assessing Costs for Environmental Decision Making

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  1. Assessing Costs for Environmental Decision Making Chapter 8

  2. Environmental CostsConceptual Issues • Incremental costs are the change in costs arising from an environmental policy initiative • Economic costs include • Explicit (or monetary) costs • Implicit (or nonmonetary) costs • Ideal measure is the social costs of policy • Expenditures needed to compensate society for resources used so that its utility level remains the same

  3. Explicit Costs • Administrative, monitoring, and enforcement expenses incurred by the public sector plus compliance costs incurred by all sectors • Capital (or fixed) costs • spending on plant, equipment, construction, and process changes for pollution abatement • Operating (or variable) costs • costs of operating and maintaining abatement processes

  4. Implicit Costs • Value of nonmonetary effects that negatively affect society’s well-being • Examples included diminished product variety, time costs of searching for substitutes, reduced convenience, etc.

  5. Modeling Incremental Costs • Find baseline TSC before policy • Find TSC after policy is implemented • Subtract baseline from new TSC • TSC can be found as area under MSC • Recall MSC = MACMKT + MCE

  6. MSC and TSC of Abatement MSC = 4 + 0.75A MSC = MACMKT + MCE MSC ($millions) TSC 4 0 A1 A (abatement %)

  7. Incremental costs = $104.375 million Modeling Incremental Costs MSC = 4 + 0.75A MSC = MACMKT + MCE 22.75 19 MSC ($millions) 4 0 20 25 A (abatement %)

  8. Incremental costs = $104.375 million Modeling Incremental Costs TSC TSC ($millions) TSC = 4A + 0.375A2 334.375 230 0 20 25 A (abatement %)

  9. Estimating Explicit Costs • Two methods • Engineering Approach • Survey Approach • Common to use a combination approach

  10. Engineering Approach • Estimates abatement spending based on least-cost available technology • Relies on experts in abatement methods • Drawbacks • difficult to use for proposed policy due to uncertainty • must be customized to suit each production setting or suffer from averaging • likely understates true costs because it assumes all firms are cost-effective

  11. Survey Approach • Derives estimated abatement expenditures from a sample of polluting sources via surveys • Drawbacks • assumes sources are sufficiently well-informed • polluters have an incentive to exaggerate costs to officials to increase the probability that the proposed regulation will be rejected

  12. Difficult to estimate costs

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