Valuing the Environment: Concepts

1. Valuing the Environment: Concepts • Develop general conceptual framework to approach environmental problems • Examine the relationship between human actions and environmental consequences of these actions • Then establish criterion to judge the desirability of the outcome of the relationship • Trying to contrast economic view with alternative points of view. These contrasts bring economic approach into sharper focus & stimulates more critical & deeper more thinking about all possible approaches.

2. The relationship Environment is a composite asset – providing variety of services Life support system for existence Prevent undue depreciation of this asset Some services provided directly Services that have no substitute

3. Consumer products Helps this transformation Energy

4. Is ours a closed economy? • No – Sun, spaceships • Historically closed – exports & imports negligible • Whether it remains ‘closed’ depends on the degree to which space exploration opens up the rest of our solar system as source of raw material • Entropy Law: consumption of energy : irreversible process - in absence of new energy inputs, a closed system will use up all the energy - energy over  end of life • Excessive waste - depreciates the asset – pollution: respiratory problems, smog: obliterates view

5. Ours is not a ‘closed’ economy. • Upper limit is flow of solar energy • Once stock of stored energy (fossil fuel etc) is over –available energy useful for work is determined by the flow and storing capacity (dams, trees etc) • Growth process limited by availability of solar energy and our ability to put it to use, in LR

6. To understand relationship between economic system & environment: 2 types of analysis – both branches useful positive economics: what is, what was, what will be – appeal to the facts normative economics: What ought to be – value judgement

7. Normative analysis • To evaluate desirability of a proposed - - Pollution control regulation - To preserve an area due for development • Desirability of programme either beforehand or after implementation – if there is alternative • Open-ended possibilities: consider entire range of possibilities - select the best / optimal

8. Normative criterion for decision making Evaluating predefined options: • Desirability of a proposed action • Identify Benefits (B) & Costs (C) - compare B > C  support B = C  indifferent B < C  ? Measurement of B & C is anthropocentric - effects on human beings∴ effects ignored unless they directly affect humans

9. Anre Naess – Norwegian philosopher used terms:- • ‘deep ecology’: refers to the view that non-human environment has -Intrinsic value:– independent of human interests & -Instrumental value: useful in satisfying human wants Humans join organisations dedicated to protection of environment voluntarily - Environment has value that goes beyond usefulness to humans – modern valuation – humans cannot/shouldn’t decide value of other species

10. D • Benefits derived from demand curve – willingness to pay = shaded area Total willingness to pay price P1 P2 D O Q1 O Q1 Q2 quantity Env services have costs although they are produced without any human input - All costs = opportunity cost e.g. opportunity cost of producing power is = forgone benefit of white-water canoeing

11. Net benefit = B > C ∴ area under demand curve that lies above supply curve • Marginal opportunity cost curve is supply curve in PC market • Total cost = sum of marginal costs = OGIK cost S I C & B S Total cost G Net benefit O K Quantity Cost is incurred in one period & benefits are received in the other - how to make choices? D O

12. Present Value:a concept that allowsa way to compare a the net benefits received in one period to net benefits received in the other. Present value is the time value of money. ∵ the rate of interest is 10%p.a., then present value of $ 1.10 received after 1 yr from now is $1 for ‘X’ amount: after one year [X/(1+ r)], after 2 yrs X/(1+ r) ( 1+ r)= X/(1+ r)2 Net present value of one time net benefit received n yrs from now is NPV (Bn) = Bn / (1+ r)n

13. If we are investigating an allocation that would yield the net benefits on the last day of each of next 4 years is $ 6000, $ 7000, $ 10000 & $ 13000; and the rate of interest is 10%, find NPV. NPV = 6000 ∕ (1.10) 1+7000 ∕ (1.10)2 +10000 ∕ (1.10)3 + 13000 ∕ (1.10)4 If PV > 0, the action should be supported. The process of calculating the PV is called ‘discounting’ & ‘r’ is discount rate.

14. Finding the optimal outcome - To identify ‘optimal’ or best approaches To address environmental problems normative analysis proceeds in 3 steps: • identify an optimal outcome • to attempt to perceive clearly the extent to which our institutions can produce it & if there is gap between actual and optimal outcome, find behavioral sources of the problem • use both, knowledge of the problem and behavioural causes to design appropriate solutions e.g. ocean fisheries getting depleted or solid waste landfill

15. Solid waste landfill • Find optimal level of waste • Use recycling & waste reduction • Behavioural sources of problem Manila: is using 3 Rs to reduce waste: Reduce (by refusing), Recycle, Reuse (and Restore)

16. Static Efficiency • It’s the normative criterion for choosing among various allocations occurring at the same point in time – an allocation of resources satisfies the static criterion when its net benefit from the use of those resources is maximized by that allocation. • To find ‘whether a particular action was worth doing?’ – use C - B analysis • Road preservation – made by Swedish – “How many miles can be efficiently persevered for maximum benefits?” – 4 miles? Maximum net benefits?

17. If 6 miles preserved  ∆ RTU is reduction in benefit. ∴ 5 miles is the best Net benefit maximized when, marginal benefit = marginal cost • If max benefits when preserving more miles – should it be 5? Price T R U O 4 5 6 quantity Pareto Optimality: An allocation is Pareto optimal if no other feasible allocation could benefit some other people more without any deleterious effect on at least one another person. Other allocations sub-optimal – rearrange – so that no one hurt & some people are better off

18. Efficiency • Static efficiency criterion used when time is not an important factor. • Dynamic efficiency: This criterion is used to find an optimum allocation when time is involved.

19. Applying the concepts • Pollution control policy – benefits, but costs too. • ∴ quantify & monetize C & B • B: ↓DR, ↓incidence of respiratory diseases, heart disease, etc. – better visibility, ↑agricultural productivity, - many other Bs unable to quantify • C: 2 categories – (i) ↑cost of goods/services - cost of pollution control methods’ operations that is passed on to consumers  high prices (ii) cost associated with designing & implementing the regulations & monitoring • Delhi – smog – late flights, waste of time, meetings late, decisions late ∴ conversion to CNG – C: cost of CNG kits & fitting…. B: improved health & energy saving…….

20. Preservation Vs Development • Currently underdeveloped but ecologically significant land to develop • C: degradation of ecosystem in irreversible ways • B: more jobs, increased wealth, ….. • Conflict intense if the unemployment is high & local ecology is unique – around Mumbai- migratory birds like flamingoes • Kakadu Conservation Zone – Australia – mined or preserved?

21. Relation between humanity &environment requires many choices. We have to make rational choices. • Env is an asset providing services and the intensity /composition depends on the actions on the humans • +ve economics – useful: showing actions of people and their impact on env. Normative economics: guidance – how optimal services can be defined and achieved – uses C-B analysis for judging • Static efficient allocation: maximises net benefits over all possible uses of resources • Dynamic efficiency criterion: time important – maximises PV of net benefits from all uses of resources.