Environmental Economics Course

1. Environmental Economics Course Market failure and decision making 19/10/2011 Cristina Marta-Pedroso cristina.pedroso@ipb.pt cristina.marta@ist.utl.pt

2. Externalities • Public Goods • Ecosystem services • Economic Valuation of Ecosystem Services • Highlighting the inclusion of Economic Valuation in decision making: • Governmental intervention (e.gAgri-environmental policies) • Castro Verde • Private sector (TEEB for Business /WBCSD ) • EVI – Cascata da Serra da Estrela

4. X = Consumer Surplus Y = Consumer Surplus • In market equilibrium the marginal benefit is equal to marginal cost. • This is the general (and necessary) condition for optimization. • In this case, market equilibrium illustrates the quantity of seedlings that maximize the sum of consumer and producer surpluses. For example, the net benefit for consumers (forest owners) and producers (owners of nursery firms).  If the market is perfectly competitive, the market equilibrium is also socially optimal.

5. Externalities (Negative or Positive) An external effect, or an externality, is said to occur when the production or consumption decisions of one agent have an impact on the utility or profit of another agent in an unintended way, and when no compensation/payment is made by the generator of the impact to the affected party.

6. Positive Externality: Bread smell

7. Analysis of Positive Externalities

8. Underproduction

9. Negative Externality: Pollution

10. Analysis of an negative externality

11. Overproduction

12. Public Goods (extreme cases of Positive Externalities)

14. Why is there a problem? When markets are unable to capture some attributes of a given good is there a market failure, e.g. the private (cost) benefit does not equal the social benefit (cost). Inequalities among the private and social cost and benefit are called externalities, negative positive or externalities.

15. What is called the free rider problem gives light on why the firms, e.g. farmers, do not have an incentive, in a competitive market, to provide public goods too consumers. The absence of a full internalization of these benefits in the market price of agricultural products is the main underlying cause for natural resources depletion. The "free rider" principle says that you cannot charge an individual a price for the provision of a non-excludable good because somebody else would gain the benefit from consumption without paying anything

16. o consumo de um individuo desse bem não diminui a possibilidade de consumo por outro Rivarly Purely Private Mercado Mixed Goods Purely Public Excludability Intervenção Governamental uma vez produzido esse bem é impossível (ou muito difícil) evitar que outro tenha acesso a ele

19. Benefícios que os ecossistemas providenciam ao Homem

20. The value of a forest is often measured only by the timber and fuel provided by its trees. In these countries, however, that is generally less than one third of the total economic value. The higher figure includes services such as control of the climate through absorption (sequestration) of carbon dioxide, protection of freshwater sources (watersheds), and recreation. Because many of these services are not bought and sold in markets, they are frequently lost or degraded even though their value to human societies is high. (Source: MEA) Madeira e lenha correspondem a menos de 1/3 do valor económico das florestas mediterrânicas Millennium Ecosystem Assessment

24. Environmental Economics Course Market failure and decision making 20/10/2011 Cristina Marta-Pedroso cristina.pedroso@ipb.pt cristina.marta@ist.utl.pt

25. Externalities  • Public Goods  • Ecosystem services  • Economic Valuation of Ecosystem Services  • Wrap up • Highlighting the inclusion of Economic Valuation in decision making: • Governmental intervention (e.gAgri-environmental policies) • Castro Verde • Private sector (TEEB for Business /WBCSD ) • EVI – Cascata da Serra da Estrela

26. 1. Which of the following statements is true regarding externalities? A. Both negative and positive externalities lead to inefficient outcomes in markets. B. Negative externalities lead to inefficiencies in markets, but positive externalities do not. C. Negative externalities occur when the good harms those who consume it. D. Positive externalities occur when the good benefits those who consume it. 2.   The two main characteristics of a public good are:  A. production at constant marginal cost and rising demand.B. non-excludability and production at rising marginal cost.C. non-rivalry and non-excludability.D. non-rivalry and large negative externalities.

27. 3.Unlike a private good, a public good:  A. has no opportunity costs.B. has benefits available to all, including nonpayers.C. produces no positive or negative externalities.D. is characterized by rivalry and excludability. 4.   Which of the following is an example of a public good?A. a weather warning systemB. a television setC. a sofaD. a bottle of soda

28. 5.   The market system does not produce public goods because: A. there is no need or demand for such goods.B. private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.C. public enterprises can produce such goods at lower cost than can private enterprises.D. their production seriously distorts the distribution of income. 6.   Because of the free-rider problem: A. the market demand for a public good is overstated.B. the market demand for a public good is nonexistent or understated.C. government has increasingly yielded to the private sector in producing public goods.D. public goods often create moral hazard and adverse selection problems.

29. (Under)Provision of Public Goods by farmers

30. Manutenção da identidade e patrimonio cultural Produção de Alimento e fibra Oportunidades de Recreio, Lazer e relaxamento Protecção da biodiversidade

31. Falha de mercado e a intervenção pública agro-ambiental Falha de mercado Os preços de mercado não incorporam as consequências ambientais das decisões dos agricultores. Estas consequências nã dão assim origem a custos e ou benefícios privados para o agricultor, pelo que o óptimo privado não coincide com o óptimo social. Na ausência de outros incentivos o agricultor actua no sentido de maximizar o seu rendimento (o rendimento que consegue captar – no mercado). A grande maioria destes benefícios não são transaccionados no mercado, portanto não têm preço. Intervenção pública (e.gagri-enviornmentalpolicy) As políticas devem fornecer os instrumentos (taxas, subsídios) mais adequados e ter em conta a disposição a pagar da sociedade por aqueles benefícios.

33. A case studyregardingtheprovisionofPublicGoodsbyAgricultural GovernmentalIntervention EconomicValuation: contingentvaluation

34. The Cereal pseudo steppes of Castro Verde: an human dominated ecosystem

35. Bird’s populations decline and landscape scenery loss Land abandonment Afforestation Main reasons for land use change Marginal economic system (low productivity; low revenue)

36. A Contingent Valuation Approach

37. Metodological approach (2) 1) Questionnaire(s) structure Socio-economic profile of respondents Individuals’ attitude towards rural landscapes preservation WTP elicitation Non-market good description and valuation scenarios

38. Metodological approach (3) 2. Valuation scenarios Elicitation scenario Current EU financial support to keep farmers income would be suspended and new forms of land use will be adopted NGO intervention mainly supported by citizens donations Government intervention supported by an environmental tax (additional one) Elicitation procedure Open-ended questions in a two stage process

39. Metodological approach (4) 2. Valuation scenarios (cont.) Budget constraint reminder Prior to stating their WTP, individuals were asked to have in mind: • their current net income • their current expenses • The existence of other typical rural landscapes in the country Support materials A set of pictures and maps have been used to illustrate landscape, its location and the assemblage of birds depending on it.

42. Visualization of the landscape pictures and location map Imagine that this financial support is to be suspended and other farming options, would take place leading to a strong change in landscape structure. 8 Regarding this I would like to ask you to consider the following hypothesis: A) As part of a national strategy of rural landscapes preservation the Portuguese government will implement a program of financial incentives to which the farmers of the municipality of Castro Verde could apply. The objective of such financial support is to ensure the continuity of traditional agricultural practices, to achieve the goal of cereal steppe preservation, at least, in 2/3 of the area of the municipality of Castro Verde payment vehicle = tax This investment will be partially supported by one TAX to be paid by all Portuguese. Suppose that tax, additional to your current taxes, will be managed honestly and will be totally destined to maintain the traditional agricultural practice that origins the cereal steppe. What is the maximum that you will be willing to pay annually, as an environmental tax, to maintain the cereal steppe, at least in 2/3 of the area of the municipality of Castro Verde.

43. What is the maximum that you will be willing to pay, as a one time payment, to maintain the Cereal steppe, at least in 1/3 of the area of the municipality of Castro Verde? B) In order to maintain the current landscape, at least in 1/3 of its extension, a private and non-profit organization, will acquire that area Castro Verde being responsible for its management. This intervention will be essentially supported by citizen donations. payment vehicle = donation

45. Pictures and information about of Birds species and habitat requirements The landscape introduced to you before is from, an ecological perspective, an important refugium for a set of birds’ species threatened at national and international level. Eventual landscape transformations, arriving from a shift in agricultural practice, will lead to a reduction in this birds population and to contribute for the risk of their extinction at global scale. 9 Facing this information would you like to revise the amount stated before? Yes Rectification of answer 8 A Rectification of answer 8 B No, I knew about it No, I do not consider it important No, Other

46. Idade > 30 Regressão Modelo Spike Modo de Entrevista Rendimento mi E (WTP) 95% CI pi E (WTP) € € - Web 3.001 48.13 [60.5 38.3] 0.49 24.54 < 500 - 500-1100 Web 3.215 0.49 59.62 [47.5 30.39 74.9] - Web 3.446 75.11 [94.4 59.8] 0.49 38.29 1100-1750 - > 1750 Web 3.900 118.27 [148.6 94.1] 0.49 60.29 - < 500 Presencial 3.430 73.92 [92.9 58.8] 0.49 37.68 - 500-1100 Presencial 3.645 91.65 [115.2 0.49 46.72 72.9] - Presencial 3.876 115.47 [145.1 91.9] 0.49 58.86 1100-1750 - Presencial 4.330 181.82 [228.4 144.7] 0.49 92.68 > 1750

47. Results  Portuguese active population (older than 21 years) 4 802 985  WTP (Combined Spike model); one time payment 30.4 €  Agregated WTP – 18 966, 67 hectares of cereal steppes 146 M€ [121– 160]  Annuity - hectare t = 40 years 446 € r = 5% [362 – 491]

48. Total Ecosystem Valuation of an hydropower system watershed in Serra da Estrela, Portugal

49. Enquadramento