Environmental economics 2

1. Environmental economics2

2. 2 different approaches • Ecological paradigm: concerned with the health and survival of ecosystems • Economic paradigm: concerned with maximizing human welfare • BUT: does that mean current welfare (short-term) or future welfare (long-term)??

3. Ecological paradigm • Ecologists think of maximizing long-term welfare • What do we call that? • Sustainability

4. Economic paradigm • Economists often concerned with how the environment affects human well-being • Environment has no value by itself (intrinsic value)

5. Environmental economics • Maximizing human welfare MUST INCLUDE properly valuing ecosystems and the costs of environmental degradation

6. Environmental economics • To an economist, environmental issues fall into two areas: • Generation of wastes and pollutants as unwanted byproducts of human activities • The management of renewable and nonrenewable natural resources

7. How much is too much? • How much pollution should be permitted? • Current levels too high? . . . Or too low? • Shouldn’t pollution be zero? • Why or why not?

8. Market economy • For many goods, supply and demand determine a market equilibrium. • Examples: iPads, Modern Warfare II, bananas • BUT: for natural resources or environmental quality • Not true market goods • Hard to price

9. Externalities • Key concept • Whenever an economic activity creates ``spillovers’’ on people not directly involved in the activity, there is an externality. = unintentional side effects • Usually negative

10. KEY Slide Externalities are social costs Supply + social cost • When externalities occur, a company’s private production cost is NOT the same as the social cost of production. • Social costs might include costs of pollution cleanup or added healthcare costs • When external costs are ADDED to the costs of production, the supply curve shifts left (for a given price, suppliers will supply less) supply What happens to the price of a product if externalities are Included?

11. Externalities • A factory that pollutes a river creates involuntary costs (negative externalities) for anyone using the river • Fishermen –can’t fish or can’t eat catch • Boaters –unable to boat or increased maintenance • Swimmers – lose swimming spot; increased illness • Water suppliers – costs of making water safe

12. Externalities • There can be positive externalities • Examples? • Your neighbor paints her house and improves her yard with new landscaping. She bears all the cost. She reaps some benefit. • YOU and other neighbors also benefit

13. How deal with externalities? • Several ways • Command-and-control (government regulation) • Tax • Subsidy Economic • cap-and-trade incentives

14. Command-and-control • The traditional way of dealing with environmental regulation in the U.S. (and elsewhere). • Regulators – usually the federal or state government – sets standards or limits on some activity, such as pollution emitted.

15. Command-and-control • Ambient standard • Regulator sets the amount of a pollutant that can be present in a specific environment. • E.g.: government sets limit on ground-level ozone (say, 100 ppm) in an area • Indirect: the limit is on the level in the atmosphere, not on specific polluters.

16. Command-and-control • Emission standards • Limit the amount of emissions from a specific firm, industry, or region • Doesn’t set allowed level in environment, but tries to reduce pollution company by company.

17. Command-and-control • Technology-based standard • Require polluters to use particular technology to control pollution. • E.g.: power plants that are required to install scrubbers on their smokestacks.

18. Command-and-control • Why use c-and-c? • Clear outcome • Easy to monitor compliance • Drawbacks • Information can be hard to come by • The regulated industry has incentive for dishonesty • Gathering information can be expensive • Regulated industries may have no incentive to find innovative ways to meet standards

19. Command-and-control • Drawbacks (continued) • Not always cost effective • Marginal cost for limiting pollution likely to vary among sources • Means: some companies may be able to reduce pollution much more cheaply than others

20. Command-and-control • Command-and-control is comforting to politicians and people: governments know what they are asking for, people know what they are getting; companies know what they are supposed to deliver; the only people who do not like it are economists. • The Economist, September 2, 1989

21. Tax • Fee charged to polluter • Value determined by the regulator • Goals: • Discourage environmentally damaging activity • Raise revenue (often to be used for environmental projects) • Internalize the externality

22. Tax • A tax may be imposed on a product that causes environmental harm, such as a pollutant. • The tax is a way to INTERNALIZE the externality—that is, to REVEAL the true cost of the product (including the social costs such as environmental degradation or health impacts). • What is the effect? • Environmental economists LIKE pollution taxes!

23. Tax • Example: • Gasoline tax • Much higher in Europe than the US • Environmental taxes were about 3.5% of total tax revenue in the US in 2003 • About 7% in Europe

24. Tax • Advantages • The source (regulated industry) can determine most cost effective way to reduce emissions • Economically efficient: polluter will reduce emissions as long as that’s cheaper than paying the tax. • The regulator (government) doesn’t need as much information (such as on control techniques) so less expensive to implement

25. Tax • Disadvantages • Taxes are politically unpopular • Fairness: gas tax, for example, may be perceived as harming the poor the most

26. Subsidy • A reverse tax • Payments—by governments—for desirable activities • ‘A result of a government action that confers an advantage on consumers or producers, in order to supplement their income or lower their costs’ • For example: there have been subsidies for purchasing fuel-efficient cars—money back or a tax break.

27. Subsidy • Disadvantages • May make it seem like environmentally friendly behavior must be paid for, rather than is a responsibility. • Subsidies have a cost—government is paying for them • Subsidies may require government to pick winners

28. Subsidies & taxes • Possible negative effect of both: • May decrease people’s environmental ethic, because they may feel that if they pay the tax or forego the subsidy, they have a right to pollute and no further responsibility. • DISCUSS