EN. EC. week 50-2010-11

8/7/2019 EN. EC. week 50-2010-11

1/54

environmental economics, d.wiersma4/11/2011 1

Excursion on Friday, 21January at 14.00 -15.00 p.m. !!!

Subject:

Newest energy saving technology for large buildings

Heat /Cold Storage in underground layers

Place:

Zernike complex , start Blue room, Duisenberg building

Organisation:

Call for volunteers ;students who arewilling and able

to translate theexplanation in English

Mail to [email protected]

8/7/2019 EN. EC. week 50-2010-11

2/54

Environmental Economics

The economic theory of natural resources III1. Water

2. Biological Renewable resources : Fisheries

8/7/2019 EN. EC. week 50-2010-11

3/54


I.Global water trends

II.Economic studies of water resources

i.Economics of large scale flooding ( sea or rivers)

ii. Efficiency studies of drinking water companies, water purification plant anwaterboards

iii. A sustainable use of ground water in theNetherlands

III. The EconomicTheory of Fisheries

8/7/2019 EN. EC. week 50-2010-11

4/54


I. Global water issues

8/7/2019 EN. EC. week 50-2010-11

5/54


Halpern, B. S. et al (2008) ,A Global Map on

Human Impact on Marine Ecosystems, Science,

319, no 5856, 948-952.

8/7/2019 EN. EC. week 50-2010-11

6/54

environmental economics, d.wiersma4/11/2011 6Published by AAAS

B. S. Halpern et al., Science 319, 948 -952 (2008)

Global map (A) of cumulative human impact across 20 ocean ecosystem types

A. Pollution of the oceans

8/7/2019 EN. EC. week 50-2010-11

7/54


World water shortage; projected water scarcity in

2025 Souce: United Nations

B. Fresh water quantity

8/7/2019 EN. EC. week 50-2010-11

8/54


C Fresh water quality:

8/7/2019 EN. EC. week 50-2010-11

9/54


II.Economic studies of water resources

i.Economics of large scale flooding ( sea or rivers)

ii. Efficiency studies of drinking water companies,

water purification plant and waterboards

iii. A sustainable use of ground water in theNetherlands

8/7/2019 EN. EC. week 50-2010-11

10/54


i. Water management policy of large scale flooding

1953: a terrifying flood in the provinces South Hollandand Zealand

Damage :

1835 people died

200.000 cows , horses and pigs died

200.000 hectares of land unusable for many years

72.000 peoplewereevacuated to other areas

8/7/2019 EN. EC. week 50-2010-11

11/54


Policy measures :

The Delta Plan; a combined strategy of building higher dikes

and the developing of theentire delta.

theexecution was concluded in 1997 with the movable storm

barrier near Rotterdam.

Economic th

eory :

calculation of a fixed exceedence probability aftereach

investment in the relevant safety structure ( Van Dantzig).

This method is still in use in CBA of flood protection

8/7/2019 EN. EC. week 50-2010-11

12/54


Movable storm barrier in Rotterdam

8/7/2019 EN. EC. week 50-2010-11

13/54


Primary objective :protection against flooding forevery part of the

country without consideration of differences in

economic activity

Criticism :

All over protection against flooding does not take

into account the spacial distribution ofeconomic

activity , so the protection policy is not very cost-

effective

8/7/2019 EN. EC. week 50-2010-11

14/54


Since 2004: a gradual shift in water management policy

From :defending against to living with water

room forwater , let the river be the river

give more space to natural waterflows

example: the creation oflower flood levels of the River Rhine bij

increasing the capacity of the discharge from 14.000 m3/s

to 16.000 m3/s in 2015 and 18.000 m3/s at the

end of this century

8/7/2019 EN. EC. week 50-2010-11

15/54


Area for storage of

water

8/7/2019 EN. EC. week 50-2010-11

16/54


New approach ofwatermanagement:

Integration of

watermanagement

spatial planning

economic development

8/7/2019 EN. EC. week 50-2010-11

17/54


ii. Efficiency studies in the water sector

1. drinking watersupply companies

characteristics:

* traditional natural monopolies because of a network of pipelines

* input: groundwater

surfacewater

* interconnection of networks of firms may give health problems

because of the different types of inputs and it is difficult to find out

which firm is legally resposible

* separation of the network and the production on the network,

likeelectricity and natural gas is not possible

* Priceelasticity of demand for drinking water is relative low

8/7/2019 EN. EC. week 50-2010-11

18/54


regulation of drinking water companies

Traditionalregulation by the government: prices has to cover total cost

Problem ofregulation: the government has less information about the

specific cost of the different firms than the firms itself.

Result:

*drinking water companies have no incentive to produce at minimum

cost

*higher than minimum prices can be charged, because the companiesface no competition.

Inefficiency and welfare loss for society!!

8/7/2019 EN. EC. week 50-2010-11

19/54


Actual price

Lowest price

Actual demand Optimal demand

X- inefficiency at firm level

ACmin = Minimum Average Cost

ACactual= Actual Average Cost

MC

ACmin

ACactual

X- inefficiency

8/7/2019 EN. EC. week 50-2010-11

20/54


Empirical estimated inefficiency, NL , 1991-1995

Drinking water

companies

Waste water purification

plants

% of costs

15.2

30.0

Joint research RUG with Erasmus University Rotterdam

8/7/2019 EN. EC. week 50-2010-11

21/54


Innovations of regulation to decrease inefficiency in thewatersector

UK

Privatization ofwater companies, combined with price cap regulation

(Offwat)

Result : Cost inefficiency is significant lower than in theNetherlands

France

Tender system in which the most efficient firm receives the right to supply

drinking water for a specific period in a specific region

Netherlands

System ofbench marking in the sector itself: publication of cost comparisons

between firms

Result : costs are going down in the period 1997 2004 by 1.3% per year

8/7/2019 EN. EC. week 50-2010-11

22/54


ii. Efficiency studies in thewatersector

2. Collective waste waterpurification plants

Public firms with prices based on cost coverage

Public Monopoly (no competition)

X inefficiency (production not by lowest cost

Private firms who can clean their own waste water cheaper has leftleft the public firm

As a result the public firm gets over capacity and prices have

increased

In a study we proved that an X-inefficient firm with prices based

on cost coverage can become efficient , when the public firm withmarket power at the supply side will be confronted with market

power at the demand side

8/7/2019 EN. EC. week 50-2010-11

23/54


Wastewater purification plant

8/7/2019 EN. EC. week 50-2010-11

24/54


iii. Efficient allocation of groundwater resources

by means of economic incentives

Case study of theNetherlands

Desertification of

nature bydecrease of

groundwater

level

8/7/2019 EN. EC. week 50-2010-11

25/54


Groundwater use Damage to ecosystems

Main developments in the last 50 years:

1. Increased dewatering and drainage of agricultural areas (70%)

2. Increased extraction of groundwater for drinking water and

industrial/agricultural use (30%)

8/7/2019 EN. EC. week 50-2010-11

26/54


Groundwater level

Damage

ForestNature sensitive to

water

About 400.000

hectares

11% of total area

ofNL

Agricultural

revenue

loss

8/7/2019 EN. EC. week 50-2010-11

27/54


Damaged areas in theNetherlands

(Red and yello areas)

8/7/2019 EN. EC. week 50-2010-11

28/54


Government policy :

Since 1990.

Main objective: Sustainable use of groundwaterwithin 50 years

2 stages

1. 1990 -2000 to stop increase of damage to ecosystems

2. 2000- 2050 recovering ecosystems

Measures:

1. Improved water management

2. Limitation ofextraction of groundwater

( groundwater is used for drinking,

industry for cooling and agriculture in very dry periods )

8/7/2019 EN. EC. week 50-2010-11

29/54


Past allocation of groundwaterextraction

Main instrument: quantity regulation per region by means of licences

criterion : no expected damage to other users

Inefficiencies

1.Damage to ecosystems was not taken into account

2. Inefficient allocation among extractors

( extraction licences was not based on differences

in economic value of groundwater among users)

8/7/2019 EN. EC. week 50-2010-11

30/54


Adjusted measures to limit groundwaterextraction

* limiting groundwater extraction for drinking by means of a publicity

campaign with the objective to reduce the extraction by 15 % in 2010

*Industrial self extraction of groundwater (especially for coolingpurposes) will be reduced by means of the existing system of regulation

Inefficiencies

Inefficient allocation between extractors

( extraction measures are not based on differences

in opportunity costs between drinking water firms and industry)

8/7/2019 EN. EC. week 50-2010-11

31/54


Alternative allocation

Efficient allocation: regional auctions of groundwaterextraction permits

Problem: thin regional water markets with a few big extractorsTo correct for strategic behavor: special design of the auction

Result of an auction:

Same

reduction ov

er 1990 -2010 at 10

%lowe

r total costs!!Water companies save money , industry pays more

8/7/2019 EN. EC. week 50-2010-11

32/54


III. BIOLOGICAL RENEWABLE RESOURCES

- Capacity for reproduction and growth

- For ests, fisheries: populations of biological mechanisms;

Focus on fisheries!!

8/7/2019 EN. EC. week 50-2010-11

33/54


Fisheries

1. biological sub-model- logistic growth curve= stylized prescription of

population dynamics2. economic sub-model ;

description of behavior of fisheryman

3. steady stateequilibrium: static efficiency

4. open access fishery

5. dynamic allocation6. policies to avoid extinction of the resource

8/7/2019 EN. EC. week 50-2010-11

34/54


1. Biological sub-model ; logistic growth approach to the

behaviour of fish population (stock)

Competition

for scarcity of

food

Reproduction

time

Stock SS max

S min

8/7/2019 EN. EC. week 50-2010-11

35/54


Relation between the stock (S) and the natural

growth rate g of the stock

Smax =40

g =dS/dt

MSY

Example:

g = 4S 0.1 S

g= S(4- 0.1S) = 0;

Smin = 0; Smax = 40

dg/dS = 4- 0.2S=0;

S = 20

gmax = g (S=20) = 40

40

20

gmax =MSY = maximum sustainable yield

0

8/7/2019 EN. EC. week 50-2010-11

36/54


2. Economic sub-model

a) Harvest function or production function of the fishery sector:

H (harvest) = H(E,S)

E = Fishing effort (capacity of the ships, the time spend at the ocean)

S = Size of the stock

Assumption 1.

Following Schaefer, 1954 and Munro, 1981,1982 a good approximation of

the production function is : H =e ExS

With e is a measure of the catch efficiency

In case ofe=1 we have: H= ExS

Assumption 2.

Steady stateequilibrium H = g

8/7/2019 EN. EC. week 50-2010-11

37/54


Production function

H( harvest) = E (effort) x S (stock)

ES

H*

SO S* Smax

H, g

C

8/7/2019 EN. EC. week 50-2010-11

38/54


H=g

H

So Smax

h0

h1

h2h3

0 2 4

E0S

E1S

E2S

E3S

h0

h1 h2 h3

Transformation of H=H(S) to H= H(E)

Assume E0 < E1

8/7/2019 EN. EC. week 50-2010-11

39/54


b) Costs and benefits and profit of fishing

Total costs of harvesting: C = C(E)

Assume a linear function : C =wE (2)

withw the cost per unit ofharvesting (w is constant)

c) B denote the gross benefit from harvesting:

B =B(H)

Assume that in the commercial fishery that fish are sold in a competitive

market, each firm takes the market price P as given and the revenue

obtained from the harvest H is

B = HP (3)

d) Fishing profits (net Benefits) :NB = B-C (4)

8/7/2019 EN. EC. week 50-2010-11

40/54


TC=wE

TB=PH

E* E(ffort)

TB,TC

3.Staticefficiency:max.net benefits

Assumptions:

Totalbenefits (Revenues): TB = PH

Total Costs TC = wE

Calculation example:

Assume P=1, w=10

H = 40 E -10E (1)

TB = PH= 40 E -10E (2)

TC = wE =10E (3)

NB =TB-TC= 30 E 10E

Max.NB ; d(NB)/ dE =0

dNB/dE = 30 - 20E= 0 ; E* =1.5

TB = 37.5; TC =15; NB=22.5

1.5

S = 40-10 E = 25

8/7/2019 EN. EC. week 50-2010-11

41/54


4. Open access fisheries

characteristics:

* Harvesting by a large number of independent firms

* No barriers to entry or exit for the fishery

* No enforcable property rights to the in situ fish resources

* Perfect competition: effort applied will continue to increase as long

as it is possible to earn a positive economic profit

* Entry continue until the profits will become zero

Long run free access equilibrium NB=0 orTB=TC

8/7/2019 EN. EC. week 50-2010-11

42/54


Equilibrium : Free access

Average =marginal costs

Average BenefitsMarg. Benefits

E(ffort)

PH

wE TC

Efree accesE efficient

Calculation example:

Free access case

TB = TC

40 E -10E = 10E

E= 0; E= 3

S = 40-10E=10

TB

31.5

Free access

AB =TB/E = 40 -10E

AB = AC; 40-10 E = 10;

E =3; S=10

Efficient MB equal MC

MB =d(TB)/dE = 40-20E

MC= 10 ;E=1.5; S =25

8/7/2019 EN. EC. week 50-2010-11

43/54


FreeAccess:

2 types ofexternalities:

- contemporaneous: overcapacity of fishing

- scarcity rent of the resourcewill be dissipated

(inefficient)

- intertemporal: overfishing reduces stock for future

generations, so future profits will be lower (not

sustainable)

CONCLUSION

Free access violates conditions forefficiency and sustainability

8/7/2019 EN. EC. week 50-2010-11

44/54


5. Dynamic efficiency: time preference!

E static efficient E free access

Dynamic efficiency?

r=0 : Static efficient

r>o : time preference : E Stock

r = g: no value for future revenues: E = E free access

8/7/2019 EN. EC. week 50-2010-11

45/54


0.000

10.000

20.000

0.000

40.000

50.000

0.000

0 20 40 0 0 100 120 140 1 0 1 0 200 220 240 2 0 2 0 00

0.000

0.200

0.400

0. 00

0. 00

1.000

1.200

to cort

Stock and effort dynamic paths for an illustrative model.

Perman, et. al.

8/7/2019 EN. EC. week 50-2010-11

46/54


Probability ofextinction of the species?

No extinction in steady stateequilibria

Possibleextinction when the critical Smin is at

a relative high level of the stock

Extinction is in a lot of cases irreversable

6 P li l i ffi i ll i

8/7/2019 EN. EC. week 50-2010-11

47/54


6. Policy solutions to get an efficient allocation

1. A tax t on Effort or on access for fishing

* Assume free access behaviour:

TB= TC

HP =(w +t)E

example: 40 E 10E = (10+t) E (1)

Social objective:efficient level E*=1.5 (2)

Substitution of(2) in (1) gives 60 22.5= 15 + 1.5 t ; t* =15

1.5 3 E

TC =10E

TC=(10+t)E

8/7/2019 EN. EC. week 50-2010-11

48/54


2. A Command and Control approach a quantity restriction

by means of fish quota

TC=10 E

1.5 3 E

At E=1.5 ; TB = 40 E -10 E= 37.5 ; TC = 10 E = 15; NB = 22.5>0

There is a positive incentive to fish more and a tendency for entry

Entry can be limited by licenses for the incumbent fishing firms

To restrict the effort of the incumbent firms strict control is needed

8/7/2019 EN. EC. week 50-2010-11

49/54


3. Transferable (marketable) rights on fishing effort

Government issues for E = 1. 5 rights on effort, which can be

bought by the fishing firms.

The willingness to pay is the maximum value (NB per unit E)

the firms have to pay for the rights.

The fishing rights are free tradable on the market

NB = 30 E -10 E ;Average NB per E is 30 -10E

Demand function of fishing rights P = 30-10E

1.5 3 E

30

15

S

D

Demand: P = 30 10 E

Supply : E =1.5

P* =15

8/7/2019 EN. EC. week 50-2010-11

50/54


World:

World fish harvest: 100 - 120 million tonnes

1. Employment; - directly 30 million jobs

- indirectly 200 million jobs

2. Exploitation of the stocks:

- 25%moderately

- 50% fully

- 25% overexploited or depleted

8/7/2019 EN. EC. week 50-2010-11

51/54


Policy European Union (1)

-1977: 200 Miles limit

-1983 -2002: Common Fisheries Policy (CFP)

Objective: sustainable use of fish stocks

Measures: -ceiling on annual fish quotas

(total allowable catches (TAC)

-distributed over member states, based on historical

catches over 1973-1978.

-Control and enforcement by the member states

8/7/2019 EN. EC. week 50-2010-11

52/54


Evaluation CFP

-large number of stocks below biological reasonable

levels

-Current fleet is still over-sized

-Legal systems and sanctions are not harmonized

8/7/2019 EN. EC. week 50-2010-11

53/54


Policy European Union (2)

-reform policy after 2002

*Shift from short run to a long term approach

(not just one species but a group of interdependent species)

Measures:

1. Total Allowable Catches to limit the amount of fish over a specific period

of time.

2. Technical measures, such as mesh sizes, closed areas

3. Limiting fishing effort by reducing the number of fishing days at sea

4. Fixing the number and type of fishing vessels

8/7/2019 EN. EC. week 50-2010-11

54/54

environmental economics d wiersma4/11/2011 54

Market alternatives :

(proposed by Netherlands Institute of Agriculture and Economics)

1. Quotas for fishing effort (fleet capacity and fishing periods(advantage: restriction of capacity and easier control)

2. Licences for access to specific region and per type of fish

3. Tax on fishing effort

4. Auction of fishing effort rights, which are tradable at a market

EN. EC. week 50-2010-11

Documents

Transcript of EN. EC. week 50-2010-11