RYERSON UNIVERSITYRYERSON UNIVERSITYEnvironmental Applied Sciences and Environmental Applied Sciences and ManagementManagementES 8926ES 8926ENVIRONMENTAL ECONOMICSENVIRONMENTAL ECONOMICS

Notes for Class # 5October 12, 2011CHAPTERS 5, 6 , 7, 8

NOTES AND NOTES AND ANNOUNCEMENTSANNOUNCEMENTS

Review Quiz #1 Topics for Term Project Articles for Mid Term Essay

REVIEW REVIEW DISTORTIONS & MARKET FAILURESDISTORTIONS & MARKET FAILURES Monopoly, Oligopoly Market Structure Government Interventions

◦ Price Controls◦ Barriers to Entrance or Exit◦ Subsidies

Externalities, Social Costs◦ Pollution◦ Destruction of Habitat & Open Space

Public Goods Issues & Characteristics◦ Open Space, Access to Waterfront, Parks◦ National Defence, Local Security◦ Light houses, Broadcast Media, Education◦ Health Care

(Lack of) Property Rights◦ Depletion of Un-owned, Open Access Resources

REVIEW REVIEW DISTORTIONS & MARKET FAILURESDISTORTIONS & MARKET FAILURESPublic Goods

◦ Demand Expresses Marginal WTP◦ Derive Aggregate Demand for Public Good by

Vertical Adding MWTP at Given Quantities ◦ Env. Quality Improvements are Public Benefits

Producers of Pub. Goods Cannot Extract Full WTP From Users Because◦ Free-rider Effect◦ WTP Values Not Revealed in a Market

Typically Private Production of Public Goods Less Than Socially Desirable and Efficient.

NORMATIVE vrs POSITIVE NORMATIVE vrs POSITIVE ECONOMICSECONOMICSPositive Economics – Study,

Description, Evaluation of How Economic Systems, Firms, Institutions and Individuals Behave and Operate – How do the work? – Objective Observations and Conclusions, Supposedly “Value Free”

Normative Economics - How Should an Economy, Firms Institutions or Individuals Operate or Behave - Subjective Views and Opinions Based on Individual Values and Biases.

Measures of Efficiency Measures of Efficiency Social Efficiency – Competitive Markets

◦ Private and Public, Market and Non-market Costs and Benefits Included in Demand and Supply (Cost) Factors, and

◦ D (MR) = S (MC) = Max Net Social Value/SurplusAllocative Efficiency - Value of Benefits

Equal to or Greater Than Value of Costs Cost-efficiency - Implement the least-cost

method or means to achieve a given end, objective or benefit.

Productivity - Units of Output / Unit of Input (Labour)

TARGET LEVELS OF POLLUTION OR TARGET LEVELS OF POLLUTION OR ENVIRONMENTAL PROTECTIONENVIRONMENTAL PROTECTIONNo Release, Pristine Pure – eg. Virtual

Elimination, Zero Discharge, Bans Threshold Ambient

Concentration/Exposure Criteria◦ No Known Adverse Effects ◦ Lowest Possible Risk Levels, eg. 1: 100,000

or better Technical/Engineering Criteria

◦ LAER◦ BAT; BAT,EA; BPT

Economic Criteria - Balance Benefits and Costs

ECONOMIC MODEL FOR ECONOMIC MODEL FOR NORMATIVE TARGET-SETTINGNORMATIVE TARGET-SETTING Balance Environmental Damages With

Abatement Costs Environmental Damages

◦ Pollution Releases -> Ambient (Air, Water, Soil) Concentrations -> Marginal Dose-Damage/Response Relationships -> Populations Exposed -> Environmental, Biological, Human Health Effects -> Monetary Value Estimates

◦ Cumulative, Non-accumulative pollutantsMarginal Damage Functions Fig 5-1

◦ Total Damage = Area Under Marginal Damage Curve

◦ Some Reveal Thresholds

ABATEMENT COST FUNCTIONS -ABATEMENT COST FUNCTIONS -11“Abatement”

◦ End of Pipe/Stack Treatment◦ Process Changes◦ Input Substitutions/Changes◦ Energy, Materials Conservation and

Efficiency◦ Recycling◦ Production Reduction

Pollution Loadings = Mass/Time (kg per day)

Pollution Concentrations = Mass/Vol (gram/M3, mg/l)

ABATEMENT COST FUNCTIONS - ABATEMENT COST FUNCTIONS - 22Aggregating Marginal Abatement

Costs = Application of Equimarginal Principle◦Each Plant Abate to Same Marginal

Cost Levels to Achieve Desired Pollution Reduction

◦Figure 5-5 Horizontally Add Pollutant Reductions at Equal Marginal Cost Levels

SOCIALLY EFFICIENT LEVELS OF SOCIALLY EFFICIENT LEVELS OF POLLUTION RELEASESPOLLUTION RELEASESMarginal Damage Function =

Marginal Abatement Cost FunctionFigure 5-6Socially Efficient Levels of Pollution

are Seldom Zero Pollutant ReleasesValue of Benefits (Damages

Avoided/Reduced) =/> Abatement Costs

ABATEMENT COSTS & PROFITSABATEMENT COSTS & PROFITS Competitive Firms and MarketsPollution Damages (External, Public Costs) Result in Excess Outputs/Production (Fig. 5-7)Abatement Costs + Operating Costs = >

◦ Pollution Damages Internalized => ◦ Higher Operating Costs => ◦ Reduced Output/Production => ◦ Foregone Profits

“Competitiveness Issue”◦ Competitive Market => Reduced Profits => Plant Closures => Lay-offs◦ Monopoly/Oligopoly => Higher Prices => Cheaper Imports

FACTORS THAT MITIGATE ADVERSE FACTORS THAT MITIGATE ADVERSE ECONOMIC, FINANCIAL AND ECONOMIC, FINANCIAL AND COMPETITIVENESS EFFECTSCOMPETITIVENESS EFFECTS Ability to Raise Prices Ability/Opportunities to Reduce Input Costs

◦ Reduce, Recover, Recycle◦ Process Changes◦ Pressure Suppliers

Implementation Timing Tax System, Tax Concessions Magnitude of Abatement/Environmental Protection Costs Small Relative to

◦ Exchange Rate◦ Interest Rate◦ Labour Contracts◦ Raw Material, Energy Prices

BENEFIT-COST BENEFIT-COST ANALYSISANALYSISObjectives = Value Benefits - Costs

◦ Economic Feasibility of Single Option◦ Determine Socially Efficient Scale of Public

Project◦ Ranking of 2 or More Options

Advantages◦ Informs Public Expenditure Decisions◦ Avoid Losers ◦ Encourage Efficiency of Public

Expenditures

BENEFIT-COST ANALYSIS - BENEFIT-COST ANALYSIS - CRITICISMSCRITICISMS Justify larger budgets Avoid political discussion and debate about Public Projects Can’t Quantify or Value Benefits, Cut Public Programs Environmental resources, benefits Unpriced, Unvalued Future damages, benefits discounted Monetary values alone hide important information and social issues Env. benefits = intangible perceptions, difficult to quantify, value. Uncertainties in natural science methods, data, human behaviour, responses, methods to estimate economic values => estimates subject to wide ranges, low credibility. BCA appropriate where consequences small relative to economy as a whole. Large effects (extinctions, pollution of ocean, climate change) can alter fundamental preferences & price sets => reduce reliability of BCA for decision-making. Intergenerational sustainability of environmental resources.

BCA - FRAMEWORKBCA - FRAMEWORKDescribe Project, Program, Scale,

PerspectiveIdentify, Quantify, Value Inputs,

Outputs, Social/External Costs and Benefits

Evaluate, Compare Quantities & Values of Benefits and Costs

BCA – EVALUATION & DECISION BCA – EVALUATION & DECISION CRITERIACRITERIAEvaluation Criteria – Compare

Outputs, Results, Consequences of Options, Projects, Policies

Decision Criteria for Accepting, Rejecting, Ranking◦ B-C = Net PV Benefits◦ B/C ratio ◦ Capitalized Value, Asset Value, Internal

Rate of Return of Annual Benefits

BCA TOPICSBCA TOPICSDiscounting, Choice of Discount RateUncertainty

◦ Expected Values◦ Sensitivity Analyses ◦ Monte Carlo Techniques

Distribution, Equity◦ Horizontal, Vertical Equity◦ Proportional, Regressive, Progressive

Programs and Policies