Post on 20-Dec-2015
Economics 350Economics 350Economics 350Economics 350
Environmental EconomicsEnvironmental Economics
Air pollution
Hazardous wastes
Cost-benefit analysis
Abatement costsWater pollution
Optimal pollution
Global warming
Endangered species
EPA
Solid municipal waste
Tradable discharge permits
Command and control
Emission taxes
Households: “pay as you throw” garbage systems
Firms: CO2 taxes and tradable SO2 permits
Appeals to moral behavior
Recognizes that people respond to incentives
Moral ApproachMoral Approach Economic ApproachEconomic Approach
Households: “give a hoot, don’t pollute”
Firms: emission standards
Why do people behave in ways that harm the environment?
Economic Way of Thinking
Rationality Scarcity Marginal analysis Equilibrium Positive vs. normative analysis
Environmental Policy
ObjectivesEnvironmental qualitySustainable developmentBiodiversity
Types of PoliciesCommand and ControlMarket Approaches
EffectivenessCost/Benefit Analysis
Environmental Policy
PoliticsSpecial interestsFairness issues
OutlookPessimists
Thomas Malthus
Bootleggers & Baptists ?
Malthusian Model
time
Food production
Population
Thomas Malthus
Environmental Policy
PoliticsSpecial interestsFairness issues
OutlookPessimists
Neo-Malthusians“Limits to Growth”
Optimists“cornucopians”Technology and markets
Julian Simon
Economy and Environment
Economy
Nature
Natural Resource Economics Environmental Economics
resources residuals
PPC shows all combinations of two goods that can be produced from given resources and technology
Illustrates tradeoff between the two goods
PPC shows all combinations of two goods that can be produced from given resources and technology
Illustrates tradeoff between the two goods
Economy and Environment: PPC
Market Goods
Environmental Quality
PPC
A
B
ΔG
ΔEQ
Note: Environmental degradation may shift PPC inward over time.Note: Environmental degradation may shift PPC inward over time.
Production Possibilities Curve
Assume a concave production possibility curve. Suppose that society decides to increase the production of market goods by 10,000 units, and that as a result environmental quality falls by 10 units. If a further increase of 10,000 units of market goods is sought, we can expect that environmental quality will:
1 2 3 4 5
a) b) c) d)
0% 0%0%0%
a) fall by 10 units. b) fall by less than 10 units. c) fall by more than 10 units.d) increase by less than 10 units.
Producers
Consumers
Residuals: Rp Discharged: dRp
Residuals: Rc Discharged: dRc
Recycled: rRc
Goods: G
Recycled: rRp
Raw Materials
M
M = dRp + dRc M = G + Rp – (rRp + rRc)
Fundamental Balance
3 Ways of Reducing MReduce G
Reduce “consumerism”Zero population growth?
Reduce Rp
Reduce residual intensity of productionSectoral shift
Increase (rRp + rRc)Mandatory content requirements
Fundamental Balance
M = G + Rp – (rRp + rRc)
Types of Pollutants Cumulative Noncumulative
Local Regional Global
Point Source Non-Point Source
Stationary Source Mobile Source
Continuous Emissions
Episodic Emissions
Radioactive waste, plastics, many chemicals
Noise
Noise, visual
SO2
CO2, CFCs
Smoke stacks, waste treatment plants
Agricultural runoff
Factories
Cars, planes, boats
Power plants, factories, waste treatment plants
Oil and chemical spills
US Pollution Control Expenditures: 2005
Abatement Expenditures (billions $)
Capital Operating Total % of Total
Air $3.88 $ 8.63 $12.51 47
Water $1.35 $ 6.73 $8.08 30
Solid Waste $0.68 $ 5.32 $6.00 23
Total $5.91 $20.68 $26.59U.S. Census Bureau, Pollution Abatement Costs and Expenditures: 2005, MA200(05), U.S. Government Printing Office, Washington, DC, 2008. Online: http://www.census.gov/prod/2008pubs/ma200-05.pdf
Review of Microeconomic Theory
Rational man modelAn individual seeks to maximize his or her utility.
For social optimality the rule is:
Taking action until the marginal private cost of further action equals the marginal private benefit of that action.
Taking action until the marginal social cost of further action equals the marginal social benefit of that action
Market Model
What Q is produced? What Q should be produced?
What Q is produced? What Q should be produced?
Supply
Demand
quantity
Price
Q*
P*
Normative
Positive
Consumer Surplus = ∑(WTP – Price) Total Expenditure = P*Q
Consumer Surplus = ∑(WTP – Price) Total Expenditure = P*Q
Market Model: Demand Side
Demand
quantity5
$50
Buyer’s Marginal Benefit or WTPPrice
$25
1
Consumer Surplus
Total Expenditure
Market price
Producer Surplus = ∑(Price – Marginal Cost) Producer Surplus = ∑(Price – Marginal Cost)
Market Model: Supply Side
Supply
quantity
Price
3
$25
Total Cost
Producer SurplusSeller’s Marginal Cost
$10
Market price
CS
Market Model
Free Market Outcome: P*, Q* Maximizes social welfare: SW = CS + PS
Free Market Outcome: P*, Q* Maximizes social welfare: SW = CS + PS
Supply
Demand
quantity
Price
Q*
P*
PS
Deadweight Loss
Q
Market Model
Problem Set 1, #8 Problem Set 1, #9
Equimarginal PrincipleTotal Costs of Production
Output Plant A Plant B Plant C
0 20 5 15
1 25 13 22
2 37 30 32
3 50 60 47
4 80 105 77
5 115 155 117
ΔTCMC=
ΔQ
Suppose you wanted to produce Q = 11. How would you allocate output among the three plants if you wanted to minimize the costs of production?
Suppose you wanted to produce Q = 11. How would you allocate output among the three plants if you wanted to minimize the costs of production?
Allocate output such that MCA = MCB = MCCAllocate output such that MCA = MCB = MCC
Define:
__________________
Plant A: Q = 4Plant B: Q = 3Plant C: Q = 4
MC = $30 in all plants
TC = 80 + 60 + 77 = $217
Imperfect competition Imperfect information Externalities Public goods/Common Resources
Imperfect competition Imperfect information Externalities Public goods/Common Resources
Market Failures
Occur when decision makers do not consider all costs (or benefits) of their actions
Two views
A. C. Pigou Ronald Coase
Externalities
Cashmere Externalities
Externalities: Pigou
Social Cost = Private Cost + External Cost
cashmere
$
D1
Sprivate
Q1
P1
P2
Q2
Ssocial
Marginal external cost
How can society achieve social optimum?
Impose tax = marginal external cost Internalize the externality!
Free Market: P1, Q1
Optimal Outcome: P2, Q2
Free Market: P1, Q1
Optimal Outcome: P2, Q2
Free market overproduces goodsthat generate a negative externality
TEC
M&M Experiment
Public Goods & Common Resources
Rival in consumption
Non-rival in consumption
Excludable
Non-Excludable
Private GoodsArtificially Scarce
Goods
Common Resources
Public Goods
Excludability: can you be excluded from consuming the good?
Rivalry: does my consumption hinder your consumption?
Excludability: can you be excluded from consuming the good?
Rivalry: does my consumption hinder your consumption?
Tragedy of the Commons
Commonly-owned resources tend to be over-exploited Conflict between self-interest and the
common good Examples
Garrett Hardin
Am I in danger of
being over-harvested?
Sample Problems
Problem Set 1: #20 (Externality) Problem Set 1: #18 (Public Goods)
0
20
40
60
80
100
120
140
0 200 400 600 800 1000 1200 1400 1600
SO2/m3
$
ΣMB
MBH MBA MBS
MC
Social Optimum occurs where ΣMB = MC
SO2 (μg/m3) Dirtier air
$
0
10
20
30
40
50
60
70
0 500 1000 1500 2000 2500 3000 3500 4000 4500
Orange Juice
D = Σd
dA dSdH
There are essentially three ways of reducing M (raw material usage) and, therefore, residuals discharged into the natural environment. These include all of the following except
0% 0%0%0%
a) reducing G (output of goods) b) increasing Rp (production
residuals) c) increasing rRp + rRc (recycled
production and consumption residuals)
d) all of the above.
1 2 3 4 5
All of the following are examples of point-source pollutants except one. Which one is not an example of a point-source pollutant?
0% 0%0%0%
a) municipal waste treatment plants
b) agricultural chemical runoff
c) electric power plants d) Eramet Metals
manufacturing plant
1 2 3 4 5
Public goods are distinguished by two primary characteristics. These are:
0% 0%0%0%
a) market failure; high prices b) government intervention;
high prices c) nonrivalry; nonexclusivity d) rivalry; exclusivity
1 2 3 4 5
The efficient output will be less than the free market output when:
1 2 3 4 5
a) b) c) d)
0% 0%0%0%
a) Marginal social cost and marginal private cost are equal
b) Marginal social cost is greater than marginal private cost
c) Marginal social benefit and marginal private benefit are equal
d) Marginal social benefit is greater than marginal private benefit
a) Marginal social cost and marginal private cost are equal
b) Marginal social cost is greater than marginal private cost
c) Marginal social benefit and marginal private benefit are equal
d) Marginal social benefit is greater than marginal private benefit
The table below shows the marginal benefit from water quality for the only two citizens of a town. Water quality is a public good. If the marginal cost of water quality is $75 per quality unit, what is the efficient quantity of water quality?
Fanting Gary
Marginal benefit of water quality
WaterQuality
Marginal benefit of water quality
80 1 100
70 2 85
60 3 60
45 4 35
25 5 15
0 6 0
1 2 3 4 5
1 2 3 4 5 6
0% 0% 0%0%0%0%
a) 1b) 2c) 3d) 4e) 5f) 6