Valuing the Environment: ConceptsValuing the Environment: Concepts

► Develop general conceptual framework to approach Develop general conceptual framework to approach environmental problemsenvironmental problems

► Examine the relationship between human actions Examine the relationship between human actions and environmental consequences of these actionsand environmental consequences of these actions

► Then establish criterion to judge the desirability of Then establish criterion to judge the desirability of the outcome of the relationshipthe outcome of the relationship

► Trying to contrast economic view with alternative Trying to contrast economic view with alternative points of view. These contrasts bring economic points of view. These contrasts bring economic approach into sharper focus & stimulates more approach into sharper focus & stimulates more critical & deeper more thinking about all possible critical & deeper more thinking about all possible approaches.approaches.

The relationshipThe relationship

► Environment is a composite asset – Environment is a composite asset – providing variety of servicesproviding variety of services

► Life support system for existenceLife support system for existence► Prevent undue depreciation of this Prevent undue depreciation of this

assetasset► Some services provided directlySome services provided directly► Services that have no substituteServices that have no substitute

Waste

Environment

Raw material Energy

Consumer products

Helps this transformation

Is ours a closed economy?Is ours a closed economy?

► No – Sun, spaceshipsNo – Sun, spaceships► Historically closed – exports & imports Historically closed – exports & imports

negligiblenegligible► Whether it remains ‘closed’ depends on the Whether it remains ‘closed’ depends on the

degree to which space exploration opens up degree to which space exploration opens up the rest of our solar system as source of raw the rest of our solar system as source of raw materialmaterial

► Entropy Law: consumption of energy : Entropy Law: consumption of energy : irreversible process - in absence of new irreversible process - in absence of new energy inputs, a closed system will use up all energy inputs, a closed system will use up all the energy - energy over the energy - energy over end of life end of life

► Excessive waste - depreciates the asset – Excessive waste - depreciates the asset – pollution: respiratory problems, smog: pollution: respiratory problems, smog: obliterates viewobliterates view

► Ours is not a ‘closed’ economy. Ours is not a ‘closed’ economy. ► Upper limit is flow of solar energyUpper limit is flow of solar energy► Once stock of stored energy (fossil Once stock of stored energy (fossil

fuel etc) is over –available energy fuel etc) is over –available energy useful for work is determined by the useful for work is determined by the flow and storing capacity (dams, flow and storing capacity (dams, trees etc)trees etc)

► Growth process limited by Growth process limited by availability of solar energy and our availability of solar energy and our ability to put it to use, in LRability to put it to use, in LR

► To understand relationship between To understand relationship between economic system & environment: 2 types economic system & environment: 2 types of analysis – both branches usefulof analysis – both branches useful

normative economics:What ought to be –

value judgement

positive economics: what is, what was,

what will be – appeal to the facts

Normative analysisNormative analysis

• To evaluate desirability of a proposed -To evaluate desirability of a proposed -

- Pollution control regulation- Pollution control regulation

- To preserve an area due for development- To preserve an area due for development► Desirability of programme either Desirability of programme either

beforehand or after implementation – if beforehand or after implementation – if there is alternativethere is alternative

► Open-ended possibilities: consider entire Open-ended possibilities: consider entire range of possibilities - select the best / range of possibilities - select the best / optimaloptimal

Normative criterion for decision makingNormative criterion for decision making

Evaluating predefined options:Evaluating predefined options:

► Desirability of a proposed actionDesirability of a proposed action► Identify Benefits (B) & Costs (C) - compareIdentify Benefits (B) & Costs (C) - compare B > C B > C support support B = C B = C indifferent indifferent B < C B < C ? ?Measurement of B & C is anthropocentric - Measurement of B & C is anthropocentric -

effects on human beingseffects on human beings ∴ effects ignored ∴ effects ignored unless they directly affect humansunless they directly affect humans

Anre Naess – Norwegian philosopher used terms:-Anre Naess – Norwegian philosopher used terms:-► ‘‘deep ecology’: refers to the view that non-deep ecology’: refers to the view that non-

human environment has human environment has

-Intrinsic value:– independent of human interests -Intrinsic value:– independent of human interests &&

-Instrumental value: useful in satisfying human -Instrumental value: useful in satisfying human wantswants

Humans join organisations dedicated to Humans join organisations dedicated to protection of environment voluntarily - protection of environment voluntarily - Environment has value that goes beyond Environment has value that goes beyond usefulness to humans – modern valuation – usefulness to humans – modern valuation – humans cannot/shouldn’t decide value of other humans cannot/shouldn’t decide value of other speciesspecies

► Benefits derived from demand curve – Benefits derived from demand curve – willingness to pay = shaded areawillingness to pay = shaded area

D

D

price

quantityO

P1

P2

Q1 Q2 O Q1

Env services have costs although they are produced without any human input - All costs = opportunity cost e.g. opportunity cost of producing power is = forgone benefit of white-water canoeing

Total willingness to pay

► Marginal opportunity cost curve is supply curve in Marginal opportunity cost curve is supply curve in PC marketPC market

► Total cost = sum of marginal costs = OGIKTotal cost = sum of marginal costs = OGIK

S

G

cost

QuantityO

I

K

Net benefit = B > C ∴ area under demand curve that

lies above supply curve

Net benefit

C & B

D

S

O

Cost is incurred in one period & benefits are received in the other - how to make choices?

Total cost

Present Value:Present Value: a concept that allowsa concept that allows a way to a way to compare a the net benefits received in one compare a the net benefits received in one period to net benefits received in the other.period to net benefits received in the other.

Present valuePresent value is the time value of money. is the time value of money.

∵ ∵ the rate of interest is 10%p.a., then present the rate of interest is 10%p.a., then present valuevalue of $ 1.10 of $ 1.10 received after 1 yr from now isreceived after 1 yr from now is $1 $1

for ‘X’ amountfor ‘X’ amount: after one year: after one year [ [X/(1+ r)], X/(1+ r)],

after 2 yrs X/(1+ r) ( 1+ r)= X/(1+ r)after 2 yrs X/(1+ r) ( 1+ r)= X/(1+ r)22

Net present value of one time net benefit received Net present value of one time net benefit received n yrs from now is NPV (Bn yrs from now is NPV (Bnn) = B) = Bnn / (1+ r) / (1+ r)nn

► If we are investigating an allocation that If we are investigating an allocation that would yield the net benefits on the last day would yield the net benefits on the last day of each of next 4 years is $ 6000, $ 7000, $ of each of next 4 years is $ 6000, $ 7000, $ 10000 & $ 13000; and the rate of interest is 10000 & $ 13000; and the rate of interest is 10%, find NPV. 10%, find NPV.

NPV = 6000 NPV = 6000 ∕∕ (1.10) (1.10) 11+7000 +7000 ∕∕ (1.10) (1.10)22 +10000 +10000 ∕∕

(1.10)(1.10)3 3 + 13000 + 13000 ∕∕ (1.10) (1.10)44

If PV > 0, the action should be supported.If PV > 0, the action should be supported.

The process of calculating the PV is called ‘discounting’ & ‘r’ is discount rate.

Finding the optimal outcome - Finding the optimal outcome - To identify To identify ‘optimal’ or best approaches‘optimal’ or best approaches

1.1. identify an optimal outcomeidentify an optimal outcome

2.2. to attempt to perceive clearly the extent to to attempt to perceive clearly the extent to which our institutions can produce it & if there is which our institutions can produce it & if there is gap between actual and optimal outcome, find gap between actual and optimal outcome, find behavioral sources of the problembehavioral sources of the problem

3.3. use both, knowledge of the problem and use both, knowledge of the problem and behavioural causes to design appropriate behavioural causes to design appropriate solutionssolutions

e.g. ocean fisheries getting depleted or solid e.g. ocean fisheries getting depleted or solid waste landfillwaste landfill

To address environmental problems To address environmental problems normative analysis proceeds in 3 steps:normative analysis proceeds in 3 steps:

Solid waste Solid waste landfilllandfill

► Find optimal Find optimal level of wastelevel of waste

► Use recycling & Use recycling & waste reductionwaste reduction

► Behavioural Behavioural sources of sources of problemproblem

ManilaManila: is using 3 : is using 3 Rs to reduce Rs to reduce waste: waste: Reduce Reduce (by refusing), (by refusing), Recycle, Reuse Recycle, Reuse (and Restore)(and Restore)

Static EfficiencyStatic Efficiency

► It’s the normative criterion for choosing among It’s the normative criterion for choosing among various allocations occurring at the same point in various allocations occurring at the same point in time – an allocation of resources satisfies the time – an allocation of resources satisfies the static criterion when its net benefit from the use static criterion when its net benefit from the use of those resources is maximized by that of those resources is maximized by that allocation.allocation.

► To find ‘whether a particular action was worth To find ‘whether a particular action was worth doing?’ – use C - B analysisdoing?’ – use C - B analysis

► Road preservation – made by Swedish – “How Road preservation – made by Swedish – “How many miles can be efficiently persevered for many miles can be efficiently persevered for maximum benefits?” – 4 miles? Maximum net maximum benefits?” – 4 miles? Maximum net benefits?benefits?

► If max benefits when preserving more If max benefits when preserving more miles – should it be 5?miles – should it be 5?

Price

quantityO

RT

U

4 5 6

If 6 miles preserved ∆ RTU is reduction in benefit.

∴ 5 miles is the best

Net benefit maximized when, marginal benefit = marginal cost

Pareto Optimality: An allocation is Pareto optimal if no other feasible allocation could benefit some other people more without any deleterious effect on at least one another person.

Other allocations sub-optimal – rearrange – so that no one hurt & some people are better off

EfficiencyEfficiency

► Static efficiency criterion used when time is Static efficiency criterion used when time is not an important factor. not an important factor.

► Dynamic efficiency: This criterion is used to Dynamic efficiency: This criterion is used to find an optimum allocation when time is find an optimum allocation when time is involved.involved.

Applying the conceptsApplying the concepts

► Pollution control policy – benefits, but costs too. Pollution control policy – benefits, but costs too. ► ∴ ∴ quantify & monetize C & Bquantify & monetize C & B►B: B: ↓DR, ↓incidence of respiratory diseases, heart ↓DR, ↓incidence of respiratory diseases, heart

disease, etc. – better visibility, ↑agricultural disease, etc. – better visibility, ↑agricultural productivity, - many other Bs unable to quantify productivity, - many other Bs unable to quantify

►C: C: 2 categories – (i) ↑cost of goods/services - cost of 2 categories – (i) ↑cost of goods/services - cost of pollution control methods’ operations that is passed on pollution control methods’ operations that is passed on to consumers to consumers high prices (ii) cost associated with high prices (ii) cost associated with designing & implementing the regulations & monitoring designing & implementing the regulations & monitoring

► Delhi – smog – late flights, waste of time, meetings Delhi – smog – late flights, waste of time, meetings late, decisions late late, decisions late ∴ conversion to CNG – C: cost of ∴ conversion to CNG – C: cost of CNG kits & fitting…. B: improved health & energy CNG kits & fitting…. B: improved health & energy saving…….saving…….

Preservation Vs DevelopmentPreservation Vs Development

► Currently underdeveloped but Currently underdeveloped but ecologically significant land to develop ecologically significant land to develop

► C: degradation of ecosystem in C: degradation of ecosystem in irreversible waysirreversible ways

► B: more jobs, increased wealth, …..B: more jobs, increased wealth, …..► Conflict intense if the unemployment is Conflict intense if the unemployment is

high & local ecology is unique – around high & local ecology is unique – around Mumbai- migratory birds like flamingoes Mumbai- migratory birds like flamingoes

► Kakadu Conservation Zone – Australia – Kakadu Conservation Zone – Australia – mined or preserved? mined or preserved?

► Relation between humanity &environment requires Relation between humanity &environment requires many choices. We have to make rational choices.many choices. We have to make rational choices.

► Env is an asset providing services and the intensity Env is an asset providing services and the intensity /composition depends on the actions on the /composition depends on the actions on the humans humans

► +ve economics – useful: showing actions of people +ve economics – useful: showing actions of people and their impact on env. Normative economics: and their impact on env. Normative economics: guidance – how optimal services can be defined guidance – how optimal services can be defined and achieved – uses C-B analysis for judgingand achieved – uses C-B analysis for judging

► Static efficient allocation: maximises net benefits Static efficient allocation: maximises net benefits over all possible uses of resourcesover all possible uses of resources

► Dynamic efficiency criterion: time important – Dynamic efficiency criterion: time important – maximises PV of net benefits from all uses of maximises PV of net benefits from all uses of resources.resources.