Transcript ECONOMICS & ENV - myersparkenvironmental

ECONOMICS
and the
ENVIRONMENT
Economics
Study of how people use their limited
resources to try to satisfy their unlimited
wants.
– Use analytical tools to understand
consequences of the allocation of limited
resources.
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Develop hypotheses
Test models
Analyze observations
Analyze data
Free Market Economy
Free Market
The price of a good is determined by supply & demand.
Ex: U.S. has a Free Market Economy
• High Supply = ____ demand = ____ price
• Low Supply = ____ demand = ____ price
• High prices encourage suppliers to continue production
• Economic Expansion : increase in economic activity
• Economic Recession : slowdown in economic activity
• Economists try to predict the consequences of particular
economic actions.
• May lead to policy decisions with environmental consequences
Natural Environmental Capital
Economy depends on the environment.
Source: part of the environment from which
materials move. (where stuff comes from)
Sink: part of the environment that receives an input
of materials. (where stuff goes)
Natural Environmental Capital continued….
Natural Capital
Earth’s resources & processes that sustain living
organisms.
• Includes minerals, forest, soil,
water, air, wildlife…
• Includes both sources and sinks.
Resource Degradation & Pollution represent the
overuse of natural capital.
• Resource Degradation is the overuse of sources.
• Pollution is the overuse of sinks.
 These threaten our long-term economic future!
The Environment &
National Income Accounts
Our economic well-being flows from natural assets.
land, rivers, ocean,
resources, air
Use & misuse of natural resources is measured in
National Income Accounts
National Income Accounts :
Represent the total income of a nation for a
given year.
– Includes:
• Gross Domestic Product (GDP)
GDP Cartogram
• Net Domestic Product (NDP)
GDP & NDP continued….
• Gross Domestic Product (GDP)
Market value of all final goods and services
produced by the country
• Net Domestic Product (NDP)
Equals the GDP minus the depreciation of capital
Ex: A firm produces some product but in the process
wears out a portion of its plant and equipment.
GDP – Depreciation = NDP
GDP & NDP provides estimates of national
economic performance used to make important
policy decisions.
Flaws in Calculating GDP & NDP
1.Natural Resource Depletion
GDP doesn’t calculate for depleting Natural Resources.
Ex: Oil Company drains oil.
Value of the oil is counted as part of the nation’s GDP
No offsetting deduction to NDP is made to account for the depletion
of a non-renewable resource.
How to fix this….
Draining the oil field should be considered to be “depreciation”
And the net product of the oil company should be decreased.
Natural Capital is a very large part of a country’s economic
wealth, and it should be treated the same as humanmade capital.
Flaws in Calculating GDP & NDP Continued…
2. Cost and Benefits of Pollution Control
National income accounts attach no explicit value to
a clean environment.
Ex: - A company receives $100 M worth of output but
causes pollution in a local river.
- If 10% of the workers were used to properly dispose
of the waste (avoid polluting!)
- Only a $90M profit.
Contribution to GDP will be larger without
pollution control because the national income
accounts attach no explicit value to a clean river!
Flaws in Calculating GDP & NDP Continued… (Cost & benefits of pollution control)
An ideal accounting system…
• Env. Degradation would take away from GDP
• Env. Improvement activities would add to GDP
Some countries have attempted to raise their GDP by
overexploiting their natural resources and
impairing the environment.
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What is the problem with doing this?
There is much support for replacing traditional GDP and
NDP estimates with estimates that include
environmental effects.
An Economist’s
View of Pollution
External Costs (Negative Externalities)
• External Cost
Harmful side effect not reflected in a products market price
Example
 A company makes a product and releases a pollutant into the
environment.
 The product’s price reflects the cost of making the product,
NOT the cost of the damage to the environment by the
pollutant.
 Consumer is unaware of the pollution aspect of the product
because they didn’t have to pay for
the
negative environmental effects.
 Pollution aspect has no influence
on the consumer’s decision to buy.
External Costs (Negative Externalities) continued….
The failure to add the price of environmental damage
to the cost of products generates a market force that
increases pollution.
Economist perspective:
The root cause of the world’s
pollution problem is the failure
to consider negative externalities
in the pricing of goods.
What is the meaning of this
cartoon in terms of costbenefit anaylsis & the
economic impact?
How much pollution is acceptable?
How much pollution should be allowed in our environment?
Imagine two extremes…
Wilderness
Sewer
No pollution
produced
Completely polluted
from excess
production
Highest
Environmental
quality possible
Many goods would
be scarce or nonexistent
Lowest
environmental
quality possible
Many goods
produced
In our world, a move toward a better environment
almost always entails a cost in terms of goods.
Marginal Cost
Marginal Cost
Additional cost associated with one more unit of
something.
Two examples of marginal costs of pollution:
• Effects of pollution on human health
• Effects of pollution on organisms in natural environment.
The trade-off between environmental quality and more
goods involves balancing 2 marginal costs.…
1.Cost (in terms of environmental damage) of more
pollution = MARGINAL COST OF POLLUTION
2.Cost (in terms of giving up goods) of eliminating
pollution = MARGINAL COST OF POLLUTION ABATEMENT
Marginal Cost of Pollution
…. Added cost for all present and future members of
society of an additional unit of pollution.
– difficult to determine because the risks associated with the
pollution must be assessed.
Example: Sulfur Dioxide
– Creates acid rain.
– At high levels:
• one additional unit of sulfur dioxide will cause
great harm because the environment more and more overloaded.
• (marginal cost of pollution = high!)
– At low levels:
• one additional unit may cause little or no harm if the environment
can absorb the damage.
• (marginal cost = low)
Marginal Cost of Pollution Continued….
This graph specifies the cost of damage associated
with additional units of pollution.
Shows that as the level of pollution rises, the social cost
(health, environmental damage) increases sharply
Marginal Cost of Pollution Abatement
…. Added cost for all present and future members
of society of reducing a given type of pollution by
one unit.
Pollution abatement costs more as the level of
pollution is lower.
Example
It’s not very expensive
to decrease auto fuel
emissions by half, but the
technology to decrease it
in half again is VERY
expensive!!
What is the Optimum Level of Pollution???
Cost-Benefit Diagram
 Shows the Optimum amount of pollution
 Shows the point at which the marginal cost of
pollution equals the marginal cost of abatement.
If more pollution is allowed,
the social / env. cost will be
unacceptably high.
If less pollution is allowed, the
abatement cost will be
unacceptably high.
What if the actual pollution level is different
optimum level?
If the Actual Level is ABOVE the
Optimum Level:
– Harm done exceeds the cost of reduction.
– Social/env. cost of pollution is too high.
– What do we do?
• It’s economically more efficient to reduce
the pollution.
If the Actual Level is BELOW the
Optimum Level:
– Less harm done, so it’s not costing much
to pollute.
– Pollution abatement cost is too high.
– What do we do?
• Polluters “should” be allowed to pollute
more (or pay less for their pollution).
from the
A “Real” Cost Benefit Diagram
Flaws in the Optimum Pollution Concept
1. The true cost of environmental damage by
pollution is difficult to determine.
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What is the value of environmental beauty?
What is the value of a species going extinct?
How do you give a value to resource degradation over
a large area that affects many communities?
2. The risks of unanticipated environmental
catastrophe are not taken into account in
assessing the potential environmental damage of
pollution.
•
The whole is MUCH more than simply the sum of its
parts… economists can’t just add up the costs of lost
elements in a polluted environment!
1. Command & Control Regulations
The passage of laws that set limits on
levels of pollution.
– Sometimes set specific control
methods…
Ex: Catalytic Converters in cars.
– Sometimes set quantitative goals…
• Ex: Clean Air Act (’90) established a goal of 60%
nitrogen oxide emissions by 2003.
– All polluters must comply with the
same rules and regulations,
regardless of their circumstances.
Criticism of Command-Control
Can be more costly
than necessary
• Command & control
regulation sets
environmental pollution
levels much lower than the
economically optimum
level of pollution
• Many economists prefer
incentive-based regulation
over command & control
…………………………………………………………….
Incentive-Based Regulation continued….
Emissions Charge “green tax”
– Basically a tax on pollution.
– Meant to correct what is considered to
be a distortion in the market
–Environmental costs of
manufacturing aren’t included
in market values.
2. Incentive-Based Regulation
Emission targets are established and
industries are given incentives to reduce
emissions.
• Considered a market-oriented
strategy
– Depends on market incentives
to reduce pollution & minimize
the cost of control.
• Ex: Emission Charge!!
(popular in Europe)
Incentive-Based Regulation continued….Green tax examples
• GERMANY
– Increased tax on gas, heating oil
and natural gas
• Carpooling increased 25%
• BRITAIN
– Increased fuel tax
• 13% increase in truck efficiency
• Fuel consumption dropped
• NETHERLANDS
– Tax on gas, electricity, fuel oil, heating oil & Income
taxes decreased to offset tax burden
• electricity and fuel use declined
Incentive-Based Regulation continued….Green tax- good or bad?
Green Taxes… good or bad?
• Not notably successful in actual
practice:
– People usually have strong objections
because they think creating pollution is
free.
– Even when it’s publicized that this will
benefit them during income tax time,
people still aren’t excited about it
– TOO MANY TAXES!!!
Often, the Green Taxes are set too low to have much effect on
polluting behavior.
3. Marketable Waste-Discharge Permits
Another approach to incentive-based pollution control…
• Government sets a cap on pollution at an “acceptable” level
• Government issues a fixed number of permits allowing the
holder to emit a specified amount of a given pollutant.
– Emission Reduction Credits (ERC’S) can be bought and sold by
industries freely
• Produce too much pollution costly to companies that have to
purchase more ERC’s
• Produce less pollution than permitted may sell excess ERC’s.
– … it pays to pollute less… literally!
• Allows companies to determine what level of pollution
abatement measures are economically appropriate for them.
A five-cent tax on plastic
shopping bags has cut the use
of the bags by more than half
in Washington, D.C. It's a
compelling example of how a
small incentive can have a big
effect.