Source: U.S. Department of Energy Strategic Petroleum Reserve Web site: http://www.fe.doe.gov/programs/reserves/index.html and http://www.spr.doe.gov/dir/dir.html (accessed November 1, 2010). Although some of the studies found that the willingness-to-pay estimates derived from surveys exceeded actual expenditures, the majority of those found that the differences were not statistically significant.7 More recently, Ehmke, Lusk, and List (2008) tested whether hypothetical bias depends on location and/or culture. Farmers who own the land have an incentive to fertilize and irrigate it because the resulting increased production raises income. In this chapter, we shall begin to investigate these questions. The dynamic efficiency criterion, which is appropriate when time is an important consideration, is satisfied when the outcome maximizes the present value of net benefits from all possible uses of the resources. What would be the global cost of losing or reducing this valuable ecosystem service? By 2004 this percentage had risen to 29 percent. To put the point another way, revealed or expressed willingness-to-pay is often the best evidence of someone’s welfare equivalent. A useful piece of information for utilities, however, is how much their customers respond to given price increases. Cropper also points out that people are always making decisions that recognize a trade-off between the cost of more protection and the health consequences of not taking the protection. These profits can be used to fund additional new investments. With the advent of mining came a need to divert The Current Allocation System water away from streams to other sites. Will a private utility choose q*? One such standard concerns the treatment of future generations. The act raises prices that the federal government charges for irrigation water, though the full-cost rate is imposed only on the final 20 percent of water received. This transfer might shift the demand curve for either steel or resorts out, as long as higher incomes result in greater demand. According to this interpretation, the value of the remaining stock of natural capital should not decrease. This process, called artificial recharge, has also been used in other locations to store excess surface water and to prevent saltwater intrusion.7 What this brief survey of the evidence suggests is that in certain parts of the world, groundwater supplies are being depleted to the potential detriment of future users. The second law also implies that in the absence of new energy inputs, any closed system must eventually use up its available energy. Would the utility have an incentive to choose the efficient level of precaution? More than 80 percent of land subsidence in the United States has been caused by human impacts on groundwater (USGS, 2000).6 In Mexico City, land has been subsiding at a rate of 1–3 inches per year. Residents were pretty much on their own in creating a sense of order. Furthermore, landowners are typically not expected to compensate the government when regulation increases the value of their land. Finally, they point out that Australia has crafted a system within which environmental sustainability goals do not compromise economic efficiency goals. The incentives of each member and the incentives of the group as a whole may diverge. I apologize for the number of topics that I’m trying to cover in a quick period, but I’m trying to give you my sense of the overall moral terrain as it bears on environmental law. That is not a very appealing alternative.9 One key to resolving this dilemma may be provided by a technique called benefit transfer. The remainder either evaporates or flows through the soil, eventually finding its way back to the original water source (such as a river or irrigation ditch). Economist Maureen Cropper responds that it would be immoral not to consider the benefits of lifesaving measures. Less agricultural land was needed to meet the rising food demand than would otherwise have been the case. This source of power is clean from an emissions point of view and domestic hydropower can help with national security concerns as well. According to that principle, net benefits are maximized when the marginal benefit is equal to the marginal cost. Expenses, such as court time, lawyers’ fees, and so on, fall into a category called transaction costs by economists. The selective disengagement of government in some areas must be complemented by the enforcement of programs to internalize the costs of environmental damage. In order to understand the interaction of these factors five supply curves are relevant. These reforms would promote efficiency of water use while affording more protection to the interests of future generations of water users. Source: Richard T. Carson, Robert C. Mitchell, Michael Hanemann, Raymond J. Kopp, Stanley Presser, and Paul A. Ruud. Irrigators with original rights pay approximately $3.50 per share. Sources of Inefficiency The current system is not efficient. Bromley, Daniel W., ed. EXAMPLE 2.2 28 Chapter 2 The Economic Approach Improperly Designed Property Rights Systems Other Property Rights Regimes2 Private property is, of course, not the only possible way of defining entitlements to resource use. When the authors placed an economic value on this particular ecological service, they found that the pollination services from two specific preserved forest fragments (46 and 111 hectares, respectively) were worth approximately $60,000 per year for one large, nearby Costa Rican coffee farm. In part, that depends on how serious a risk is posed by the contamination. Why does the efficient allocation change so radically between S0T and S1T? Knowledge of how the value of each site varies with respect to its characteristics allows the analyst to value how degradation of those characteristics (e.g., from pollution) would lower the value of the site. This approach gives local communities veto power over the location, but it also attempts to share the benefits of the regional facility in such a way that makes the net benefits sufficiently positive for them that the communities will accept the facility. The general answer is no. In the absence of excludability, consumers are not likely choose to reveal the strength of their preference for this commodity. Old scrap is recovered from products used by consumers. At the very least, support seems to be growing for the proposition that economic valuation can be a very useful means of demonstrating when environmental degradation is senseless, even when judged from a limited anthropomorphic perspective. Yet, due to the paucity of other techniques, the failure to use contingent valuation may, by default, result in passive-use values of zero. AEM 2500: Environmental and Resource Economics Problem set 1 solutions A. Static efficiency: The demand curve for a product is given by Q D = 400-20P and the supply curve for a product is given by Q S = 16P-32. Scarce water is not, in any meaningful sense, a free good. After five years, let us imagine, annual compliance costs can be predicted to drop to $10 million. 13 (June 1986), an attempt was made to quantify the marginal benefits and marginal costs of U.S. Coast Guard enforcement activity in the area of oil 99 100 Chapter 4 Valuing the Environment: Methods spill prevention. These cases illustrate the general economic premise that environmental problems arise because of a divergence between individual and collective objectives. 16, No. Finding examples of inefficiently low transportation costs is not difficult. Thus, we have established a procedure for measuring efficiency, and a means of describing how the surplus is distributed between consumers and producers. The existing studies have been sophisticated enough to account for many of these other possible influences but, because of the relative paucity of data, they have not been able to cover them all. An analysis that examines whether user fees do, in fact, encourage people to recycle waste; using evidence derived from nine U.S. communities, the author concludes that they do. Worldwide in 2000, agriculture accounted for 67 percent of world freshwater withdrawal and 86 percent of its use (UNESCO, 2000).2 Tucson, Arizona, demonstrates how some Western communities cope. If we were simply to add up the available supply of freshwater (total runoff) on a global scale and compare it with current consumption, we would discover that the supply is currently about ten times larger than consumption. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290. Researchers attempt to find a threshold level below which no damage seems to occur. In particular they suggest a specific strategy for policy. The only effect of the court’s decision would be to change the distribution of surplus among the affected parties. An allocation of resources is said to satisfy the static efficiency criterion if the economic surplus derived from those resources is maximized by that allocation. The Survey Approach. Porter, Richard C. The Economics of Waste (Washington, DC: Resources for the Future, Inc., 2002). As the number of hunters increased, eventually every additional unit of hunting activity increased the amount of time and effort required to produce a given yield of bison. Finally, we examine the menu of opportunities for meaningful institutional reform. Let me repeat, because I am sure this will be a contested point in the discussion. The results indicated that a cost-effective strategy would cost less than one-tenth as much as the traditional approach to control and less than oneseventh as much as a more sophisticated version of the traditional approach. The amount of virgin ore falls. A review of the interaction between environmental ethics and economic valuation. Valuation Stated Preference Methods Stated preference methods use survey techniques to elicit willingness to pay for a marginal improvement or for avoiding a marginal loss. According to our definition of static efficiency, the efficient allocation would result when OB is supplied. Relative to the fossil fuels they displace, greenhouse gas emissions are reduced 12 percent by the production and combustion of ethanol and 41 percent by biodiesel. First of all, in this case, as in the two-period case, the efficient marginal user cost rises steadily in spite of the fact that the marginal cost of extraction remains constant. Wildlife habitat may be eliminated, wetlands may be paved over, and recreational opportunities may be gone forever. Since we can find another allocation with greater net benefit, four miles of preservation could not have been efficient. (normative) Criterion 1: static efficiency: MAX net social benefit from utilization - like efficient production decision . It certainly isn’t the only example of privatization failure. Note: Prices are in 2009 dollars. Paid participants are informed of the rules of the experiment and asked to make choices. 183 184 Chapter 8 Recyclable Resources: Minerals, Paper, Bottles, and E-Waste As long as the resource can be recycled at a marginal cost lower than that of the substitute, the market tends to rely on the recyclable resource longer than it does on a nonrecyclable resource with an identical extraction cost curve. Does that seem the right choice? By contrast, a movement from left to right represents increasing geological uncertainty about the size of the resource base. Too much pollution is produced. We will return to this example later. Geographic information systems (GIS) help researchers use watersheds and water courses as organizing tools. Property Rights Efficient Property Rights Structures Let’s begin by describing the structure of property rights that could produce efficient allocations in a well-functioning market economy. By help of their incantations and evil agents, they had endeavored to pry into the future which belongs to the almighty alone, and now their faces are painfully twisted the contrary way; and being unable to look before them, they are forced to walk backwards. Valuing Ecosystem Services: Pollination, Food Security, and the Collapse of Honeybee Colonies Utilizing a multi-region, computable general equilibrium (CGE) model of agricultural production and trade, Bauer and Wing (2010) examined the global economic impacts of pollinator declines. The source of this remarkable transformation of a problem of scarcity into one of abundance was the discovery of a new technique of preparing iron ore, called pelletization. Omstead and Stavins (2007) find similar results in their summary paper. In the United States, which does not subsidize waste oil recycling, the waste oil market has been rather less successful, but it is growing. The land market provides a mechanism by which the parties can bid for land; the resulting prices reflect the value of the land in its various uses. (Hint: The marginal revenue curve has twice the slope of the demand curve.) In this figure, the green area is consumer surplus and the purple area is total cost. After Hurricane Katrina caused massive damage to the oil production facilities, terminals, pipelines, and refineries along the Gulf regions of Mississippi and Louisiana in 2005, sales of 11 million barrels were used to offset the domestic shortfall. You be the judge. 3. If the availability of water as presented by the supply curve was greater than the amount represented by the point where the aggregate marginal net benefit curve intersects the axis, water would not be scarce. It increases by area MNR. Travel cost methods may infer the value of a recreational resource (such as a sport fishery, a park, or a wildlife preserve where visitors hunt with a camera) by using information on how much the visitors spent in getting to the site to construct a demand curve for willingness to pay for a “visitor day.” Freeman (2003) identifies two variants of this approach. 9 EXAMPLE 1.2 10 Chapter 1 Visions of the Future The field of environmental and natural resource economics has become an important source of ideas for coping with this dilemma. Be the first to receive exclusive offers and the latest news on our products and services directly in your inbox. The general conclusion, which holds for all models we consider, is that higher discount rates tend to skew resource extraction toward the present because they give the future less weight in balancing the relative value of present and future resource use. The market system is remarkably resilient in how it responds to challenges. 3 For an economic analysis of the magnitude of this impact, see Herriges et al. Further Reading Anderson, Terry L. Water Crisis: Ending the Policy Drought (Washington, DC: Cato Institute, 1983): 81–85. Solar energy can be used to provide space heating or to provide hot water. Water is an increasingly cr, HANDBOOK OF ENVIRONMENTAL ECONOMICS VOLUME 1 Unique circumstances may cause the costs of that firm to be higher, or lower, than estimated; the firm, in short, may not be typical. Successful rent-seeking activity will increase the net benefits going to the special interest group, but it will also frequently lower the surplus to society as a whole. Open-access resources, as we shall henceforth call them, have given rise to what has become known popularly as the “tragedy of the commons.” The problems created by open-access resources can be illustrated by recalling the fate of the American bison. We shall consider several sets of problems associated with land-use inefficiencies that commonly arise in the industrialized countries: sprawl and leapfrogging, the effects of taxes on land-use conversion, incompatible land uses, undervaluation of environmental amenities, and market power. 46, Supplement (1994), pp. In 2000 the city sold the plant to a company in Saudi Arabia. 853. . Static efficiency is efficiency in terms of the refinement of existing products, processes or capabilities. This, therefore, describes both allocative and productive efficiency. The increase in net benefits provides a means for compensating those who might otherwise lose from the change. Several practical corollaries follow from this theorem. Finally we can use both our knowledge of the nature of the problems and their underlying behavioral causes as a basis for designing appropriate policy solutions. They would have gained a net benefit equal to B + C. It may appear that producers could also gain if D > B, but that is not correct because this diagram does not take into account the effects on other time periods. For a wetland, it would require the preservation of the specific ecological functions. In the early 1970s, Robert Haveman (1972) conducted a major study that shed some light on this question. Suppose a grandparent left you an inheritance of $10,000, and you put it in a bank where it earns 10 percent interest. 2. If the marginal extraction cost of the newly discovered resources is low enough, these discoveries could lower, or at least delay, the increase in the total marginal cost of production. Explain the intuition behind your results. For this example, that would be $5 divided by the change in risk of death (1/100,000–1/150,000), or $1.5 million. With respect to allocating among competing users, the dictates of efficiency are quite clear—the water should be allocated so that the marginal net benefit is equalized for all uses. Curve MCa is the marginal cost of damage avoidance. For example, how was the number $900 million in damages in the Exxon case arrived at? Source: Office of Air Quality Planning and Standards, United States Environmental Protection Agency, “Economic Impact Analysis of Proposed Iron and Steel Foundries.” NESHAP Final Report, November 2002; and National Emissions Standards for Hazardous Air Pollutants for Iron and Steel Foundries, Proposed Rule, FEDERAL REGISTER, Vol. Compare the effects of a per-unit tax on the depletable resource to an equivalent per-unit subsidy on solar energy. One such algorithm for this example can be constructed as follows: (1) assume a value for λ; (2) using Equation set_ (1) solve for all q’s based upon this λ; (3) if the sum of the calculated q’s exceedsQ, adjust λ upward or if the sum of the _ calculated q’s is less thanQ, adjust λ downward (the adjustment should use information gained in previous steps to ensure that the new trial will be closer to the solution value); (4) repeat steps_ (2) and (3) using the new λ; (5) when the sum of the q’s is sufficiently close to Q stop the calculations. The availability of potable water is further limited by human activities that contaminate the finite supplies. Since it is possible to find a way to lower cost, then clearly the initial allocation could not have minimized cost. That test can be performed each year without knowing anything about future allocations or preferences. Since the dam that generates the power would flood the rapids, the two uses are incompatible. 2 3 Exxon Shipping Company v. Baker. A resource in the ground has two potential sources of value to its owner: (1) a use value when it is sold (the only source considered by those diagnosing inevitable myopia) and (2) an asset value when it remains in the ground. Valuing Natural Assets: The Economics of Natural Resource Damage Assessment (Washington, DC: Resources for the Future, Inc., 1993). Up to 50 percent of Africa’s urban residents and 75 percent of Asians lack adequate access to a safe water supply. Industrialized countries that undertake stringent environmental policies may not suffer much at the national level due to offsetting increases in income and employment in industries that supply renewable, cleaner energy and pollution control equipment. This market is unique because shares are homogeneous and easily traded; the infrastructure needed to move the water around exists and the property rights are well defined (return flows do not need to be accounted for in transfers since the water comes from a different basin). Though the prior appropriation doctrine stands as the foundation of this allocation system, it is heavily circumscribed by government regulations and direct government appropriation of a substantial amount of water. (Favorable sites are those with sufficiently steady, strong winds.) * * Not applicable. Suppose the marginal avoided disposal cost was $20 per ton. The public sector could simply buy the land from its current owner of course and that approach has much to recommend it. How tenable is the assumption of complete substitutability between physical and natural capital? If the compensation is adequate to induce them to accept the site, then nuclear power is a viable option and the costs of disposal are ultimately borne by the consumers. In your hometown what system is used to price the publicly supplied water? Why would a recession make the cartel more vulnerable to price cutting? Utilitarianism is one way to incorporate overall well-being within your moral theory, but not the only way. Let’s see why. Normative disagreements, however, involve value judgments. In the constant-cost case, the depletable resource reserve is ultimately completely exhausted. Barbier relates the results of a study he conducted with Burgess in Malawi: In Malawi female-headed households make up a large percentage (42 percent) of the “core-poor” households. The vulnerability premium reflects the additional national security costs caused by imports. According to a subsequent analysis of the data on these same minerals by McClintock and Emmett (2005), despite ups and downs in prices over the course of the past century, Simon would also have won even a century-long wager. How much would be supplied by a competitive market? Environmental and natural resource decisions are intimately and inextricably linked. In this case, it could choose any production level it wanted, but it would have to pay the resort an amount of money equal to the area between the two marginal cost curves from the origin to the chosen level of output. The next step is to estimate how strong the relationship is between the effect and the pollution concentrations. One form is illustrated by the U.S. Mining Law of 1872. The traditional cost-benefit test says to aggregate these compensating variations across the population. At lower elevations, the water is channeled into natural streams and feeder canals for distribution to irrigation districts and front-range cities. The treatment of our planet and its immediate environs as a closed system has an important implication that is summed up in the first law of thermodynamics— energy and matter can neither be created nor destroyed.1 The law implies that the mass of materials flowing into the economic system from the environment has either to accumulate in the economic system or return to the environment as waste. 4 November 1999, pp. Title. Because water supplies fluctuate over time, unusual scarcities can occur in any particular year. We shall also see how the skillful use of economic incentives can allow policymakers to exploit “win-win” situations to promote a transition onto a sustainable path for the future. b. Compute the consumer surplus and producer surplus. *Greater detail on the mathematics of constrained optimization can be found in any standard mathematical economics text. Usage Source: Four examples of consumption charge models from WATER RATE STRUCTURES IN COLORADO: HOW COLORADO CITIES COMPARE IN USING THIS IMPORTANT WATER USE EFFICIENCY TOOL, September 2004, p. 8 by Colorado Environmental Coalition, Western Colorado Congress, and Western Resource Advocates. Among those concerns, the panel listed: (1) the tendency for contingent valuation willingness-to-pay estimates to seem unreasonably large; (2) the difficulty in assuring the respondents have understood and absorbed the issues in the survey; and (3) the difficulty in assuring that respondents are responding to the specific issues in the survey rather than reflecting general warm feelings about publicspiritedness, known as the “warm glow” effect.8 But the panel also made clear its conclusion that suitably designed surveys could eliminate or reduce these biases to acceptable levels and it provided, in an appendix, specific guidelines for determining whether a particular study was suitably designed. The opportunity cost of producing power is the foregone net benefit that would have resulted from the white-water canoeing. The implication is that if transportation costs are inefficiently low due to subsidies or any uninternalized negative externalities from travel that have not been internalized, a bias will be created that inefficiently favors more distant locations. This explicit integration of research and policy within each chapter avoids the problem frequently encountered in applied economics textbooks—that is, in such texts the theory developed in earlier chapters is often only loosely connected to the rest of the book. I’ve written, in particular, about the normative foundations of cost-benefit analysis (CBA). If OPEC raised the price of oil high enough, would that be sufficient to promote an efficient energy mix? Allowing users to capture the value of water saved by permitting them to sell it would stimulate water conservation and allow the water to flow to higher-valued uses (see Example 9.1). Sometimes societal reactions not only fail to solve the problem, but they can actually make it worse. As can be seen from Table 7.2, among the fossil fuels, coal contains the most carbon per unit of energy produced and natural gas contains the least. In the ninth edition, we have retained the strengths that are particularly valued by readers, while expanding the number of applications of economic principles, clarifying some of the more difficult arguments, and updating the material to include the very latest global developments. “Packaging Taxes and Recycling Incentives: The German Green Dot Program,” National Tax Journal Vol. Notice that with positive feedback loops the process is self-reinforcing. The Engineering Approach. Several trends are worth noting. Insofar as the underlying moral view is a pluralist view, such that overall welfare is one moral criterion among several, it’s a mistake to think of CBA as a complete governmental choice-procedure.13 It would, in that case, simply be one part of the complete procedure. The concept that allows this comparison is called present value. As we discuss in a subsequent section of this chapter, markets for discarded electronics in industrializing countries may lack good enforcement mechanisms to ensure proper disposal of the hazardous components. 42 (2002), pp. Competition could not erode that profit because the amount of high quality land was limited and lower prices would serve only to reduce the Externalities as a Source of Market Failure supply of land below demand. 0 P(t ) MC(t ) Time 1 2 3 4 5 6 7 8 9 10 11 12 (periods) (b) 144 Chapter 7 Energy: The Transition from Depletable to Renewable Resources Price controls may cause other problems as well. Tax incentives and subsidies would be used to promote domestic production. By reducing the allowed residential density, it can actually contribute to urban sprawl by forcing more land to be used to accommodate a given number of people.4 Undervaluing Environmental Amenities Positive externalities represent the mirror image of the negative externalities situation described above. The local political pressure was sufficient to secure project approval despite its inherent inefficiency. As water was always a significant factor in the development of an area, the first settlements were usually oriented near bodies of water. The competitive fringe, however, is under no such constraint and is free to take advantage of the high prices caused by the cartel’s withheld production without cutting back its own production. 109 110 Chapter 5 Dynamic Efficiency and Sustainable Development EXAMPLE The Alaska Permanent Fund 5.1 One interesting example of an intergenerational sharing mechanism currently exists in the State of Alaska. Under a compensation scheme, those consuming nuclear power would be taxed to compensate those who live in the areas of the disposal site. The price will rise to P* to equate supply and demand. Area pricing is probably the easiest to implement since the only information necessary is the amount of irrigated land and the type of crop produced on that land. Remember that Sd1 is the domestic supply curve, given enough time to develop the resources. All members of a resource cartel share a common objective—increase prices as much and as soon as possible. Can the need to be seen driving a new car by the rich be a boon to those with lower incomes who will ultimately purchase a better, lower-priced used car as a result? Unfortunately, the same is not true for old scrap. On the negative side, benefit–cost analysis has been attacked as seeming to promise more than can actually be delivered, particularly in the absence of solid benefit information. 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