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RYERSON UNIVERSITY Environmental Applied Sciences and Management ES 8926 ENVIRONMENTAL ECONOMICS

RYERSON UNIVERSITY Environmental Applied Sciences and Management ES 8926 ENVIRONMENTAL ECONOMICS. Notes for Class # 5 October 12, 2011

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RYERSON UNIVERSITY Environmental Applied Sciences and Management ES 8926 ENVIRONMENTAL ECONOMICS

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  1. RYERSON UNIVERSITYEnvironmental Applied Sciences and ManagementES 8926ENVIRONMENTAL ECONOMICS Notes for Class # 5 October 12, 2011 CHAPTERS 5, 6 , 7, 8

  2. NOTES AND ANNOUNCEMENTS • Review Quiz #1 • Topics for Term Project • Articles for Mid Term Essay

  3. REVIEW DISTORTIONS & 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

  4. REVIEW DISTORTIONS & MARKET FAILURES • Public 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.

  5. NORMATIVE vrs POSITIVE ECONOMICS • Positive 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.

  6. Measures of Efficiency • SocialEfficiency– 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/Surplus • Allocative 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)

  7. TARGET LEVELS OF POLLUTION OR ENVIRONMENTAL PROTECTION • No 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

  8. ECONOMIC MODEL FOR NORMATIVE 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 pollutants • Marginal Damage Functions Fig 5-1 • Total Damage = Area Under Marginal Damage Curve • Some Reveal Thresholds

  9. ABATEMENT COST FUNCTIONS -1 • “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)

  10. ABATEMENT COST FUNCTIONS - 2 • Aggregating 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

  11. SOCIALLY EFFICIENT LEVELS OF POLLUTION RELEASES • Marginal Damage Function = Marginal Abatement Cost Function • Figure 5-6 • Socially Efficient Levels of Pollution are Seldom Zero Pollutant Releases • Value of Benefits (Damages Avoided/Reduced) =/> Abatement Costs

  12. ABATEMENT COSTS & PROFITS • Competitive Firms and Markets • Pollution 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

  13. FACTORS THAT MITIGATE ADVERSE ECONOMIC, FINANCIAL AND COMPETITIVENESS 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

  14. BENEFIT-COST ANALYSIS • Objectives = 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

  15. BENEFIT-COST ANALYSIS - CRITICISMS • 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.

  16. BCA - FRAMEWORK • Describe Project, Program, Scale, Perspective • Identify, Quantify, Value Inputs, Outputs, Social/External Costs and Benefits • Evaluate, Compare Quantities & Values of Benefits and Costs

  17. BCA – EVALUATION & DECISION CRITERIA • Evaluation 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

  18. BCA TOPICS • Discounting, Choice of Discount Rate • Uncertainty • Expected Values • Sensitivity Analyses • Monte Carlo Techniques • Distribution, Equity • Horizontal, Vertical Equity • Proportional, Regressive, Progressive Programs and Policies

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