Economics of Environmental Issues: Dollars and Sense

1. Chapter 27 Dollars and Environmental Sense: Economics of Environmental Issues

2. Learning Objectives: • When and how is it possible to put a dollar value on the environment? • What is the “tragedy of the commons” and how does it lead to overexploitation of resources? • How does the perceived future value of an environmental benefit affect our willingness to pay for it now?

3. What are externalities and why is it important to evaluate them in determining the costs of actions that affect the environment? • What factors may be involved in determining a level of acceptable environmental risk and risk to human life? • Why it is difficult, yet important, to evaluate environmental intangibles, such as landscape beauty?

4. Value of Environmental Spending • The U.S. presently spends about $170 billion, including spending by consumers, to deal with pollution. • This investment yields comparable health and other benefits. Valuation of benefits involves both tangible and intangibles, the latter being far more difficult to quantify. • The annual budget of the EPA (Environmental Protection Agency)= $6 billion

5. Case Study: The Economics of Mahogany • Mahogany worth $1500-$100,000 per tree • Roads must be built to transport logging • Loggers bring pollution and disease • Land turned to farm lands- wiping out forests • America- biggest consumer of Mahogany

6. Mahogany Imports 'Are Wiping out Peru Tribes' • Trees provide food, shelter and resources for people, animals and plants that live in the rainforests • Loggers bring disease and pollution previously unknown to tribes (no immunity)

7. The Environment as a Commons • Commons: • Land or another resources owned publicly with public access for private uses

8. Commons • Often people using commons do not seek sustainability • People are selfish and think short-sided • Atmosphere and oceans are considered commons • Recreation is a problem of the commons- overcrowding of National Parks

9. What is the appropriate public use of public lands? • Should all public lands be open to all public uses? • Should some public lands be protected from people? • The United States has a policy of different uses for different lands

10. Externalities • Externality (Indirect Cost) • An effect not normally accounted for in the cost-revenue analysis of producers and often not recognized by them as part of their costs and benefits • Direct Costs • Those borne by the producer and passed directly on to the user or purchaser

11. Direct Costs (Nickel Ore) • Traditionally, the economic costs associated with the production of commercially usable Nickel from an ore are the direct costs- costs of purchasing the ore, buying energy to run the smelter, building the plant and paying employees (Cost included in price)

12. Indirect Costs (Externalities) • Degradation of the environment from the smelter plant- destroyed vegetation, increase in erosion (loss of trees and damage to overall ecosystems), air pollution of the local area, and pollution of the local water systems

13. Evaluation of environmental intangibles is becoming more common in environmental analysis • Losing “Public Service Functions” will convert from indirect to direct costs • Public Service Functions of Nature: • Bees pollinate $20 billion worth of crops in the United States yearly • Bacteria fix Nitrogen in the oceans, lakes, rivers and soil • Bacteria clean water by decomposing toxins • The atmosphere converts toxic Carbon Monoxide to harmless Carbon Dioxide

14. Risk-Benefit Analysis • Def: The riskiness of a present action in terms of its possible outcomes • The relation between risk and benefit affects our willingness to pay for an environmental good • What is the future worth?How much are you willing to risk for today?

15. Examples of Life/Death Risks: • Cigarette Smoke- 8 in 100 deaths • Automobiles - 1 in 100 deaths • Sunlight Exposure- 2 in 1000 deaths • Outdoor Air Pollution- 4 in 10,000 deaths • Airplane Passenger- 1 in 1,000,000 deaths

16. Pollution Risk • Pollution directly affects more than just our health • Ecological and Aesthetic damage can also indirectly affect human health • We might want to to choose a slightly higher risk of death in a more pleasant environment rather than increase the chances of living longer in a poor environment

17. Degree of Risk- Legal Processes • U.S. Toxic Substances Control Act- requires a new chemical to obtain clearance from EPA. • EPA determines if it can be used based on “reasonable risk”- what is considered reasonable? • Example: DDT

18. Global Issues: Who Bears the Costs? • Example: Fossil fuels- Global Climate Change • The less developed countries did not share in the economic benefits of the burning of fossil fuels but they are sharing in the disadvantages of this activity

19. Who pays, and how? • It may be necessary to reduce the total production of greenhouse emissions- who pays, and how? • Who is responsible for cleaning and keeping clean our global commons?

20. Environmental Policy Instruments • Moral suasion- publicity, social pressure • Direct controls- regulations • Market processes- taxation, subsidies, refundable deposits, allocation of property rights

21. Environmental Policy Instruments • Government investments- damage prevention facilities (treatment plants), regenerative activities (reforestation), dissemination of information (pollution control, profitable recycling), research, education (general public and professional specialists)

22. Marginal Costs • In controlling pollutants, marginal cost is the cost to reduce one additional unit of pollutant. • With pollution control, the marginal cost often increases rapidly as the percentage of reduction increases

23. Summary • Economics of environmental issues are complicated! • Future worth compared with present worth can be important in determining levels of exploitation of resources • Evaluation of intangibles is important in environmental analysis