Allocation of Market and Non-Market Goods VT-Law School Class 6 G. Flomenhoft

1. Allocation of Market and Non-Market Goods VT-Law School Class 6 G. Flomenhoft

2. CIRCULAR FLOW MODEL OF ECONOMY “EXTERNALITIES” SOCIETY ? ECONOMY ? ENVIRONMENT

3. Rivalness and Excludability • Non-rival • My use does not leave less for you to use • Market sells for a price, discouraging use, but social cost of use = 0, therefore market should not supply • Non-excludable • One person can’t keep another from using the good • Consumer will not pay, market will not supply Must have a price to work in the free market!

4. Non-Excludable Excludable Open Access Regime: (misnamed: Tragedy of the commons) Oceanic fisheries, timberetc. from unprotected forests, waste absorption capacity, roads (congestible) Market Good: land, timber, fish once captured, farmed fish, Rival} Potential market good (Tragedy of the “non-commons”)but inefficient: patented information, Pond Pure Public Good:climate stability, ozone layer, clean air/water/land, Biodiversity, information, habitat, life support functions, social stability, Freedom, democracy Non-rival}

5. Economic Theories of “externalities” Coase Theorem Pigouvian Taxes

6. Marginal disutility

7. Pigouvian Taxes (page 376) How to internalize external costs? Impose a tax = marginal external costs Creates a property right for the state, using Liability rule.

8. Pigouvian Taxes-problems • Cannot accurately measure external costs • Costs change with amount of pollution • Firm may pay the costs • Enforcement?

9. Pigouvian Taxes-advantages • Firm with with lowest costs will make large • Reductions • Maintains micro-level freedom • Biggest polluters may go out of business • Or change facilities • More palatable than “Command and Control”

10. Coase Theorem (page 177) Assign property rights to polluter or to Agent impacted. Makes no difference from Efficiency standpoint

11. Marginal disutility

12. “Coal plant and the laundry” Coal plant-right to pollute: laundry must pay not to pollute “Willingness to pay” (to avoid pollution) Laundry-right to clean air: Coal plant must Compensate laundry for dirty air. “Willingness to accept” (If compensated) In theory WTP&WTA are same! In reality?????

13. Other Approaches Regulation (command and control) Cap and trade permits Pigouvian subsidies Abatement costs ITQ-Individual transferable quotas Eco-taxes

14. Non-Excludable Excludable Open Access Regime: (misnamed: Tragedy of the commons) Oceanic fisheries, timberetc. from unprotected forests, waste absorption capacity, roads (congestible) Market Good: land, timber, fish once captured, farmed fish, Rival} Potential market good (Tragedy of the “non-commons”)but inefficient: patented information, Pond Pure Public Good:climate stability, ozone layer, clean air/water/land, Biodiversity, information, habitat, life support functions, social stability, Freedom, democracy Non-rival}

15. Stock-Flow/ Fund-service (page 72) Stock-flow Are materially transformed into what they produce Can be used at any rate subject to use of capital Productivity measured by physical units Can be stockpiled Are used up, not worn out Fund-service Are not materially transformed Can only be used at a given rate Productivity measured as output per unit of time Cannot be stockpiled Are worn out, not used up

16. The Valuation of Ecosystem Goods and Services Matthew A. Wilson Gund Institute for Ecological Economics & School of Business Administration Email: Wilson@bsad.uvm.edu

17. List of Ecosystem Goods and Services ECOSYSTEM SERVICES ECOSYSTEM FUNCTIONS Gas regulation Regulation of atmospheric chemical composition. Regulation of global temperature, precipitation, and other biologically mediated Climate regulation climatic processes at global, regional, or local levels. Disturbance regulation Capacitance, damping and integrity of ecosystem response to environmental fluctuations such as sea level rise. Water regulation Regulation of hydrological flows. Water supply Storage and retention of water. Erosion control and sediment retention Retention of soil within an ecosystem. Soil formation Soil formation processes. Nutrient cycling Storage, internal cycling, processing, and acquisition of nutrients. Waste treatment Recovery of mobile nutrients and removal or breakdown of excess or xenic nutrients and compounds. Pollination Movement of floral gametes. Biological control Trophic-dynamic regulations of populations. Refugia Habitat for resident and transient populations. Food production That portion of gross primary production extractable as food. Raw materials That portion of gross primary production extractable as raw materials. Genetic resources Sources of unique biological materials and products. Recreation Providing opportunities for recreational activities. Cultural Providing opportunities for non-commercial uses. Adapted from Costanza et. Al. (1997) “The Value of the World’s Ecosystem Services and Natural Capital” Nature, vol. 387 pp.253-260

18. Techniques for Valuing Ecosystem Services • Avoided Cost (AC): services allow society to avoid costs that would have been incurred in the absence of those services; flood control (barrier islands) avoids property damages, and waste treatment by wetlands avoids incurred health costs. • Replacement Cost (RC): services could be replaced with man-made systems; natural waste treatment can be replaced with costly treatment systems. • Factor Income (FI): services provide for the enhancement of incomes; water quality improvements increase commercial fisheries harvest and thus, incomes of fishermen. • Travel Cost (TC): service demand may require travel, whose costs can reflect the implied value of the service; recreation areas attract distant visitors whose value placed on that area must be at least what they were willing to pay to travel to it. • Hedonic Pricing (HP): service demand may be reflected in the prices people will pay for associated goods: For example, housing prices along the shore of pristine freshwater lakes tend to exceed the prices of inland homes. • Contingent Valuation (CV): service demand may be elicited by posing hypothetical scenarios that involve some valuation of alternatives; people would be willing to pay for increased water quality in freshwater lakes and streams. • Marginal ProductEstimation (MP): Service demand is generated in a dynamic modeling environment using production function (i.e., Cobb-Douglas) to estimate value of output in response to corresponding material input. • Group Valuation (GV): This approach is based on principles of deliberative democracy and the assumption that public decision making should result, not from the aggregation of separately measured individual preferences, but from public debate.

19. Full World or Empty World?

20. Valuation of Non-Market Social Services: