Chapter 3

MEASURING RISK

Decisions in life ruled by Risk and Cost

Take Hwy at 70 or side road at 35?

• How likely will someone or something be hurt? 

• How much will it cost to prevent?

• Probability versus Possibility

Chapter 3

RISK ASSESSMENT • Facts and assumptions to estimate probability of harm. • Well known versus little known actions.

• Animal tests versus human responses. (example: carcinogens)– Estimates of probabilities.– Not all people respond the same.– Err on the side of safety.

Chapter 3

• RISK MANAGEMENT • Decision making process:

1.            Which risks have highest priorities? 2.                  Cost to reduce risks? 

3.                  Where to spend limited dollars?• 4.                  How much risk is acceptable?• 5.                  How to enforce?• Answers to questions are controversial• Science is often incomplete• We often don’t understand the risks we accept and those we

won’t.

Chapter 3

TRUE AND PERCEIVED RISKS• Daily, common events and infrequent but dramatic

events.• “Experts” and the “public” often differ.

– public trust of experts

• Degree of risk that is acceptable– zero risk vs. negligible risk– voluntary vs. involuntary risk

• What is the proper balance?

Chapter 3

ECONOMICS AND ENVIRONMENT • To achieve long-term economic growth

while improving/sustaining the environment. Whose goal?

• Economics are associated with environmental issues---Resource Allocation

Chapter 3ECONOMIC CONCEPTS• “Goods” or “services” are those things that are scarce.• “Resources” make goods and services available.• “Supply” is the amount of goods or services available.

– 1.                  raw materials– 2.                  amount available– 3.                  cost to utilize raw material– 4.                  competition for raw material– 5.                  feasibility of recycling material– 6.                  societal costs

• “Demand” is the amount of goods or services that are being purchased.•  • Supply/Demand curve

Chapter 3 Demand is the amount of goods or services

that consumers are willing/able to buy at various prices. Supply is amount available.

When supply exceeds demand, must lower prices to sell product

Demand

Supply

Chapter 3

• MARKET-BASED INSTRUMENTS• Supplement but do not substitute• Require open dynamic market system, other

aspects of more developed nations.– 1.                  Information Program– 2.                  Tradable Emissions Programs– 3.                  Emission Fees, Taxes and Charges– 4.                  Deposit-Refund programs– 5.                  Subsidies

Chapter3

COST-BENEFIT ANALYSIS•  1.                  ID the project.•  2.                  Determine all impacts (+ and -).•  3.                  Value of impacts.•  4.                  Calculate cost/benefit ratio -- profits?

CONCERNS• Does everything have economic value?• How can you determine all impacts (both + and -)?• Assumes that money is the most important thing.

Chapter 3

SUSTAINABLE DEVELOPMENT• “Development that meets the needs of the present without

compromising the ability of future generations to meet their own needs.” – Is economic growth necessary to finance investments in

environmental improvements?– Will technological advances solve environmental improvements?– These two approaches view the environment as part of the

allocation of resources process.– Are economic and environmental well-being mutually

reinforcing goals?

Chapter 3

• Economic growth may create its own failing.

 

• Healthy economies are necessary to invest in environmental protection.– Can economic growth be managed such that the

environment is not damaged?

• Different abilities in different countries.

Chapter 3

Sustainable development will require change in our economic policy:

• GNP currently does not include environmental costs and benefits.

• Short term gains often have long term effects. 

• Politicians are on 2 to 6 year terms. • Investors have 3 month to a year outlook.

Chapter 3

Sustainability requires:•  1. Use renewable resources.•  2.  Substitute renewable resources for non-

renewable ones.•  3. Recognize the interdependence of the large

system.•  4.   Adaptability of system requires diversity.•  5.   Institutional commitment.

Chapter 3

EXTERNAL COSTS (Externalities) • Expenses generated by producer, but borne by someone else.

That would be you and I.

• Pollution-prevention costs are passed on to others. – Sewage treatment

• Pollution costs:– 1.  Expenditures to avoid or remove damage once pollution has

occurred.– 2.  Increased health costs or loss of use of a resource.

Chapter 3

THE PROBLEM WITH “COMMONS”• When something belongs to everyone, it will

almost always be aggressively exploited.– Burn wastes because air is free. 

– Dump in the ocean.

– Fish the ocean.

 • Garrett Hardin’s “Tragedy of the Commons”

Chapter 3ECONOMICS AND THE BIOPHYSICAL ENVIRONMENT • Humans change the environment for human gain.• Population size cause changes such as loss of biodiversity and

climate change.• Time for biodiversity to develop.• Rate for reduction in biodiversity.• Market decisions cannot take into account the inner-connectivity

of the environment.• Uniqueness of some locations is not considered in many

economic decisions.

Chapter 3

DEVELOPING NATIONS• Most ecological diversity now occurs where

developing nations occur.• Developing nations borrow money for large

development projects.– Debt for Nature exchanges

• Tremendous debt forces short-term returns. • Environmental protection is ignored.• Long term future is jeopardized.