Erling Eide, ELE Day 2 2 Environmental issues (problems and goals)

Erling Eide, ELEDay 2

2 Environmental issues (problems and goals)

• 2.1 Examples of what might be thought to be a problem

• 2.2 What is the problem?

• 2.3 Goal analysis: Modeling priorities and policy choices

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2.1 Examples of what might be thought to be a problem

• Environmental services– Purification services (Nature as a purification plant)

– Recreation services

– Extraction of resources (animals, minerals,…)

• Problems – Degradation/reduction in these services

• Long list of what people consider as problems– Pollution damage

– Damaged recreational services

– Depletion of natural resources

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2.1 (cont.)

• Exhaustable resources (minerals, gas, oil, species…)– Depletion

• Non exhaustable resources (fish stocks, pastures, forests, clean atmosphere, clean rivers,…)– Overuse, reduction of stocks, pollution…

• STOP IT?– Pollution causes health problems. Stop it?

– Waste causes degraded recreational services. Stop it?

– Extraction of minerals reduces stock available to future generations. Stop it?

• Stop it at which level of depletion/degradation?U/ELE/H13 day 2 rev3.ptt 3

2.2 What is the problem? Externalities

• Decision makers’ behaviour: – Decision makers do not take into account the negative

effect on others of their activity.• Damage costs to others (negative externalities) not included when

producers and consumers are balancing benefits vs. costs.

• In market equilibrium consumers pay for the scarce resources used in production (at the margin), -- but not for the external effects.

• Products too cheap.

• Production too high.


Example: The tragedy of the commons

• Definition of commons:– Resource that anybody can extract or use

– Resource rent: The surplus value after all costs of extraction or use, and normal returns, have been accounted for.

– The gift of nature

– Competition to get hold of the gift

– (Model) consequence: The tragedy of the commons: Resources depleted

• Examples of commons– Fish stocks in oceans (whales, cod,…)

– Pastures

– Atmosphere


2.3 Goal analysis: Modelling priorities and policy choices

• Alternative goals:– Welfare based optimal emissions

– Other standards of emissions

• 2.3.1 Optimal production: See section 1.5


2.3.2 Optimal amount of emissions -- Emissions given level of production

• Example: Pollution of a given activity (Production in a given plant is held constant)

• Costs of pollution:– Reduced environmental quality

• requires purification measures in adjacent plant

• Causes health problems

• Reduces recreation services in the neighborhood

• Costs of reducing pollution– Higher quality of inputs

– More air cleaners

– Increased quality control of production

– …

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2.3.2 (cont.)Goal: Minimisation of total costs

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EMISSIONS

COSTS

DAMAGE COSTS

ABATEMENT COSTS

TOTAL COSTS

OPTE

MINTC

FIG. 2.1 Determination of optimal emissions

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2.3 (cont.) Goal: Minimisation of total costs

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MARGINAL ABATEMENT COSTS

MARGINAL DAMAGE COSTSMARGINAL COSTS

MDC=MAC

OPTE EMISSIONS

FIG. 2.2 MARGINAL COSTS AND OPTIMAL EMISSIONS


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EMISSIONS

COSTS

DAMAGE COSTS

ABATEMENT COSTS

TOTAL COSTS

OPTE

MINTC


MARGINAL COSTS

MDC

EMISSIONSOPTE

MACMDC=MAC

Internalizing Externalities

• Allocation of ownership rights (property rights):– To the polluter

• Contract on pollution reduction (”laissez-faire rule”)

– To the damaged party• Contract on pollution increase (”polluter rule”)

• Transferability of ownership rights

• Allocation and transferability of ownership rights makes externalities into a marketable good.– The government set the rules

– Actors act.


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EMISSIONS

COSTS

DAMAGE COSTS

ABATEMENT COSTS

TOTAL COSTS

OPTE

MINTC


MARGINAL COSTS

MDC

EMISSIONSOPTE

MACMDC=MAC

2.3 (cont.) Internalisation of costs

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MARGINAL ABATEMENT COSTS

MARGINAL DAMAGE COSTSMARGINAL COSTS

MDC=MAC

OPTE EMISSIONS

FIG. 2.2 MARGINAL COSTS AND OPTIMAL EMISSIONS


EhighElow

Internalizing Externalities (cont.)

• Environmental liability

• Pigouvian taxes

• Regulations


Erling Eide, ELE Day 2 2 Environmental issues (problems and goals)

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