Describe the connection and importance of environmental economics to the science of sustainability based on what was learned in class.

Describe the connection and importance of environmental economics to the science of sustainability based on what was learned in class. Cite what you have learned in class and analyze the case presented in class. You may also use a few Google resources to supplement and support your points. Paper requirements: 400~600 words, double-spaced.

Requirements: 500 words or more

1Chapter 17Public GoodsPrivate goodsprivate goods have properties of•rivalry: only one person can consume the good (it is depletable)•exclusion: others can be prevented from consuming the goodFour types of goodsExclusiveNonexclusiveRivalPrivategoodapplecomputerpencilCommon resources goodfisheryFreewayNonrivalClub goodcable TVconcerttennis clubPublic goodnational defenseclean airfireworksCommon property•common property: resources to which everyone has free access•overuse of common property because people don’t have to pay to use it•examples•fisheries•common pools (petroleum, water…)•Internet•roads

2Common Pool Fights•petroleum, water, and other fluids and gases extracted from a common pool•common pool may lie under two or more properties•owners of wells drawing from a common pool compete to remove the substance most rapidly, thereby gaining ownership of the fluid or gasCommon Pool Fightsone well removing fluid creates an externality on the other well by lowering fluid pressure, which makes further pumping more difficult and reduces the amount in the groundMiddle East conflicts•1990–1991, Saddam Hussein justified Iraq’s invasion of Kuwait by claiming that Kuwait was overexploiting common pools of oil that lie beneath both countries •Jordanians, Palestinians, and Israelis draw from the same water sources, which leads to conflictsGovernment response•overuse occurs because individuals do not bear the full social cost•governments apply tax or fee so that individuals internalize the externality•example: bridge toll such as the Bay Bridgesome economists estimate that optimal toll on S.F. would save commuters 20.6 minutes per day (compared to no toll)

3Public goods•public good: commodity or service whose consumption by one person doesn’t preclude others from also consuming it•example: national defense•public good lacks rivalry•public goods lack exclusion•produce positive externality•excluding anyone from consuming them is inefficientClub good•no rivalry, but has exclusion•example: swimming pool club•concert:•security guards prevent people who don’t have tickets from entering a concert hall•marginal cost of adding one more person is zero as long as the hall is not filledMarkets for public goods•exist only if nonpurchasers can be excluded from consuming them•thus markets do not exist for nonexclusive public goods•if government doesn’t provide a nonexclusive public good one, usually no one willDemand for public goods•market demand curve is social marginal benefit curve•private good•social marginal benefit = private marginal benefit•market demand is horizontalsum of the demand curve of individuals•public good•social marginal benefit is sum of marginal benefit to each consumer•market demand (willingness-to-pay) curve is vertical sum of individuals’ demand curves

4Mall Example•demand for guard services by stores in a mall•guards provide a service without rivalry: guards protect all stores simultaneously•demand for electronic store, D1•demand for ice-cream store, D2Inadequate Provision of a Public GoodPrice of guard service,$ per hourGuards per hourSupply, MC25181310873257940epesD1DD2Free riding•benefit from actions of others without paying•people are often unwilling to pay for their share of a public goodTwo stores share a guard•cost is $10 per hour•benefit to each store is $8•social optimum: hire guard because social benefit, $16 per hour, exceeds marginal cost•stores acting independently won’t hire•vote:•if both vote for guard, they split cost•if only one votes for guard, bears full cost

5Free riding on water•Perth, Australia•water is a private good for most households•pay the price of each unit•most households are individually metered •10% share meters (duplexes, apartments); on average 11 of these households share a meterExtra consumption from shared meterscompared to households with private meters•consume 17% more water on average •2-family duplexes consume only 0.05 kiloliters more•10 housing units in a block average 1.3 kiloliters more•222 member housing unit in a block average 640 extra kilolitersHerd Immunity•Herd immunity:If a sufficiently large share of the population is immune to a contagious disease then the contagious disease cannot spread easily.•An immune person provides a positive externality to others, lowering their probability of getting the disease.•Herd immunity is a public good.

6Vaccination: Public goodA measles or Covid-19 vaccination is a public good: a vaccinated person provides a positive externality to other free-riding people by helping to limit the spread of the diseaseFree riding problem•when too many people free ride by forgoing vaccination, the entire herd becomes more vulnerable•a person with the disease inflicts a negative externality on others•measles is so contagious that 90% of people who are exposed become infected•one sick person typically infects 12 to 18 others who lack immunityHerd Immunity Threshold Estimates•According to most experts:•Measles: 92% to 95%•Polio 80%•Covid-19: 70% to 90%•Problems:•Over time, the virus mutates•Threshold rate is misleading if vulnerable people cluster•Covid-19: nursing homes, assisted living•Measles: children in schoolsMeasles vaccination program•before the introduction of the measles vaccine in 1963, measles infected 90% of Americans by the time they were 15•the vaccine has prevented an estimated 35 million cases since 1963•U.S. declared measles eliminated in 2000•however, travelers from other countries continue to import the disease

7Vaccination rates•best estimate is that herd immunity requires at least a 92% to 95% vaccination rate•in Mississippi, where vaccination of school kids is mandatory, 99.7% of kindergarten students are vaccinated, so they have herd immunityCA and other states•CA and several states allowed families to avoid vaccinating children for religious or other reasons•because some people believe discredited reports that the vaccine causes autism and other problems, vaccination rates are < 90% in 6 states and Washington, D.C.•vaccination rate = 84% in Colorado, WV, Ohio•CA was 90.7% statewide in 2014; lower in SF, LA, and Orange County•these areas lack herd immunityAnti-Vaxxers•Some people believe a discredited study that the measles vaccine causes autism.•The journal that published it retracted the paper.•The author was stripped of his medical license.•Some people oppose all vaccines.•Famous anti-vaxxersinclude Jessica Biel, Robert F. Kennedy Jr., Jenny McCarthy, Robert DeNiro, Donald Trump.Anti-Vaxxersin Europe & Measles•In 2018, 527,000 European children missed their first dose of the measles-containing vaccine.•European measles cases spiked•60,000 in 2018, more than double that in 2017. •90,000 infected in the first half of 2019.•A large measles outbreak in Ukraine infected more than 25,000.

8Providing public goods•to ensure that nonexclusive public good is provided, government usually •produces it •compels others to do so•government has difficulty learning cost and benefits•government learns benefit (value of public good) by•survey•citizens voteVoting•whether majority votes for a public good depends on preferences of •median voter:•person with respect to whom half the populace values the project more and half less•efficientto provide public good if value ³cost•majority voting may not lead to efficiencyExample•traffic signal costs $300 to install•3 voters•thus, each votes for signal only if person thinks signal is worth at least $100 (tax person will pay)•3 cases (corners) in table•in each case, Hayley is median voter, so her views signal outcome•vote doesn’t always lead to efficiencyVoting on $300 Traffic Signals

9Club Goods•club good:a good that is nonrival but is subject to exclusion•some club goods are provided through true clubs, such as swimming clubs or golf clubs•exclude people who do not pay membership fees•services they provide, swimming or golfing, are nonrival•cable TV•concerts•software, moviesBooksAmazon sells 6,400 Kindle (electronic) copies/day of Harry Potter and the Deathly Hallowsfor $8.99 each Microsoft Word•at almost no extra cost, Microsoft can provide a copy of the software program to another consumer (nonrival)•because Microsoft charges a (high) positive price, a market failure results in which too few units are sold Piracy•if Microsoft cannot enforce its property right by excluding pirating, an even greater market failure may result: It may stop producing the product altogether•in countries where the cost of excluding non-paying users is high, computer software is pirated and widely shared•in its 2012 report, the Business Software Alliance (BSA) estimated that the 2011 piracy rate (share of software that was pirated) was over •90% in some developing countries such as Georgia, Zimbabwe, and Bangladesh•between 22% and 30% for most EU countries, Australia, Canada, Japan, and New Zealand•19% in the United States

10BSA’s Estimates: Share of Pirated Software 2018Cable TV before regulationPrice regulation reduces DWL

1FishingKey issues1. lack of property rights causes over fishing2. biology and economics determines the competitive steady state3. the competitive steady state is generally not the social optimumExercises•Why is the maximum sustainable yield not the economic optimum?•Show that a small shift in the demand curve can cause a large shift in the steady-state competitive catch.•Show how a per catch tax, t, can solve the externality problem in a competitive fishery.•What is the effect of technical change?Property rights•fisheries typically have common access•consequently, they lack clearly defined property rights•if anyone can fish a particular area, then no one has property rights to the fish until they are caught•so fishers have an incentive to catch more fish than if access to the fishery were restricted •which leads to over fishing

2Private vs. social costs•equivalently: competitive firms •look at their private costs (the cost of catching fish today)•do not use true social costs (the private cost plus the effect of fishing today on reducing the fish population in the future)•that leads to over fishingSex Life of Fish(Fishing biology)•consider an ocean-dwelling fish•thestockof fish in the ocean (the current population) in the time t, N(t),determines the stock of fish next period, N(t+1) in the absence of fishingGrowth rate without Fishing•the change in the stock of fish from tto t+1: Nt+1= Nt+ BNt•natural netbirths, b = BNt=fish born −fish that die from natural causes (age, illness, lack of food, and natural predators)•if there is no fishing and net births are positive, the stock of fish next period will be larger than the stock this period2 types of commercial ocean fish•demersal fish: bottom feeders (e.g., scallops)•pelagic fish: roam the seas (e.g., swordfish and sharks)

3Demersal fish•tend to remain confined to a certain area (e.g., flounder; similarly clams, lobsters)•because they stay in a small area, virtually the only way to make them extinct is to kill them all•the net birth curve hits the horizontal axis when the stock is zero and at the carrying capacity of the fisheryStock, NN*b1N1N2Net births, bPelagic fish•roam the seas (e.g., swordfish and sharks)•if number drops below a (positive) critical level, N, they become extinct: fish of reproductive age have trouble finding mates•growth curve for pelagic fish: quadratic curve shifts right so that extinction can occur at a positive stockStock, NN*NNet births, b

4Effect of fishing•the catch, Cincreases deaths (reduces net births)•Nt+1= Nt+ BNt–CSteady State•because Nt+1= Nt+ BNt–C•in the steady state,where the stock is unchanged: Nt+1= Nt•net births must equal the catch: b = BNt= C•that level of catch is called the sustainable yieldCatch•the catch, C, is a function of the stock of fish, N, and the effort, E: C = C(E, N)•for many fisheries it isC = C(E, N) = kEN•so the catch is linear in the stock of fishStock, NN*C2= C1N2N1Net births, b, Catch, C C(Em, Nm)C(E2, N2)C(E1, N1)NmMSY = Cm

5Maximum sustainable yield•MSY= the largest sustainable harvest•MSYoccurs at the peak of the net birth curve.Exercise 18F.1Why is the MSY the biological optimum, but not the economic optimum?06.113.224.4018.445.464Herring Effort Yield CurveBoat-yearsHarvest (kmt)Competitive fishery•in a competitive (or open-access) fishery, any firm (boat) can enter•firms enter is expected economic profit > 0; stop entering when profit = 0•profit = 0, where the private average cost of catching a fish equals the price•at zero profit, each firm operates at the minimum of its average cost curve, where the private marginal and average costs are equal•thus, the competitive supply curve is the average cost, AC, and private marginal cost, MCpof catching fish

6Cost of fishing•private cost of catching fish depends on•boat rentals•wages•material prices•ease of catching fish•thus, even if factor costs remain constant, the private average cost of catching fish rises as the stock of fish fallsSocial costs•private cost ignores the effect of fishing today on the future stock and hence on future catch•the social cost, which takes this externality into account, exceeds the private costShape of cost curves•the next figure shows •the private average cost curve, AC= MCp(it is also the private marginal cost curve)•the social marginal cost curve, MCs•as fishing effort increases, the catch, C, increases, in turn raising the cost of catching additional fish•thus, the ACcurve at first rises as effort and catch rise•eventually, however, so much effort is put forth (any level beyond that associated with the MSY) that the stock of fish falls, and additional effort reduces the long-run sustainable catch while driving up costs•thus, the ACcurve starts bending back on itselfMSYCatchPriceMCsAC= MCp

7Competitive vs. social equilibriawhether the social optimum catch is larger or smaller than the catch in the competitive steady state depends on whether the demand curve hits the supply curve in the upward or backward bending sectionMSYCatchPriceMCsAC= MCpD1CsCcMSYCatchPriceMCsAC= MCpD2CsCcSocial optimum•if the social discount rate is zero, the socially optimal output is the one in the figures, determined by the intersection of the demand curve and the social marginal cost, MCs•if the social discount rate is infinite, the social optimum is the competitive steady state

8Exercise 18F.2Show that a small shift in the demand curve can cause a large shift in the steady-state competitive catch.Exercise 18F.3Show how a per catch tax, t, can solve the externality problem in a competitive fishery.Exercise 18F.4What is the effect of technical change on the fishing competitive steady state?Similar Markets•hunting/gathering•highways•Internet•crime in Central Park•common pools (water, petroleum,…)

117 ExternalitiesExternalityan externalityoccurs when a person’s well-being or a firm’s production capability is directly affected by the actions of other consumers or firms rather than indirectly through changes in prices. Negative or Positive•negative externality harms others example: a chemical plant spoils a lake’s beauty when it dumps its waste products into the water and in so doing harms a firm that rents boats for use on that waterway•positive externalitybenefits othersexample: an attractively maintained garden benefits neighborsGovernment•when an externality problem arises, government intervention may be desirable•a government may regulate an externality such as pollution directly or indirectly control an externality using taxes or laws that make polluters liable for the damage they cause•similarly, a government may provide a public good

2Welfare Analysis with Externalities•if a market has externalities, they need to be taken into account in the welfare analysis•with externalities, competition need not maximize welfareFirms aren’t green•some firms claim they are environmentally aware•they endorse •Valdez-CERES Principles, which require that a company “sell products that minimize adverse environmental impacts,” or •Business Charter for Sustainable Development, which calls for firms “to modify their operations to prevent serious or irreversible environmental degradation”•are these firms just “talking green,” or are they willing to raise production costs to improve environmental quality?Lave and Matthews survey•surveyed 54 large American companies that had expressed environmental concerns•posed hypothetical situation:•a material used in one of your company’s products is found to harm the environment•another, nontoxic material is available that yields same product quality but costs more than original input•would company switch to nontoxic input?Survey results•nearly half, 25/54, responded•two-thirds willing to switch •if doing so would raise product cost by 0.01%•for example, by switching, a manufacturer’s costs would rise by $2 on a $20,000 car•willingness to switch fell as cost increased•1/3 if costs increased 1%•8% if costs rose 5%•none if cost increased by more

3Inefficiency of competition with externalities•competitive firms and consumers do not have to pay for harms of their negative externalities•so they produce excessive pollutionPaper Mill Example Assumptions•competitive paper market•firms produce paper and gunk (by-products): air and water pollution that harm people who live near paper mills•each ton of paper produced increases the amount of gunk by 1 unit•only way to decrease volume of gunk is to reduce the amount of paper manufactured•paper firms do not have to pay for harm from pollution they causePrivate vs. social costs•private cost: cost to firm of production only, not including externalities:•direct costs of labor, energy, and wood pulp •but not indirect costs of harm from gunk•social cost: private cost plus cost of harms from externalitiesSupply-and-demand analysis•competitive market produces excessive pollution because firms’ private costs < social costs•maximizes welfare: sum of CS and socialPS (based on the social marginal cost curve)•social optimum •welfare maximized where price equals social MC•optimal tradeoff between value of production and pollution harm

4Welfare Effects of Pollution in a Competitive MarketPrice of paper, p,$ per tonDemandMCpMCgMCgMCs=MCp+MCg450ps= 282pc= 2403084198Qc=105Qs=842250ecesABFCDEHGG, Units of gunk per dayQ, Tons of paper per dayMCpKey Results•unregulated competition almost certainly produces too much pollution•the optimal amount of pollution is not zeroReducing externalities•competitive markets produce excessive negative externalities•hence government intervention may benefit societyGovernment expenditures•expenditures on environmental protection as a percentage of GDP range between a 0.2 to 1%: •0.2% Italy•0.4% Portugal, United Kingdom•0.6% United States, Spain•0.7% Sweden•0.8% Germany, Switzerland•1.0% Austria, Denmark, and Japan•world’s poorest countries spend little if anything on pollution control

5Carbon Dioxide: CO2•primarily produced by burning fossil fuels•major contributor to global warming, damages marine life, and causes additional damage•which countries are the largest producers depends on the question askedCO2, Million Metric TonsGlobal share of CO2(%)Change 2006 to 2016 (%)CO2Tons per CapitaChina10,15128.2566.6United States5,31216.0–1215.5India2,4316.2871.6Russia1,6354.5–110.2Japan1,2093.7–69.0Germany8022.2–98.9Canada5631.7–115.3United Kingdom3891.1–316.0France3431.0–174.4Industrial CO2Emissions, 20161952 Thick FogStarting on December 5, 1952, the fog was so thick that Londoners called it a “pea souper.” People had trouble finding their way home. Birds crashed into buildings.Sulfuric Acid Mist•Burning coal pumped large quantities of sulfur oxides into the fog. •Exposed to moisture, the sulfur oxides produced a sulfuric acid mist, which caused massive inflammation of the lungs. •Hospitals filled with patients in acute respiratory distress. •Others didn’t make it to a hospital. Ambulances had trouble finding victims and got stuck in major traffic jams.

6Death Toll•All over the city, people with inflamed lungs died by suffocation. •During the 5 days of the fog, 4,000 people died by suffocation. •Undertakers ran out of coffins, and florists couldn’t supply enough flowers for funerals.•Another 8,000 people died in the next two months. •The death rate was 2% higher than normal during the following summer (1953).Governments Act•The City of London (Various Powers) Act of 1954 and the UK Clean Air Acts of 1956 and 1968 banned emissions of black smoke. •Since then, London has not had another pea souper.•Today in London, particulates (microscopic solid and liquid matter in the atmosphere) are only one-hundredth the level of that in 1952. Other Countries•Following the United Kingdom’s lead, the United States passed a Clean Air Act in 1970•Many other countries have passed their own Clean Air laws to control pollution. •But not all governments have acted strongly. For example, the Chinese cities of Beijingand Shanghai regularly have smog that kills.U.S. Clean Air ActLeadCarbon MonoxideSulfur DioxideNitrogen DioxideOzone98%85%80%57%29%Reduction in Pollutants 1980 to 2014

7Regulation Is Responsible•Regulation effectively reduces pollution by inducing firms to engage in cleaner production. •Shapiro-Walker (2015) found that U.S. manufacturingemissions of the most common air pollutants fell by 60% between 1990 and 2008 even though U.S. manufacturing output increased substantially.•That study estimated that at least 75% of the reduction was due to environmental regulations.Cost-Benefit Study of the Clean Air Act•EPA (2011) study estimated that by reducing air pollution from smokestacks and tailpipes, the Clean Air Act in 2010 prevented•over 160,000 premature deaths,•millions of respiratory problems,•3.2 million lost school days,•13 million lost workdays. •Academic study: reductions in fine particle pollution between 1980 and 2000 in U.S. cities increased average life expectancy at birth by approximately seven monthsEPA Estimate•After putting dollar values on the health gains as well as the costs, the EPA estimated the Clean Air Act’s•benefit at $1.3 trillion, and•cost at $53 billion.•benefit of the Clean Air Act outweighed the cost by nearly 25 to 1•EPA predicted that the benefit would outweigh the cost by more than 30 to 1 by 2020Benefit$1.3 trillionCost$53 billionBush’s Clean Air policy•immediately after the mid-term election in 2002, President George W. Bush substantially eased clean air rules•opponents, including officials in several north eastern states, complained that the new rules allowed utilities (particularly coal-firing plants), refineries, and manufacturers to avoid having to install expensive new anti-pollution equipment when they modernize their plants•Administration responded that revised rules give firms more flexibility

8Obama Administration•stricter and new regulations•slightly greater enforcement of regulationsTrump Administration•acting to undue Obama Administration regulations•enforcement is currently unknownGovernment intervention•direct approach: emissions tax, fee, effluent charge•indirect approach: emissions standard(quantity restrictions on outputs or inputs)•because output and pollution move together, regulating either worksInternalize Externality•government imposes costs on polluters by•taxing their output•taxing amount of pollution produced•through a law making a polluter legally liable for damages•causes a manufacturer to internalize the externality: to bear the cost of the harm that one inflicts on others (or to capture the benefit that one provides to others)

9Taxes to Control PollutionPrice of paper,p, $ per tonDemandMCpMCgMCs=MCp+(tQ)MCp+ττ=84450ps= 282MCp= 198MCg= 84Qs=842250esG, Units of gunk per dayQ, Tons of paper per dayGlobal Warming•A Pew Research Center poll of people in 40 countries•many people view climate change as the world’s top threat•People were especially concerned in Latin America, Sub-Saharan Africa, India, the Philippines, and much of Asia.•In2019,over11,00scientistsfrom153countrieswarnedthat•theEarth“clearlyandunequivocallyfacesaclimateemergency.”•humanactivity—pollutionfromburningfossilfuels—iscausingtemperaturestoriseSkeptics•some non-scientists are skeptical•Pew Research Center poll of U.S. adults: •68% say that solid evidence exists that the planet has been warming over the last several decades•25% think that such evidence does not existVarious Reports•According to the National Aeronautics and Space Administration, at least 97% of actively publishing climate scientists agree that climate-warming trends over the past century are likely due to human activities•The Academies of Science from 80 different countries agree•Various UN reports say the situation is dire

10Heat-Related ProblemsCostalDamagefromRisingSeaLevelsCitiesandtownslocatednearcoasts,suchasMiami,alsofacesubstantialdamagefromflooding.Costal Damagefrom Rising Sea Levels•People in island nations face inundation due to rising sea levels.•the value of existing costal property that is expected to be below sea level nationally:•By 2050: Between $66 and $106 billion•By 2100: Between $238 and $507 billionHeat and Health•Arecentacademicstudypredictedthat,bytheendofthiscentury,areasofthePersianGulfcouldbehitbyseverewavesofheatandhumiditythatwouldbe“intolerabletohumans.”•A2018studypredictsthatby2099,1.5millionmorepeopleworldwidewilldieeachyearbecauseofincreasedtemperatures.(Forcomparison,1.25millionpeopledieworldwideintrafficaccidentsannually.)Heat•By mid-century, the number of days that the average American will see 27 to 50 days over 95oF each year will double or triple the number over the past 30 years•By the end of this century, the average person will suffer from 45 to 96 days•In the Southwest, Southeast, and upper Midwest, people probably will face severalmonthsof 95°F days each year

11Crop and Other Losses•BankofEngland:theglobalvolumeofweather-relatedinsurancelosseshasmorethantripledsincethe1980s•WorldBankreportpredicted:morethan100millionpeoplecouldbedrivenintoextremepovertyby2030,unlessactionsaretakentoprotecttheworld’spoorfromclimatechangecatastrophessuchascropfailures,naturaldisasters,andwaterbornediseasesCrop Loss•some states in the Southeast, lower Great Plains, and Midwest may suffer a 50% to 70% loss in average annual crop yields in corn, soy, cotton, and wheat, unless they can switch to more resilient crops•however, agricultural yield will rise in currently colder states like those in the upper Great PlainsOptimal regulation •unfortunately, government usually does not know enough to regulate optimally•government needs to know:•marginal social cost curve•demand for paper curve•how pollution varies with output

12Enforcement•even if government knows enough to set optimal regulation, it must enforce regulation to achieve social optimum•U.S. Environmental Protection Agency (EPA) smog standards violated in many metropolitan areas including Baltimore, Boston, Chicago, Houston, Los Angeles, Milwaukee, New York, and Philadelphia•http://www.epa.gov/epahome/whereyoulive.htm•http://www.scorecard.orgCounties•EPA sets ozone (smog) standard of 0.085 parts per million exceeded in 474 counties in 31 states, home to 159 million people, in 2004•in 2008, the EPA tightened its ozone standard from 0.08 parts per million to 0.075•2012: •36 areas were marginally out of compliance with this rule•3 moderately•3 severely•2 extremely (LA-South Coast Air Basin; San Joaquin Valley) Application: Auto Externalities•driving causes many externalities including congestion, accidents, and pollution + production of the fuel used also creates pollution•taking account of both these sources of pollution, Hill et al. (2009) estimated that burning one gallon of gasoline (including all downstream effects) causes a carbon dioxide-related climate change cost of 37¢ and a health-related cost of conventional pollutants associated with fine particulate matter or 34¢ •extra drivers on the road (especially drunks and SUV drivers) cause additional auto accidentsAuto taxes•to reduce the consumption of fuel (reduce pollution and accidents), governments tax gasoline, cars, carbon produced by cars, or miles driven•under a 2009 law, current Dutch road-taxes and a 25% car-sales tax will be abandoned by 2012 in favor of a pro-rated distance tax•Drivers will be charged an average 0.03€ per kilometer (7.5¢ per mile) to reduce traffic jams, accidents, and carbon emissions•tax will increase annually until 2018, when it will cost an average 0.067€ per kilometer

13Benefit: Reduced fatality rate•Grabowski and Morrissey (2006) estimated that each 10% increase in the gasoline tax results in a 0.6% decrease in the traffic fatality rate•Anderson (2008): probability of a serious accident from a single-vehicle frontal collision is 18% higher for light trucks than for cars•marginal externality cost of driving a light truck, such as an SUV, rather than a car is $3,850•a tax would raise $30 billion in tax revenue per year•a gas tax has a similar effect•increase in real gasoline price by more than a dollar in the last four years reduced the share of light trucks by about 10.3 percentage points, which explains part of the reason why high gasoline taxes reduce fatalitiesDrunk drivingLevitt and Porter (2001) estimated that to optimally mitigate the externality from drunk driving requires a tax of 30¢ per mile driven or $8,000 per drunk driving arrest Monopoly and externalities•monopoly output may be less than social optimum even with an externality•competition is not necessarily better than a monopoly with an externalityMonopoly, Competition, and Social Optimum with PollutionPrice of paper,p, $ per tonQ, Tons of paper per dayDemandMRMCpMCgMCs=MCp+MCg450330310282240308410522570600emecesetABCD

14Cost-benefit analysis•instead of using the supply-and-demand analysis to show that competitive market produces too much pollution•use a cost-benefit diagram•welfare is maximized by reducing output and pollution until the marginal benefit from less pollution equals the marginal cost of less outputWelfare problem•gunk, G, is reduced from the competitive level, •B(H) = benefit to society of reducing the units of gunk produced by H•C(H) = associated social cost due to the forgone consumption of the good so as to reduce gunk•society wants to maximize welfare: benefit net of cost: W= B(H) -C(H). GCalculus•choose amount of gunk to remove to maximize welfare: set derivative of welfare with respect to Hequal to zero:•thus, welfare is maximized when marginal benefit, dB(H)/dH, equals marginal cost, dC(H)/dH()()()0ddddddWHBHCHHHH=−=Cost-Benefit Analysis of PollutionBenefit, Cost, $Cost: less paperBenefit: less gunkMaximumnetbenefit8463105084105G, Units of gunk per dayQ, Tons of paper per dayG, Units of gunk per dayQ, Tons of paper per day(a) Cost and BenefitMarginal benefit,Marginal cost, $(b) Marginal Cost and Marginal Benefit4,0002,000105840MCMB

15Costs and benefits •cost of reducing ozone: greater expenses of•manufacturing •driving•benefit•better health in urban areas•increased agricultural yields in rural areas•consequently, optimal level differs in urban and rural areasLos Angeles•benefits of reducing ozone level > costs over past several decades•however, if standards are set too strictly, the cost outweighs the benefitRural areas•is CA standard too strict for an agricultural area?•according to the CARB, crop losses due to high ozone levels range from •8.4% for alfalfa hay•32% for oranges •CARB claims production yields fall for ozone-sensitive crops such as beans, cotton, grapes, lemons, and oranges even at ozone levels as low as 0.09San Joaquin Valley•produces 60% of CA crops and 9% of U.S. crops•has second-worst air quality in CA (after LA)•Kern County in 1990:•ozone went up to 0.17 ppm one day•0.09 ppm standard was surpassed on 120 days•0.12 ppm standard was exceeded 37 days

16Estimated benefits and costs•Kim, Helfand, and Howitt (1998) estimated that meeting the CA’s 0.09 ppm standard•health benefits range from $2.58 million to $51.58 million•consumer surplus ranges from $229 million to $270 million•producer surplus ranges from $297 million to $348 million•welfare is maximized at slightly below 0.14 ppm (conservative estimates)•substantial benefits from reducing pollutionEmissions Standards for Ozone0.120.110.100.090.160.150.140.13Ozone concentration, ppmMarginal benefit,Marginal cost, $ millions400300200100MCMB0.120.110.100.090.160.150.140.13Ozone concentration, ppmState standardFederal standardOptimalCostBenefitBenefit, Cost, $ millions(a) Cost and Benefit1,000800600400200(b) Marginal Cost and Marginal BenefitRegulation•purpose of environmental regulation is to limit damage from pollution•2 ways to limit damage: •reduce the amount of effluent created •clean up effluent at the source, before it gets into the environmentThree ways to reduce production of pollution•change input mix•change the production process•change the quantity of production

17Lettuce example•when lettuce producers respond to higher water prices by using less water•changes input mix•less output•reduced nitrate run-off Cleanup•if emissions can’t be completely prevented,•use methods to collect pollutants at the source, before they enter the environment •clean up the pollution•farmers can use drainage pipes: underground pipes with holes to collect runoff•cattle feedlots can use holding ponds: hold waste until it can be processedPrivate approaches•example: make polluters financially responsible for any damages that they cause•make a polluter pay compensation after the damage is done (lawsuit)•create an incentive to avoid polluting•here, we assign the right to be free of pollution to consumers or the general public•the “rights assigner” is the legal system rather than the regulatory arm of government•because assigning private rights cannot always be used, people turn to government regulationsSpatial issues•justification for government intervention: production in one area causes pollution damage in another•bad water quality in the Gulf of Mexico due to excess fertilizer applications in the upper Midwest that travel down the Mississippi River•damages from acid rain and snow in New England due to power plant emissions in the Ohio Valley•regulating emissions near Gulf of Mexico or New England will not solve pollution problems

18Regulation over large areas•consequently, much U.S. environmental regulation is controlled by the U.S. government rather than by the states•the European Union allows the European nations to coordinate their environmental policies•many now call for international treatiesNitrogen Oxides (NOx)•NOxresult from nitrogen, a major component of air, burning in a combustion process•NOxinteracts with hydrocarbons (another pollutant) to produce ozone•an oxygen compound that protects us from solar radiation when it’s high in the atmosphere•but is a pollutant when it’s concentrated in the lower atmosphereMany source of NOx•NOxcome from •gasoline-fueled cars•diesel-powered trucks•coal-fired power plants,…•NOxsources vary in production methods, so different technologies needed to reduce NOxemissions•their costs of abatement are very different•Should all sources be required to abate the same amount?•If not, what other rule might be used to decide how much different sources should abate? Feasibility•after regulatory agency decide how much abatement, the agency must consider the feasibility of any proposed rule for abatement•feasibility includes two closely related considerations: •what is the least costly way to meet an abatement target (cost-effectiveness)•what is a technically practical way to abate (technological feasibility)

19Example•cost-effectiveness approach is used by the U.S. Acid Rain Program, which•sets a goal for abatement of sulfur oxides (SOx) •aims for the lowest cost in achieving it•because polluters may know which abatement method is least expensive, it is easier to achieve cost-effectiveness than efficiency (where we also need to know benefits)Technological feasibility•technological feasibility may limit a regulator’s choices•lettuce example: •it is very difficult to measure the nitrate runoff that comes from a farm•it is easier to observe and regulate input use, such as the amount of fertilizer or irrigation water applied to a fieldAlternative: Measure water quality•regulator •measures ambient water quality in river, lake, or aquifer where the agricultural runoff ends up•sets an ambient water quality standard•however, if multiple farmers are polluting, regulating ambient water quality may not give effective signals to farmers to reduce their emissions—each farmer blames others for any water quality problems•thus, regulator’s ability to monitor and induce polluters to change their behavior varies with pollution problemTwo types of regulation•command and control: direct regulation of behavior•market-based instruments: induce behavioral changes

20Command and control pollution standards•command and controlapproach generally sets a pollution standard•standards set along damage chain•Input standards•technology orprocess standards: processes that a firm uses•emissionsor effluent standards(often technology-based emissions standards): target the pollution its at source•ambient standards: limit the concentration of pollution in the environmentInput standard•restricts the use of an input to production•all agricultural pesticides are subject to safety restrictions or are banned completely in U.S.•use of lead in gasoline and paint is strictly limited in U.S. and EUTechnology or process standard•directs producers to use a specific technology or process•smokestack scrubber in a factory filters out particles and other contaminants on their way out of the smokestack•some states require new electric power generators to install desulfurization technology•green building codes require double-paned glass, reflective tile, and insulation to reduce energy consumptionEmission or effluent standard•requires a source to emit no more than a given amount of effluent (or rate)•U.S. Clean Air Act: new sources of pollution must restrict the quantity of NOx, SOx, and other pollutants•standards vary by industry, size, or process •emission standard doesn’t restrict the firm’s choice of inputs

21Technology-based emissions standard•predominant way of limiting emissions in the Clean Air and Clean Water Acts•standard is set based upon the effluent levels that would be emitted if a known technology is used•regulator estimates how much effluent would be emitted if a plant were to use a known technologies•regulator sets that amount of effluent according to the technology•firm ultimately sees only an effluent standardFlexibility•firm can meet technology-based standard using the technology the regulator investigated•the firm may also meet the standard in other ways•EPA does not require automobiles sold in the United States to be equipped with catalytic converters•EPA imposed automobile emissions standards in grams per mile of NOxand hydrocarbons•this standard is based on what catalytic converters are capable of doing, and cars typically have them as their way of meeting the standardAmbient quality standard•specify the concentration of pollution that is acceptable in the environment•they are goals for pollution reduction rather than ways to achieve pollution reduction•Clean Air Act requires each U.S. jurisdiction achieve the National Ambient Air Quality Standards•ambient standards for water quality vary by state•abatement programs that target inputs, processes, or emissions are designed to achieve ambient quality goalsPollutantLevelCarbon Monoxide9 ppm (10 mg/m3) per 8 hoursLead1.5 µg/m3 quarterly avNitrogen Dioxide0.053 ppm (100 µg/m3) annual avParticulate Matter (PM10)150 µg/m3 dailyParticulate Matter (PM2.5)15.0 µg/m3 annual av;35 µg/m3dailyOzone0.075 ppm per 8 hours Sulfur Dioxide0.03 ppm annual average;0.14 ppm daily

22Criteria for evaluating pollution control standards•technology feasibility•cost effectiveness•incentives for technological improvementEmissions monitoring•standards’ feasibility depends on ability to monitor pollution•point source pollution is relatively straightforward to observe•point sourceemitsfrom an identifiable point: smokestack, discharge pipe•possible to use emissions standards, or process or input standards•nonpoint sources, such as crop farming, on the other hand, raise monitoring problems•nonpoint source pollution: can’t see emissions, or emissions travel a long way before settling•pollution cannot easily be traced to a specific source (pesticides/fertilizers farmers apply migrate underground•reducing nonpoint source pollution relies on input and process standards (limits on the amount of fertilizer application or the method of pesticide application) Monitoring and standards•input standards can be monitored if regulators can oversee use of the inputs; but regulator may not see all inputs•technology standards easy to monitor: regulator see scrubber installed, but needs to make sure it is used Cost effectiveness: Process•setting a standard to use a known process helps ensure technological feasible•however, it does not allow a source to consider alternatives•if all coal-fired electricity plants were required to use scrubbers, •sources would not be allowed to switch to low-sulfur coal instead, which might be less expensive for many of them

23Cost effectiveness: Emissions•an emissions standard gives sources the flexibility to choose the approach•sources usually choose whichever method is cheapest, so an emissions standard will be at least as inexpensive as either a technology standard or an input standard•however, if an emissions standard is not feasible, the theoretical possibility of lower costs is irrelevantCost effectiveness not achieved•effluent or emission standards are lower cost than technology or input standards•but they are costlier than necessary to achieve a specified pollution reduction•they usually violate the equimarginal principleIncentives for new technology•emissions standards encourage installing new technology that is less costly to achieve the effluent reduction target•an input standard may stimulate the search for alternatives to using that input: •when chlorofluorocarbons (CFCs) were banned as the propellant in aerosol cans (harmed the ozone layer) manufacturers found other propellants•substitute input may have undesirable characteristics: when lead was removed from gasoline, methyl tert-butyl ether, MTBE, was used until people found MTBE leaking out of storage tanks and contaminating groundwater•a technology standard provides no incentive or ability for innovation—locks in a particular abatement technologyAmbient qualityEmissions standardInput standardTechnology standardTechnological feasibility? Easy to set and usually easy to monitor, even if not efficientUsually feasible to monitor point sources, not nonpoint sourcesSometimes but not always easy to monitorOften easy to monitor existence of standard, but not its useLeast cost for specified emissions (equimarginal principle)?Cost-effective methods can be chosen to implement standardsNo, unless regulators have enough information to write cost-minimizing standards for each source, or all sources have identical marginal abatement costsNo, unless regulators have enough information to write efficient standards for each source, or all sources use the input in the same wayNo, unless regulators have enough information to write efficient standards for each source, or standard achieves same marginal abatement cost for all sourcesEncourages innovation?Depends how standards are implementedYesEncourages substitutes for the inputNo

24Clean Air Act of 1970•primary framework for improvements in air quality in the United States•complex combination of flexibility and mandates, standards and markets, giving significant power to both the national and state governments. •establishes the National Ambient Air Quality Standards (NAAQS) for 6 major pollutants States under Clean Air Act•each state is expected to achieve NAAQS•each state decides how to regulate•EPA can step in if one state’s pollution affects another stateNew sources•any new source must meet federally specified New Source Performance Standards under the Clean Air Act•making standard same nationally keeps states from trying to attract new industry w/ low standardsMobile sources•mobile sources: cars, trucks, airplanes, construction equipment, boats, lawnmowers •nationally regulated separately under the Clean Air Act, except CA•because CA regulated vehicles before Clean Air Act, it can set (w/ federal permission) more stringent vehicle emissions standards than the national level

25Standards•Clean Air Act primarily uses standards•starting in 1970s, EPA allowed small forms of programs that acted like marketable permits•if a new source wanted to move into an area that had not yet achieved the NAAQS (and can’t afford new air pollution), it could pay for abatement equipment on an existing source, as long as the abatement was more than the amount the new source would emit•A 1990 amendment to the Clean Air Act established a large-scale marketable permit program for SO2from power plants•success of this program has led to proposals for more trading programsMarket-based instruments•alternative to command and control:•regulator can put a price on pollution making pollution expensive•several market-based instrumentscan put a price on pollution:•tax on emissions•subsidy for abatement•tradable pollution permitsPricing Pollution•sources abate if it is less expensive to abate than to pay the price of polluting •can set price on pollution by taxing•alternatively, can subsidize a firm to reduce pollutionfor polluting—same outcome•or, can create a marketOther types of subsidies•subsidies are rarely, if ever, used directly for abatement•subsidies have been provided for processes or technologies:•some U.S. agricultural programs pay subsidies to farmers if they plant buffer strips along water bodies to filter pollutants out of farm runoff•ethanol subsidy programs encourage energy producers to shift their inputs from petroleum to corn, in the hope that carbon emissions will be reduced•these subsidies do not act like the abatement subsidies because they do not focus on reducing emissions, •are unlikely to satisfy the equimarginalprinciple•easier to monitor than emissions standards•subsidies make the technologies much more acceptable

26Cap & trade: another option•marketable permit program: •permits distributed that permit a specified amount of pollution•permits can be traded in a market•sets a price on pollution•regulator reduces # of permits over time—presumably cause price to rise •profit from sales go to original permit holderDebate today•should government give initial permits to polluting firms•or sell initial permits in an auction?•another possibility: give permits to environmental or other groupsU.S. Clean Air Act of 1990•created a market for sulfur dioxide (SO2) pollution generated by power plants•law set an emissions cap of 8.7 million tons for 1995, when it would take effect•actual production in 1995, fell nearly 50% to just 5.3 million tons, and at a cost between ½ and 1/3 of the traditional standards approach: firms used smokestack scrubbers (which remove sulfur from exhaust gases) and low-sulfur coal to cut pollutionPermits•each EPA-issued permit is for 1 ton of SO2emissions annually•permits sum to the aggregate emissions cap•U.S. electric utilities that operate the 445 largest and dirtiest coal-fired power plants received permits in proportion to their use of fuel in a historical period

27Fines and selling permits•a firm producing more pollution than is permitted is fined $2,000 per ton of emissions above its allowance•at the end of a year, if a company’s emissions are less than its allowance, it may sell the remaining allowance to another firm•EPA holds annual spot auction for permits for use this year and an advance auction for permits effective in seven yearsEffects•U.S. SO2 emissions from power plants in 2001 1/3 that in 1990•Schmalenseeet al. (1998) estimated: in mid-1990s, pollution reduction under market program cost •¼ to 1/3 less than if permits had not been tradable•saving $225 to $375 million per yearBuying Permits•environmental groups encourage citizens to buy and retire pollution permits: •cleanairconservancy.org/purchase.php•1 metric ton CO2credit: equivalent to emissions from a round trip flight for 1 person flying between NY and SFBrokers•brokers trade at least 30 types of air pollution, including from SO2, nitrogen oxides (NOx), and carbon dioxide (CO2)•Cantor Fitzgerald Environmental Brokerage Service, www.emissionstrading.com, lists prices at which permits trade

28Other pollution markets•southern Californian smog market since 1994•South Coast Air Quality Management District (AQMD)•regulates emissions in 4 so. California counties •allocates credits for NOxor sulfur oxides to firms•AQMD believed that allowing trading would cut cost of complying with clean air regulations by $58 million (42% of total cost)

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