Class 2

The Human-Environment Relation Environment as asset Energy Air Water Amenities Raw materials

The Economic Approach Positive economics Normative economics

How strictly should we regulate arsenic in drinking water? carbon dioxide in the atmosphere? pesticides in our food? or How much pollution is acceptable?

In recent years the use of “cost benefit analysis” (CBA) to provide solution and to set environmentel standarts has attracted a large and high-profile group of supperters. It offers a way of achieving superior environmental results at a lower cost to society than other available approaches. CBA tries to mimic a basic function of markets by setting an economic Standart for measuring the success of the government’s projects and Programs. CBA sets out to do for the government waht the market does for business: add up the benefits of a public policy and compare them to the costs.

Air, water and hazardous waste are primarily regulated under a safety standard. air standards which protect human health and sets, as its final goal, zero discharge into navigable waters with an intermediate target of “fishable and swimmable waters”. Regulatory Impact Analysis(RIAs) “maximized net benefits to society”

Good CBA will follow; Accepted procedures for estimating benefits and costs Provide a clear statement of all assumptions Point out uncertainities where they exist Suggest realistic margins of error

Two features of CBA distinguish it from other approaches to evaluating the advantages and disadvantages of environmentally protective regulations:

1) Monetizing Benefits CBA seeks to translate benefits of regulation into monetary terms(dollars). Since there are no natural prices for health and environmental benefits (long life, good health, clean air), CBA requires the creation of artificial prices. “Human life is the ultimate example of a value that is not a commodity and does not have a price” 2) Discounting the future Discounting is a procedure developed by economists in order to evaluate investments that produce future incomes(esp. in financial investments). CBA uses the present value of future benefits. Future costs and benefits are discounted or treated as equivalent to smaller amounts of money in today’s dolars.

The efficient option will maximize the size of the economic pie or the net monetary benefits to society. This is just, maximize total benefits – total costs (max. net benefits ) Marginal analysis: marginal benefits exceed marginal costs Benefit-cost ratio: it is just the value of the benefits of the option divided by the costs

The Optimal Outcome Economic efficiency Static efficiency Dynamic efficiency For example: Does reducing pollution make economic sense?? Benefits Costs Net benefits