© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Environmental Economics and Management: Theory, Policy, and Applications 6e by Scott J. Callan and Janet M. Thomas Slides created by Janet M. Thomas 1

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. ASSESSING COSTS FOR ENVIRONMENTAL DECISION MAKING Chapter 8

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Environmental Costs Conceptual Issues Incremental costs are the change in costs arising from an environmental policy initiative Economic costs include Explicit (or monetary) costs Implicit (or nonmonetary) costs Ideal measure is the social costs of policy Expenditures needed to compensate society for resources used so that its utility level remains the same 3

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Explicit Costs Administrative, monitoring, and enforcement expenses incurred by the public sector plus compliance costs incurred by all sectors Capital (or fixed) costs  spending on plant, equipment, construction, and process changes for pollution abatement Operating (or variable) costs  costs of operating and maintaining abatement processes 4

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Implicit Costs Value of nonmonetary effects that negatively affect society’s well-being Examples included diminished product variety, time costs of searching for substitutes, reduced convenience, etc. 5

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Modeling Incremental Costs Find baseline TSC before policy Find TSC after policy is implemented Subtract baseline from new TSC TSC can be found as area under MSC  Recall MSC = MAC MKT + MCE 6

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. MSC and TSC of Abatement MSC ($millions) A (abatement %) MSC = A MSC = MAC MKT + MCE 0 4 A1A1 TSC

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Modeling Incremental Costs MSC ($millions) A (abatement %) MSC = A MSC = MAC MKT + MCE Incremental costs = $ million

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Modeling Incremental Costs TSC ($millions) A (abatement %) TSC Incremental costs = $ million TSC = 4A A 2

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Estimating Explicit Costs Two methods Engineering Approach Survey Approach Common to use a combination approach 10

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Engineering Approach Estimates abatement spending based on least-cost available technology Relies on experts in abatement methods Drawbacks  difficult to use for proposed policy due to uncertainty  must be customized to suit each production setting or suffer from averaging  unable to capture firm heterogeneity as a generalized estimate  likely understates true costs because it assumes all firms are cost-effective 11

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Survey Approach Derives estimated abatement expenditures from a sample of polluting sources via surveys Drawbacks assumes sources are sufficiently well-informed polluters have an incentive to exaggerate costs to officials to increase the probability that the proposed regulation will be rejected 12

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Classifications By economic sector Shows cost distribution across public and private sectors By environmental media Shows how costs vary across air, water, and solid waste abatement activities How are standards on GHG emissions from vehicles expected to affect automakers’ abatement costs? (See the boxed Application.) 13

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Pollution Abatement Costs by Industry (2005 data) 14 Note:Data are in 2010 dollars Source: U.S. Census Bureau (2008).

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Pollution Abatement Costs by Media (2005 Data) 15