Notes for Chapter 5 ECON 2390

2 Economics of Environmental Quality The exchange of private goods and services will generally result in socially efficient (not necessarily equal or fair) outcomes provided there is Perfect competition (perfect information) No public element to any of the goods or services (no externality) No economies of scale that lead to monopoly/monopsony or other forms of market power. The exchange of goods and services that does not meet these conditions will not be socially efficient. Normative economics – what ought to be. Positive economics – what is. Emission of GHG emissions (CO, CO 2, SO x, NO x and CACs) is widely believed to be the leading cause of human caused (anthropomorphic) climate change. These externalities are typically not captured in the price of fossil fuels leading to The social cost of “carbon”

3 Normative Policy What is the target level of quality Who are the emitters What policies (education, taxes, subsidies, regulation) will meet the target? What are the benefits and cost of the policy Benefits and costs to society Who gains/losses as a result of the policy

4 Determining Target Levels Pollution control always involve tradeoffs Other legitimate goals compete for policy space/resources Fixed resources exist for policy Diverting resources to pollution control will reduce economic growth now and in the future. Pollution damages – costs and negative impacts arising from control. Damage function Emission damages – effect of emissions on the environment Ambient damages – effect of concentration in the surrounding environment Marginal damages – the increased damage arising from a unit increase in pollution Total damages

5 Damage Functions Properties Linear: MD = a + b*E Non-linear: MD = a + b*logE or MD=a + b*E 2 Single non-accumulative pollutant No threshold Height of function shows the damages at each level of emission Total cost is the area under the curve between 0 and the given level.

6 Mitigation and abatement Mitigation and abatement (costs of reducing the residuals being emitted Changes to technology Raising costs (through taxation) Payments to recycle Directives (regulation) to cease Emissions and abatement are inverses

7 Emission – Abatement The costs of abatement typically increase with increased abatement In the chart, as emissions fall (abatement increases), costs rise. The shape of the abatement cost is determined by technology and the organization of production/consumption

8 Marginal Abatement Costs We use linear MAC for clarity. The area under the MAC is the total abatement cost. Moving from 1000 to 750 ppm (abating 250 ppm), costs more under MAC1 than MAC2 (by area “a”) Technology and institutions (stakeholders who need compensation) are the big reasons by abatement cost may vary Aggregate abatement costs for two pollution scenarios may be added (horizontally) to produce a total abatement costs (cleaning an oil spill and cleaning air pollution from a factory)

9 Zero pollution point

10 How can we measure environmental damages in money terms? What about damage to future generations

11 Social equilibrium The marginal abatement costs and marginal damage function identify an equilibrium where abatement balances damage. It never pays to eliminate all pollution Social equilibrium (efficiency) involves balancing (trading off) a marginal (unit) increase in pollution damage against a marginal (unit) in abatement cost. Once the abatement costs exceed the damage averted, we stop. When the marginal costs of abatement exceed the marginal reduction in damages we should stop. Why?