1. Assessing Costs for Environmental Decision Making
Chapter 8
Assessing Costs for Environmental Decision Making
© 2007 Thomson Learning/South-Western
Callan and Thomas, Environmental Economics and Management, 4e.

2. 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. 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. 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. 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 = MACMKT + MCE

6. MSC and TSC of Abatement
MSC = MACMKT + MCE
MSC ($millions) 4
TSC A1
A (abatement %)

7. Modeling Incremental Costs
MSC = A
MSC = MACMKT + MCE
22.75 19
MSC ($millions)
Incremental costs =
$ million 4 20 25
A (abatement %)

8. Modeling Incremental Costs
TSC
TSC ($millions)
Incremental costs =
$ million
TSC = 4A A2
230 20 25
A (abatement %)

9. Estimating Explicit Costs
Two methods
Engineering Approach
Survey Approach
Common to use a combination approach

10. 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. 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. Cost Classifications By economic sector By environmental media
Shows cost distribution across public and private sectors
By environmental media
Shows how costs vary across air, water, and solid waste abatement activities