1. Assessing Costs for Environmental Decision Making
Chapter 8
Assessing Costs for Environmental Decision Making
© 2004 Thomson Learning/South-Western

2. Identifying and Valuing Environmental Costs: Conceptual Issues
Defining Incremental Costs
Incremental costs – the change in costs arising from an environmental policy initiative.

3. Identifying and Valuing Environmental Costs: Conceptual Issues
Explicit Environmental Costs
Explicit costs – administrative, monitoring, and enforcement expenses paid by the public sector plus compliance costs incurred by all sectors
Fixed costs – not controllable in short run and not dependent on production levels
Variable costs – opposite characteristics to fixed costs

4. Identifying and Valuing Environmental Costs: Conceptual Issues
Capital costs – Fixed expenditures for plant, equipment, construction in progress, and production process changes associated with abatement
Operating costs – Variable expenditures incurred in the operation and maintenance of abatement processes

5. Identifying and Valuing Environmental Costs: Conceptual Issues
Implicit Environmental Costs
Implicit costs - the value of any nonmonetary effects that negatively influence society’s well-being
Conceptually Valuing Environmental Costs
Social costs – expenditures needed to compensate society for resources used so that its utility level is maintained

6. Identifying and Valuing Environmental Costs: Conceptual Issues
Figure 8.1 Marginal Social Cost (MSC) and Total Social Costs (TSC) of Air Quality (% SO2 Abatement)

7. Identifying and Valuing Environmental Costs: Conceptual Issues
Figure 8.2 Modeling Incremental Costs for Air Quality (% SO2 Abatement) Using the MSC Function

8. Identifying and Valuing Environmental Costs: Conceptual Issues
Figure 8.3 Modeling Incremental Costs for Air Quality (% SO2 Abatement) Using the TSC Function

9. Estimation Methods for Measuring Explicit Costs
Engineering Approach – estimates abatement expenditures based on least-cost available technology
Difficult to implement for proposed environmental controls
Assumes all firms are cost-effective or technically efficient

10. Estimation Methods for Measuring Explicit Costs
Survey Approach – polls a sample of firms and public facilities to obtain estimated abatement expenditures
Advantages
More direct means to obtain abatement cost data
Disadvantages
Implicitly assumes polluting sources provide reasonable estimates,
Inherent bias – polluting sources have incentive to offer inflated values seeking regulation rejection

11. Cost Classifications in Practice
Cost classifications by economic sector
Private business outlays
Government
Personal private sector

12. Cost Classifications in Practice
Cost Classifications by Environmental Media
Distribution of expenditures – air, water, solid waste