Chap 1: intro

ENVIRONMENTAL ECONOMICS

Definition of environment: everything surrounding us. (natural) Circular flow model and Material balance model o Circular flow: (tin v hng/sc l chy t nh sx n ng tiu dng/ng

l qua ch v ngc li) o Material Balance: (thm resource v residual chy t Nature vo/ra ci model trn) o 2 Thermodynamics laws: Environmental problems: o Degradation=loss of biodiversity + pollution + climate change o Cause of environmental pollution (natural vs anthropogenic) o Scope (local, regional and global) o Types (air, water, soil) o VN pollution

Chap 2: market failure and gov intervention (pg 69-external cost

and 76-external benefits) Market failure: o Environmental externality: Definition and examples o Environmental quality as a public goods Public goods: non-rivalry and non-excludability Free rider problem => no one want to pay for environmental improvement Gov intervention o Pigovian tax MPC+tax=MSC=> Pigovian tax per unit of pollution= MD* (MD at E*) o Coase theorem (ng ny gi r m vn sng nhn) Zero transaction/negotiation cost + property right = efficient Limitation: high transaction cost, rough bargaining, large number of interested parties

Chap 3: Emission efficiency (the formation of MAC, MD and E*)

Marginal Damage o Amount of Damage (in $ term) cause by 1 ADDITIONAL UNIT of

emission o Increase at an increasing rate (cng nhiu E th D cng to) o Special case: heavily poisonous emission => more E has litte impact 'cuz initially, the very first unit of E has caused seriously bad D => MD increase at decreasing rate. Marginal Abatement Cost o ADDITIONAL Cost of reducing pollution BY 1 UNIT o Also increase at increasing rate. Efficient level of emission

Where MAC cut MD => E*. E* near or equal 0 => hazardous pollutant (CFC's radio active for example) (xy ra khi MAC k th cut MD, vs v E u tin th MD qu ln n mc hu nh k khc phc c) Equimarginal and Equiproportional principles (pg 104-105) o Total social cost = TAC + TD o Keep E constant, TAC should be min to minimize TSC o Redistribute E between polluters E1=E2==En (Equiproportional, everyone gets an equal part => Very fair but not efficient) MAC1=MAC2==MACn (Equimarginal, minimize TSC) EXERCISE: decise the efficient level of E for each firms basing on Equimarginal principle. (pg108)
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Chap 4: benefit valuation (chap 6-7)

Benefit-cost analysis o 4 steps: Specify clearly the project/program Describe quantitatively in and out puts of the program Estimate the social costs and benefits of these in- and out- puts Compare these benefits and cost Use and non-use value of environment o Use values: derive from actual or present use of environment Direct: human health, visual amenities Indirect: physical structure, soil fertility, climate and weather,

water quality, provide recreational and culturaal activites Optional: future uses (direct and indirect) o Non-use values: intrinsic worth of ecosystem, benquest value, culture and heritage Direct and indirect methods (cc methods ny measure ci g)

Direct: use market price to measure NB (Dose-Response Methods, Preventative Expenditure Methods) DRM: Propose a policy Determine the rlts between AN increase in POLLUTANT (the dose) and the impact to health/structure/soil/water quality (regression function) Estimate the dollar value of the MARGINAL impact (cost/unit)
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Multiply that MARGINAL dollar value by total change in pollutant under the proposed program PEM: (health->preventative, fixed time frame and region) Define the pollutant and the preventative expenditures Collect data on such expenditures made by people Estimate market demand curve (regression analysis)

Estimate increase in CS fr a pollution reduction (of a policy) => drawbacks: insufficient variables, lack of data for regression function, controversal measurement criteria, only measure some benefit, not all. o Indirect: use different estimation for revealed or stated WTP (CS) (Hendonic Pricing Method, Travel Cost Method, Contingent Valuation Method) HPM: (benefit to visual amenities => pp pay more for a residential property locating in a pristine evironment) Define and measure the environmental quality indicator and a policy scenario. Specify an Hedonic Price function relating environmental quality to housing price (+other variables) Estimate demand curve for environmental quality (regression): Pi=P(Si, Ni, Zi) (Si: structural, Ni: Neighborhood, Zi: Environmental characteristics) Calculate change in CS when environmental quality changes.

TCM: (recreation site, beaches) Define the pollutant and recreation sites Develop and administer a questionare tor visitors (their origin, companions, travel mode, duration of stay, accomodations, number of trips/year, expense/trips, etc.) Estimate a Trip Demand curve for each sites (regression) Estimate CS and determine how much changes in CS can be attributed to environmental quality differences. (regression)

=> problems: substitute sites, multipurpose visits, sampling bias CVM: (non-use value pg 149, 150) Descirbe the pollutant/environmental quality characteristic to be changed, identify the population and select a sample. (500-1000) Develop and administer a questionaire asking respondent to state their maximum WTP for the improvement Calculate average household WTP=> aggregate WTP to the entire population.

Conduct validity/reliability test (regression, including gender, income, age, etc)

=> problems: protest responses, Y or N saying, payment vehicle bias, strategic bias, embedding bias. (see slides for more details)

Chap 5: Costing frameworks for the policies

Types of costs involved: Abatement cost, Gov administrative cost, direct and

indirect PS/CS loss and increase, non market cost (media switching, unintended environmental impacts, etc.)

Levels of analysis: o Single firm regulation (pg 164 - cost of single facilities): estimate firm

abatement cost o Single sector regulation (pg 167 - cost of regulating an industry): estimate sector abatement cost o Multiple sector regulation: estimate sector abatement cost of multiple sectors + direct and indirect surplus changes in sectors Economic impact analysis: calculating both direct effects and indirect effects to measure the "Multiplier" for each sector (tnh effect trc tip v gin tip, gin tip cp 1, gin tip cp 2, etc. ti khi effect gy ra bi thay i ca cs b "khu hao" ht) o Multiplier=(direct effect+Multiplier effect)/dirrect effect o Use input-output model to measure ouput multipliers or to produce an estimate of the economic impact of a policy (choose the applied sector, define the demand, factors of productions, related sectors, etc., use regression=> linear equation) => technical coefficients to calculate indirect effects. o Add POLLUTION to the In-Output model => Economic Impacts of pollution reduction ( estimate the direct and indirect impact of the pollution reduction applied in a sector on output values and PS loss, with P unchanged) o VD: c slide chap 5 hiu tc dng ca Input-output model v multiplier:D Exercise: bt cui chap 6 (trong sch), tnh Net Present Value of Benefit (NB=NPV, nh ct thc tnh tng cp s nhn, PV v PV khi n=)

Chap 6: decentralized policies

Policy evaluation criteria: (chap 9) o Efficiency and cost-effectiveness Efficiency:Level where or near MAC=MD Cost effectiveness: Unknown MD => minimum cost => o

equimarginal prinicple Fairness/moral: everyone get their fair share of cost and benefits (Polluter Pays Principle)7 o Incentive for innovation o Enforciability: minimize monitoring costs and sanctioning costs. Decentralized policies: (chap 10) o Liability law Plaintifs take polluters to court, make 'em comensate those damage caused Civil law 624, law on environmental protection: chap 14-session 2 Evaluation: Efficient: Identical MACs for polluters => what if not? Take 'em all at one and calculate MAC on the margin Fair/moral: yes Incentives to innovate: Y Enforceable: No, hard to prove the liability in court.

Property right: (Coase Theorem ^^) Gov allocate rights of the environmental service to an owner, no transaction cost => social efficiency will be achieved Property right: well defined, enforceable and transferable, competitive system and a complete set of markets for all values BT: ng nh c v nh my ha cht =)

Evaluation: Efficent: Y, but non when conditions of the Coase theorem are unsatisfied Fair: Unsure, depending on who get the rights Incentives: Y, 'cuz they wanna reduce their cost Enforceable: not often (high transaction cost, free riders, no market for environmental services) Moral suation Gov campaign/program targeting a person's sense of moral values or civic duty (vn ng tuyn truyn gio dc =)), thng ch hqu i vs polluter l ng dn (mua t) hoc polluters nh v tp trung) Evaluation: Efficient: NOT often, but MAY be cost effective(MAC=0) (fair?) Moral: Y Incentives: uncertain, depending on individual preferences. Enforceable: NO, depending on GOOD WILL of individuals

Decentralized Efficiency, cost Policies effectiveness Liability law Y, only when MACs are identical, otherwise=> only cost-effective

Fair Y

Incentive to innovate Y

Enforceabl e? N

Property right Y, only when met Coase's Not sure Y conditions Moral suation Not often efficient, may be Y Not sure

Not often NO

cost effective

Chap 7: centralized environmental policies: (chap 11, 12, 13)

Pollution standard: gov impose maximum level of pollution, if exceeded,

polluters will begiven penalties. o Emission/ambient concentration standards: Emission standard: single point polluters, measure emissions at their souce Ambient concentration standards: multiple source polluters, measure ambient concentration (air, water, soil) on a time-period basis. Gov determined E*, set a fine

Evaluation: Efficiency: Y (if emplemented correctly), same MAC and MD=> uniform standards, otherwise use individual standards Fair: Y Incentives: not often, polluters just reduce emission enough to meet the standards Enforceable: Y, however there will be issues and costs, with fine > AC o Technology standards: end-of-pipe equipment or design, do NOT limit the TOTAL AMOUNT OF EMISSION (unlike the above 2 standards). => polluters don't pay AC, just new techno. (third parties=resident) Evaluation: Efficient: N, only reduction in pollution, still have DWL Fair: Y, as long as polluters are all required to pay for new techno Incentives: N, with the techno standard, polluters will purchase the techno and won't look for further innovation Enforceable: Y, with enforceament costs.

=.= TDo

Polluter Third parties _ a+b+c+d+e+f

+g TD1 TACo TAC1 NB _ 0 0 0 a+b+c+d _ _ e+f+g

=> Social Benefit: e+f+g

Pollution taxes: polluters are charged a tax on each unit of pollution -> what's

the tax level that create price-incentives? (where MAC=MD) =.= TDo TD1 TACo TAC1 Polluter Governmen Third t parties _ _ 0 B _ _ _ _ A+B+C+D A _ _ _ _ B+C+D

Tax payment 2A+B+C -(2A+B+C) (0) Tax payment 2A (1) NB C -2A -(B+C)

=> Social Benefit: C+D (Total polluter's cost=TAC+tax)

Evaluation: Efficient: Y, if tax is set at the socially efficient level (different MD=> need region-specific tax) Fair: Y, polluters pay, gov revenue can be redistribited to the damaged parties. Incentives to inovate: Y Enforceable: Y, with enforceament costs. Pollution reduction subsidies o Gov pay polluters for each unit reduced. (what level of price is efficient? Again =.= MAC=MD)
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=.= TDo TD1 TACo TAC1 Subsidy received (0) Subsidy received (1) NB

Polluter Governmen Third t parties _ _ 0 B 0 B+C C _ _ _ _ 0 -(B+C) -(B+C) A+B+C+D A _ _ _ _ B+C+D

=> Social Benefit: C+D (polluter's subsidy received=gov payment)

Evaluation: (same to Tax, except) Fair: NO! polluters are getting paid for not harming the environment. (wtf) Marketable pollution permits: o Government set an aggregate emission target and total number of permits. Allocating the permits to polluters by simply assigning to them or through aunctioning. Polluters with unused permits can resell them to others. o Polluter with higher MAC tend to buy permits while those with lower MAC will sell.
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=.=

Polluter 1 Polluter 2 (High (Low MAC) MAC) a+b+c+d+ a+c h a+b d+c h a+c+g+e -(e+f+g) f

TAC (policy initial) TAC (after negotiation) Payment for permits NB

=> Social Benefit: C+D Negotiation=polluter 1 buy more permits from polluter 2 Polluter 1 pay = pollter 2 receive => -(e+f+g) The amount of emission to sell and buy will satisfy the Equimarginal principle, i.e: after negotiation, both polluters will have the SAME MAC level.

Evaluation: Efficient: Y, (same efficiency result as tax, subsidies and INDIVIDUAL STANDARDS) ->> problem firm in one region with steep macs may buy permits and severely damage that region: need to LIMIT trading to within a zone. Fair: Y (depends on way to distribute permits, auction is better) Incentives: Y, innovation will allow polluters to sell permits or at least, save the cost from buying permits Enforceable: Y, better enforceability 'cuz they are SELF ENFORCING. Exercise: cho MAC, MD, tng emission, tnh total cost khi khng c trading permits v khi c trading permits vi gi th trng c nh no . So snh t/hp k cho trading v c cho trading.
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Direct policies Emission Standards

Efficient

Fair

Incentive Enforceable s Not often Y, fine>Abatemen t Cost Y, with costs Y, with costs

Y (different MAC => Y individual standards) Y Y

Technology N (still have DWL) standards Tax Y (different MD=> region-specific tax)

N Y

Subsidies Permits

Y Y (region-limited trade)

N (wtf)

Y, with costs Y, self-enforcing

Y (depends) Y

Chap8: growth, development, trade and environmental quality

Growth, development and environmental quality: explained by Environmental

Kuznets Curve o EKC: the curves by Kuznets, U-shaped, inverted relationship between income inequality (KTCC =.=) and income level =>>>become>>> levels of income and certain measures of environmental quality. Inverted: environmental quality=luxury good. The assumption of technologycal life cycles Economic growth is a solution to environmental problems --> ignore environment degradation as a transitional phenomenon

Criticisms: Weak econometrics analysis Economic growth is NOT A SUBSTITUTE for environmental policies Nothing inevitable about the rlts between income and environment was observed in the past Environmental degradation is NOT ALWAYS reversible o Aggregate indicators of environment: EKC rlts: true for some fields, not true for some other (see slides) Indicators of development: o Must consider: Spatial intensity of economic activity, civil right, income inequality and education, trade-related variables and energy price. o GDP: indicator of progress, commonly used. o MEW - Measure of Economic Welfare (Nordhaus and Tobin): add allowance for leisure and non-marketed goods, substract bad expenditures (pollution) o ISEW: (sustainable): include analysis of environmental externalities=> human welfare is increasingly declining in developing countries despite the rising income Extended to GPI (genuine process indicator) Trade and environment (international trade)
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Impact of trade on environment: Developed countries have more stringent laws while developing countries tend to undervalue the environment => be turned into Pollution Havens o Impact of environmental regulations on trade o Cost of environmental regulations o Pollution Haven: Trade flow: pollution-intensive goods production is shifted to developing countries Sustainable development (SD - important) World Earth summits and Agenda 21
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