ENVIRO

Week 11
Pollution havens this hypothesis suggests that free trade can produce pollution
hotspots if strict environmental regulations in one country encourage domestic
production facilities to move to countries with less strict regulations.
Studies find there is little supporting evidence
Environmental regulations are not a major factor in firm location decisions
Pollution control costs are a small portion of total production costs
These havens may arise if environmental regulations differ between countries, if
capital is mobile, and if trade rules allow firms to relocate and still sell their products
to the same customers.
Emprirical difficulty is the assumption that differences in regulations are the key
determinant of relative production costs and location decisions

The Porter Induced Innovation hypothesis = suggests firms in areas with the most
stringent regulations will be at a competitive advantage
Regulations encourage firms to innovate = innovation makes firms more
competitive
Kuznets theory = environmental degradation increases with higher income up until
a point where it starts decreasing
Little supporting evidence, may apply to some pollutants.
Some environmental activists want to include enviro standards in trade
negotiations.
Higher income countries standards are opposed by low and middle income
countries
International standards could be used as a protectionist policy or a basis for
lawsuits when domestic producers did not meet them
Standards set by high income countries would be expensive for low and
middle income producers
Article XX = environmental action must be applied with arbitrary or unjustifiable
discrimination and must not constitute a disguised restriction on international trade
US applied ban on Venezuelan/Brazilian gas in certain regions with higher incidence
of air pollution
However this Ban was strked down by the WTO
This is because the US place higher regulations on foreign gas then domestic gas

Week 10 = Devolopment, Poverty & The Environment

While Developed countries care more about the environment as it is a luxery good
It is a concern for all
Enviro problems have global effects and should not only be a concern
for the rich
Population pressures are causing increasingly severe problems
In general economics favour incentives as the most effective way to address enviro
issues
Eg marketable permits and property rights, cheaper than command and
control
Growth occurs in two main ways
Growth through inputs, via economies of scale, diminishing laws of returns
Also occur through increases in productivity of iputs due to techonological
progress.
Sustainability
Tradeoffs between current and future consumption
Using an appropriate social discount rate
How to correctly value the environment, depletion represents a cost to future
generations
How to internalize negative externalities and correct these market failures
Reduced growth can occur if there are reduced input flows
Labour is an input = pop growth has slowed in countries, growth in labour
force slows or stops, studies find that capital and labour are strong subs
Energy costs are rising = redued use of more expensive inputs slows growth
Limits on capitals substitutability for other factors or on the productivity of
investment can hinder growth.
Capital and energy may actually be compliments. Thus a capital-energy substitution
is possible, but only for labour or other resources, not for each other
Reductions in the future productivity of capital can also slow growth

As more capital is committed to combating pollution, fewer goods are

produced. Environmental quality is enhanced, but environmental quality is not
included in traditional measures of growth.
Reduced growth can also occure with limits on technological progress
Can be a result of insitituional limits
Can occur with decreasing commitmnets to the research sector
Enviro policies impose large costs on industry, but the impact on the rate of
inflation has been small. This is because pollution control expenditures typically
make up a small portion of industry costs.
Employment gains from controlling pollution typically more than offset employment
losses in those firms that must purchase and install equipment.
Price increases for energy can be a source of growth drag.
Some studies have suggested that switching to either high energy efficient
technology or to reneweable energy sources will not only reduce pollution, but will
result in increased incomes and increased employment
Connection between poverty and the environment
The high fertility of the absolutely poor
Larger pops have potential to cause greater enviro damage
Short time horizon of the poor
With starvation as a possibility there is no finite discount rate, farmers resort
to eating next years seeds to avoid present starvation
Land tenure insecurity of the poor
When one has insecure land rights, poor often do, there is an incentive to
treat land as short term resource
Land distribution
Unequal land distribution produces political incentives to encourage poor
farmers to establish inefficient rainforest settlements.
Low status of women among poor
Poverty linked with women who often have roles as guardians of natural
resources, are responsible for agriculture and have an ultimate responsility for
fertility
Why do enviro problems exist?
Incentives people face
Property rights system

Difference between private and social costs and benefits

Tragedy of commons
The debt crisis
Inability to afford to import cleaner tech
Discount rate is likely to be very high, and a shift from emphasizing the
diversification of manufacturing to intensive natural resource extraction may be
encouraged.
LDC governments have made policy mistakes that have led to greater pollution and
environmental degradation
Some cases, rather than use taxes to discourage pollution and enviro
degradation, LDC governments have implemented subsisdies that are harmful to
environment, such as consumption subsides for kerosene and Brazils subsidy of the
cutting of the rainforest.
The dutch disease the apparent causal relationship between the increase in the
economic development of a specific sector (eg oil/natural resources) and a decline
in other secotrs

Week 9 = Waste
Nationally the amount of non-hazardous waste sent to private and public waste
disposal facilities decreased 4% from 2008 to 2010
At 37% residential waste accounts just over a third
Waste expenditures are increasing, jobs have increased too
Most of the dirtiest cities are poor cities in the LDC countries
Increased budget on waste management and cancererous plastics expected to save
3 lives in 300 years
Marketing matters, incinerators remarketed as waste to energy plants
High costs for the required filters for these plants
No new incinerators in the US since 1995
More than 80% of the time recycling is the most efficient way to deal with
household garbage
Many resources require less energy to recycle than to create new
Mike Biddle and MBA polymers recycling plastics (We can recycle plastic)

Requires less energy to recycle these plastics and they are less money to producers
who use these plastics then virgin plastics
Canadian Waste Policies
^Municipalities have implemented solid waste recycling and reduction
Volume pricing
Returnable disposal fees (deposits on beverage containers)
Consumer fees on municipal solid waste
Prohibitions on landfilling certain products (ie, tires)
Voluntary material separation and curb side recycling
Recycled or recyclable labels
Tech assistance for recycle programs
Technical assistance for recycling programs
Grants and loans for recycling programs
Public construction for waste separation and reprocessing plants
Public construction of waste to energy plants
Tax credits for waste control investment by private businesses
German option of take back principle
Producers are responsible for the product through the disposal end, and thus
must take back products that are no longer being used.
EU passed a law in 2002 requring manufacturers to be financially responsible for
recycling appliances
These types of rules are called extended producer responsility
Cost Benefit of Solid Waste Policies
Study shows that market based incentives are more efficient then command and
control
Eg Turners example of volunteering time at Flemming for small gift card
incetive vs part of job
Recycling earned profit in Urban areas, Loss in rural
Efficient Recylcing
As natural inputs become scarce relative to demand, the demand for recycled
materials should rise
As the costs of disposal rise, recycling rates should also be increased.

As land has become more scarce and thus, valuable, the burial of waste is becoming
increasingly expensive. Concerns over contamination of groundwater from buried
waste has also made landfill disposal less attractive.
The effects of the combination of rising costs of virgin materials and high waste
disposal costs is illustrated by the high recycling rates in Japan
The composition of demand effect suggests that, as long as quality is not adversely
affected, consumers will shift to materials made of recycled products if products
made with virgin materials are more expensive.
Consumers will have additional incentives to recycle materials if they also bear the
cost of disposal
If there is little or no market for the recycled materials or if the supply of recyclables
is increased to the point that prices drop severely, returning products to recycling
centers will have little effect on total recycling

Waste Recycling A simple model

TM = Total Material
VM = Virgin Material
RM = Recycled Material
TM = VM + RM
So VM = TM(1-r) r is the rate of reuse
Decrease in VM comes from increase in recycling
Issues
Spending too much on recycling
Tax on virgin Materials
Minimum content standards
Uniform Standards urban vs rural
Tradable permits for garbage turners street

Market allocations of hazardous material

Certain occupations involve risk, including the risk of exposure to toxic substances.
These are occupational hazards,
Employees will work these jobs if appropriately compensated
These high wages will provide incentives to create a safer work environment

Empirical studies suggest that willingness to pay for risk reductions is substantial,
but varies across individuals
Market solutions to occupational hazards present ethical concerns eg where
pregnant and fertile women were banned from working in a particular area
Lack of information about degrees of risk

Week 8 Stationary Source Local Air Pollution

The historical approach to air pollution is Command and Control (CAC) Based on
emissions standards
The first step is to typically establish ambient air quality standards
Ambient air quality standards set legal ceilings on the allowable
concentration of the pollutatnt in the ourdoor air for a specified period of time
Set without regards to costs
Aspects of ambient settings
Threshold health threshold defined as a margine of safety that no adverse
effects would be suffered
Recent estimates suggest while justified government command and control not
efficient.
Cap and Trade
Successfully dropped emissions by 38% since 1980
Criticism includes concentrated in areas, costly, price varies on average 40% YOY
Produces few incentives/lack of innovation
Perhaps put a ceiling and floor price. Makes it closer to a carbon tax
Government revenue more emphasis on the auction raising money
Goal of cap and trade is to allow flexibility to how standards are met.
Banking of credits allows firms to store credits for later use.

French charge system has failed to charge enough to sufficiently generate any
change.
Japan implemented a system where people with health problems caused by
pollution were reimbursed from revenue charged to polluters
However pollution emissions have declined forcing a possible revenue problem in
the future
Free rider effect is an issue when attempting to mitigate climate change
Externalities associated with climate change are both spatial and temporal making
management complex
Four strats of dealing with climate change
Climate engineering
Adaption
Mitigation
Prevention
A 5th strategy allows more carbon to be absorbed by trees and tehn be
credited
Global Environmental Facility (GEF) funds projects designed to reduce the impacts of
climate change through loans and grants.
Funds projects that cannot be justified by a domestic benefit-cost analysis are
justified when the accounting stance is international
Enormous uncertainties associated with climate changes
The use of benefit-cost analysis is itself controversial when it comes to climate
change. With the vast differences in timing, benefit-costs analysis is biased against
future generations
Incomplete information for proper analysis as well
Creating Incentives
Policies can make participation more likely by increasing the net benefits from
participation
ISSUE LINKAGE is a strategy where countries simultaneously negotiate a
climate change agreement and another economic agreement on a linked issue, eg
trade for example.
A final strategy involves transfers from gainers to losers or a redistribution of
net benefits

Transportation
Implicit Subsidies Social costs of transport tend to rise with distance driven
Private costs (insurance) do not reflect these increases
The marginal cost of driving an additional mile is zero with respect to road
construction and maintenance. However, the social cost is greater than zero
Externalities The social costs of accidents increases with distance travelled
Road congestion is also an externality
Exhaust from cars also causes high levels of pollution inside the vehicles
following
Low costs cause demands for alternatives to be inefficiently low
Settlement patterns may also be inefficient since it will be realtively cheap to
commute

Week 7 Water
90% of available fresh water is groundwater and 2.5% of that is considered
renewable.
50% of piped system water is lost due to leakage (up to 70% in agriculture)
The market can keep streams flowing marketable permits for water
Efficient Allocation =
An efficient allowcation of water will be dependent on whether the source of water
is surface or wgroundwater
The degree of renewability will determine whether or not it is crucial to
incorporate a user cost
Also need to include transaction and system costs
An efficient allocation of a renewable resource involves an opportunity cost or the
cost imposed on an alternate user
Efficiency in the presence of competing uses implies that the Marginal Net
Benefit should be equalized across users
For Groundwater if withdrawls exceed recharge, the resource will be mined over
time until it is depleted or until the marginal extraction cost reaches a prohibitive
level.
The marginal extraction cost and thus the price should rise over time until the well
runs dry or the marginal cost of pumping is either greater than the marginal benefir
or greater than or equal to the marginal cost of an alternative surface water source.
RIPARIAN RIGHTS = allocate the right to use water to the owner of the land adjacent
to the water.
THE PRIOR APPROPRIATION DOCTRINE allows the transfer of water away from the
stream for beneficial use.
These rights are based on a seniority system and require that the water is to
be put to beneficial use ( use it or lose it)
Water Rights are USUFRUCT RIGHTS = rights to use not to own.
There is then no incentive to conserve, but an incentive to put water to beneficial
use.
The federal government has subsidized many water projects even when the project
failed a benefit-cost analysis.
The pricing of the subsidiezed water also leads to inefficiencies.
Municipal and Industrial Water Pricing =

Regulated utilities typically are not allowed to earn a profit and thus are regulated to
price at average cost. Due to economies of scale, average costs are lower than
marginal costs and thus prices are too low.
Water utilities use various fees and charges, but these only reflect the costs of
storage, treatment and distribution of water. These charges rarely include the value
of the water itself.
Common Property Problems =
Aquafiers are common property resources. Many users create a free access
problem. Free access resources lose their asset value as the resource cannot be
saved fromothers using it. This will lead to overdraft of the aquafier. There may also
be a race to get a share of the water while pumping costs are cheap.
Pumping costs will rise too rapidly. Additionally intial prices would be too low and
too much water would be consumed by the earliest users.
Future user will carry the larger burden.
Solutions =
Setting property rights
Pricing out the be a big part of such discussions, yet many green lobbyists hate
talking about it
*not taking into account the external costs on ecosystems
Water Pollution
Water quality is primarily a provincial responsibility
Ontario first to legislate water quality objectives for sewage plants
By 1970s most provinces had emissions standards on water quality and drinking
water
Enforcement of the standards were negotiated, few fines
Permits for water pollution suffer as there are few polluters and thus a market for
trading these permits fails to establish in Wisconsin
Permits worked in Colorado for Phosporous emissions

Week 6 Permits
Sources are required to have permits in order to emit. Each permit specifies how
much the firm is allowed to emit. The permits are freely transferable.
The control authority issues the exact number of permits necessary to achieve the
standard.

Firms with high marginal costs of control will have incentives to buy permits from
firms with low marginal control costs. The incentives in this system will ensure
lowest costs and the control authority does not need information on control costs.

Week 5 Taxes
3 types of Standards:
Ambient refers to the surrounding environment. Ambient quality is the quantity of
pollutants in a particular region (Eg, the concentration of SO2 in the air over a city)
Emissions refers to a never-exceed level for quantities of emissions coming from a
pollution source
Technology based Standards type of standard that dictates polluters use specific
techniques (eg. A particular type of pollution abatement equipment ) or follow a
specific set of operating procedures and practices.
Issues:
The level of the standard
How much, Uniformity
The incentives the standards provide for engaging in R & D to reduce marginal
abatement costs.
Enforcement
A problem that is not given sufficient weight in many economic analyses,
though that seems to be changing
Opponents of emission charges argue that polluters will simply pay the taxes and
pass the cost on to the consumer without reducing emissions

An emission charge a per unit of pollutant fee, collected by government

A profit max firm will control (abate) pollution whenever the fee is greater than the
marginal control cost.
Each firm will independently reduce emissions until its marginal control cost equals
the emission charge. This yields a cost effective allocation
Emission taxes attack the pollution problem at its source, by putting a price on
something that has been free, and, therefor, overused. Shifts MC to MSC
Main advantage of emission taxes is their efficiency aspects
If all sources are subject to the same tax, they will adjust their emission rates
so that the equimarginal rule is satisfied

Administrators do not have to know the individual source of marginal abatement

cost functions for this to happen; it is enough that firms will be faced with the tax
and then left free to make their own adjustments
A second major advantage of emission taxes is that they produce a strong incentive
to innovate and discover cheaper ways of reducing emissions.
Emission taxes also provide a source of revenue for public authorities.
The apparent indirect character of emission taxes may tend to work against their
acceptance by policy makers
Standards have the appearance of placing direct control on the thing that is
at issue, namely emissions
Emission taxes, on the other hand, place no direct restrictions on emissions
but rely on the self interested behavior of firms to adjust their own emission rates in
response to the tax.
Difficulty in how high the charge should be set in order to ensure that the resulting
emission reduction is at the desired level. An iteratie or trial and error approach can
be used to determine the appropriate rate, but changing tax rates frequently is not
usually politically feasible.

Week 4 Sustainablity, Liability, Laws, Property Rights, & Moral Suasion

Sustainability 5 criterion
1. Combination of efficiency and Cost effectiveness
a. Minimum marginal abatement costs and equality between them and
marginal damages
b. Static View
c. Centralized vs decentralized
2. Income distribution
a. Progressive, regressive, proportional
3. Technological Change Innovation
a. Lowering marginal abatement cost function through research and
development
b. More of a focus on incentives
4. Enforceability
a. How easy is it to monitor and sanction
5. Morality
a. Whether a policy seems to violate accepted moral standards

Liability Laws
Strict liability vs negligence

Burden of proof

Property Rights:
A property right is an entitlement held by either an individual or state.
A well-defined or efficient property right will be:
1. Exclusive: All benefits and costs accrue only to the owner
2. Transferable: Property rights can be exchanged voluntarily
3. Enforceable: Property rights cannot be encroached on by others
Owning a resource with these characteristics ensures that the resource will retain
both its use value and its asset value.
Resources for which the asset value cannot be capture will typically be
overexploited.

Moral Suasion = moral appeals are frequently undervalued by hard headed

economists, but may be quite effective in some cases, and may be a realistic
approach in others
Behaviour based on morality and feelings of civic virtue is not an either/or
proposition but amenable to change as circumstances chage.

First equimarginal principal is that bet benefits are max when marginal benefits
equal marginal costs

Wicked Problems
Wicked problems have incomplete, contradictory, and often changing requirements;
and solutions to them are often difficult to recognize as such because of complex
interdependencies.
While attempting to solve a wicked problem, the solution of one of its aspects may
reveal or create another, even more complex problem.
Four characteristics of wicked problems
1. The problems is not understood until after formulation of a solution
2. Stakeholders have radically different world view and different frames for
understanding the problem

3. Constraints and resources to solve the problem change over time

4. The problem is never solved
Further characteristics:
1. Wicked problems do not have an exhaustive set of of potential solutions
2. Every wicked problem can be considered to be a symptom of another
problem
3. Discrepancies in representing a wicked problem can be explained in
numerous waysthe choice of explanation in turn determines the nature of
the problems resolution.
4. Every wicked problem is essentially uniquelessons-learned are hard to
transfer across to other problems
5. Wicked problems are often solved (as well as can be) through group efforts
6. Wicked problems require inventive/creative solutions
7. Every implemented solution to a wicked problem has consequences, and may
cause additional problems
8. Wicked problems have no stopping rules
9. Solutions to wicked problems are not true or false, but instead better, worse,
or good enough
10.There is no immediate and no ultimate test of a solution to a wicked problem
11.The planner (solving the problem) has no inherent right to solve the problem,
and no permission to make mistakes.

When it is possible to move along the contract curve simply by redistributing

endowments, and then letting competitive markets work, the economy is often
described by economists as a firstbest economy. In a secondbest economy, which
may be the more realistic case, it is not so easy to redistribute endowments. In a
secondbest economy, there is a bigger role for government to play, and the conflict
between equity and efficiency emerges.