6. Measuring the costs of environmental protection Flashcards
Explain the ‘engineering approach’ to estimating costs of environmental protection?
Simply adding up direct compliance and regulatory expenses. First costs need to be annualised.
What is the problem of the ‘engineering approach’ for economists?
It doesn’t include the opportunity cost of the goods and services foregone by investing in environmental protection.
Opportunity costs include what three indirect effects?
Productivity impacts
Employment impacts
General equilibrium effects
What are the productivity impact effect that influences opportunity cost?
Engineering cost estimates will overstate true social costs to the extent that government involvement increases productivity by increasing the efficiency with which resources are used forcing technological change or improving worker health or ecosystem services. However they will underestimate true social costs to the extent that government involvement lowers.
What are the employment impacts that influence opportunity cost?
Engineering costs will overstate true social costs to the extent government involvement reduces unemployment by creating green jobs and understate it where structural unemployment is induced.
Productivity (output per worker) is a critical economic measure. How is rising productivity represented?
A larger overall economic pie per person, which supports a growing population and equals a higher material standard of living.
The impact of regulations on productivity - positive and negative - is a critical factor in determining the ‘true’ costs of environmental protection. What are the three arguments for pro-regulation?
1) Improve the short-run efficiency of resource use (eg switch to led and hybrid cars)
2) Encourage firms to invest more or invest smarter for the long run.
3) Reduce health-care or firm level clean up costs, which then frees up capital for long-run investment.
Why does regulation favour firms that are forward looking? Ie. what is meant by ‘regulation plays a technology-forcing role’? (4)
- They anticipate trends,
- They are quicker to invest in modern production processes,
- They encourage R&D,
- They promote outside the box thinking’.
What do opponents to regulation claim? and how is this argument countered?
- There is red tape and regulatory burden associated with regulation permits and hassle.
- Not spending on regulation would result in higher health-care costs in the long run and lower incentives for firms to move to better practices.
Where does the perception that there is a serious ‘job vs environment trade off’ come from?
Industry advocates who predict doom and gloom.
Over the past four decades, economists have looked closely at the employment impacts of environmental protection and what are the four lessons that clearly stand out?
1) No economy wide trade off exists - job losses are matched with job gains
2) Green job growth - spending on environmental protection (verses other spending) can boost net job growth when the economy is not already at full employment
3) Small number of actual lay-offs - direct job losses due to plant shutdowns resulting from environmental problems are very low.
4) Few pollution havens - polluters are not fleeing in large numbers to developing countries without regulations.
How does government regulation contribute to structural unemployment?
It contributes to shift the type of the jobs that the economy creates. If the government didn’t spend on environmental protection the money would have been spent else where and jobs created there.
Explain why general equilibrium effects are a source of hidden costs and benefits?
Because regulation alters prices, not just for the regulated commodity, but throughout the economy causing firms and consumers to change their behaviours.
What is the double dividend hypothesis (which is the most significant General Equilibrium effect)?
This is where the government introduces a pollution tax or government auctioned permits under cap and trade. The double dividend hypothesis is that these
1) internalise the externality so that firms stop over consuming dirty goods
2) beneficial use of the tax revenue by Govt to encourage firms to hire more workers.
What do opponents to the Double Dividend Hypothesis argue?
That the size and even the existence of benefits exist, because the tax raises the cost of other goods and services and these reduce consumption and potentially reduce the labor supply. GE effects are hard to comprehend or assess precisely because costs and benefits are so deeply hidden.
