Discussions Flashcards
Economists see pollution problems as examples of the class of adverse externality phenomena. An
adverse externality is said to occur when the decisions of one agent harm another in an unintended
way, and when no compensation occurs. Does this mean that if a pollution source, such as a power
station, compensates those affected by its emissions, then there is no pollution problem? Please
justify your response.
This depends on what you mean by a “pollution problem”. In general, even if compensation were paid, then som emissions will still take place, and so some “pollution” will continue. However, economist tend to use the phrase “pollution problem” to refer not to the existence of pollution as such, but to describe a level of pollution that is economically inefficient. If compensation is paid to all adcersely affected parties, that compensation properly compensates thos induviduals for the damage inflicted on them, and the firm paying the compensation adjusts its behavior optimally taking into consideration the copensation payable, then the post-compensation situation will be economically efficient, and so not a pollution problem. Notice, incidentally, that the economic efficiency criterion implies that too few emission can be a “problem”, not only too many emissions.
Discuss the differences between the following mechanisms:
- Pareto criterion. - Kaldor-Hicks criterion.
Give an example of an application of the Kaldor-Hicks criterion and explain why such a criterion is
regarded as an expression of cost-benefit analysis.
Definiton of the following mechanisms
Pareto criterion, also known as Pareto efficiency or pareto optimality. It states that en allocation of ressources, is efficient if it is not possible to make one or more persons better off without making at least one other person worse off. Where gains are possible without anyone else suffering, trades will occur until al such gains have been made. These gains are known as pareto improvements. When all susch gains have been made, the resulting allocation is reffered to as pereto optiaml or Pareto efficient.
The Kaldo-Hicks citerion extends the Pareto crieterion by introducing the possibility of compensation or transfers amongst individuals. The test states that a reallocation is desirable if
- The winners compensate the losers and still be better off.
In this case the winners are not required to compensate the other, only that it is possible for them to do so.
Some similarities and differences between the two criteria
Similarities:
- Neither criterion take into account the fairness of the distribution of well being (although weighting can be applied)
Differences
- The pareto criterion cannot be used for the majority of proposed reallocations as most policies will result in individuals gaining or loosing. - Not everyone is better of under the Kaldor Hicks criterions - Pareto efficiency requires making every party involved better of (or at least not worse off). The Kaldor-Hicks criterion does not require that the compensation actually take place, only that it is possible to do so. A more efficient outcome can in fact leave some people worse off. It is a separate matter for government to decide wether compensation should occur and arrange for it. - Every pareto improvement is a Kaldor Hicks improvement, most Kaldor Hicks improvenments are not pareto improvements.
Example:
Scenario: Imagine a new factory opens in a town.
Winners: The factory provides jobs and boosts the local economy. Losers: The factory causes pollution that affects some residents' health.
Kaldor-Hicks Evaluation: The factory opening is considered efficient if the economic gains (profits, wages, economic growth) are large enough that the winners could, in theory, compensate the losers (those affected by pollution) and still have some benefits left over.
In cost-benefit analysis, economist work with monetary meassures which are intended to measure utility changes. A project is evaluated by comparing the total costs with the total benefits. It will be approved if the benefits exceed the costs.
This is effectively an application of the Kaldor-Hicks criterion because it is equivalent to requiring that the benefits be enough that those that benefit could in theory compensate those that have lose and still the winners would get a small profit.
Does international trade harm the environment?
A natural starting point for answering this question is to
restate the so-called Pollution Haven Hypothesis (PHH)
which comes in two versions.
- First version: Liberalization of trade or foreign investment
causes pollution-intensive activities to relocate to countries
with weaker environmental quality. - Second version: Tightening pollution policy in one country
causes pollution-intensive activities to relocate to other
countries with weaker environmental policy.
In the curriculum, the validity of the first version of PHH is
analyzed in a model where the world economy is divided
into a rich Northern region and a poorer Southern region.
* Each region produces two tradable goods, a capital-
intensive good and a labour-intensive good. Pollution can be
seen as an input in production in the sense that allowing
higher emissions enables firms to increase their outputs. The
governments in both regions impose an emissions tax in
order to reduce emissions, since pollution harms consumer
welfare.
At any given pollution tax rate, production of a unit of the
capital-intensive good generates more pollution than
production of a unit of the labour-intensive good.
* Before trade is liberalized, the North has a higher pollution
tax rate than the South, because consumer (voter) demand
for environmental protection is an increasing function of
income, and income per capita is higher in the North than in
the South.
When trade in goods is liberalized, the lower pollution tax
rate tends to give the Southern region a comparative
advantage in the production of the pollution-intensive
capital-intensive good, thereby tending to shift some of the
world production of this good in the direction of the South,
as predicted by the first version of the PHH.
* But since rich countries are generally more capital-
abundant, the higher capital/labour ratio in the rich North
tends to give the Northern region a comparative advantage
in production of the capital-intensive “dirty” good (seen in
isolation), thereby offsetting the comparative disadvantage
arising from the relatively high pollution tax rate.
- Depending on the net effect of these offsetting impacts on
comparative advantage, trade liberalization can either shift
some of the production of the dirty good in the direction of
the South or in the direction of the North. - If the North ends up with a higher share of world production
of the capital-intensive dirty good, the total global emissions
will go down, because some of the world production of the
pollution-intensive good is shifted to a region with stricter
environmental regulation. This will happen if the North is
very capital-abundant and/or if the North is not “too much”
richer than the South and hence does not have a much
higher pollution tax rate.
This scenario shows that the Pollution Haven Hypothesis is
not necessarily correct from a theoretical viewpoint.
* => It is an empirical question whether the PHH holds.
* Empirical evidence suggests that when it comes to CO2-
emissions, the trade liberalization in recent decades has
tended to shift some of the global emissions to the new
emerging market economies, particularly China, which is in
line with the PHH.
A good answer to “Does international trade harm the
environments?” could also talk about what ?
Mention that environmental policy (the permitted level
of pollution) can be used strategically by governments
in an effort to shift profits from foreign to domestic
firms operating in the same international market under
conditions of imperfect competition.
Finally, an answer may include a reference to the Porter
Hypothesis which comes in a “weak” and in a “strong”
version.
* The weak version says that the direct static effects of
environmental regulation on domestic production costs may
be partly offset by induced technical progress and
elimination of unnecessary waste, as firms are induced to
find new ways of reducing their emissions.
* The strong version of the Porter hypothesis says that
environmental regulation may actually improve the
international competiveness of domestic firms by making
them more innovative.
In both versions of the Porter
Hypothesis environmental regulation is assumed to be
“intelligent”, meaning that it is flexible and oriented
towards the use of cost-effective market-based policy
instruments like emission taxes or tradable emission
permits.
* The empirical evidence has given some support to the weak
version of the Porter Hypothesis, but not to the strong
version.
We argued that Rawls’s Difference Principle asserts that it is only just to
have an unequal distribution of wealth if all persons benefit from that allocation, relative to the
situation of an equal distribution. But we also argued that the total level of utility attainable might
depend on the distribution of wealth, as utility could be higher in an unequal position if incentive
effects enhance productive efficiency.
Discuss the implications of these comments for a
morally just distribution of resources within and between
countries.
Rawl´s notion of justice imply that i can only be just that we have unequal distribution of resources within and between countries if all induviduals is more wealthy (Pareto improvement) then they would be in the case of equal distribution.
On the other hand we also argued that if the “total level of utility” within and between countries are higher in the case of unequal destribution it would be morally just, but notice that this is not the same as in the Rawlsian case. This is a typical utilitarian stance, where the total level of well being matters, but not its distribution. The theory accept that some people get an extremly high utility and others get a low, if the average is better than in the equal case. Still all people could be better off (Paerto improvement) if the society or government introduce a way of redestributing the wealth.
If we look at the world we could argue that is has taken a utilitarian stance within the countries but not between. In general the worlds country become more equal, but within the country we see greater unequality. Utilitarians will argue this is just, where Rawlsians will argue for it is not just.
Consider recycling. How does recycling substitute
for environmental functions?
Substituting man-made capital services
for environmental services: Examples
- The waste sink function:
– Treatment of discharge of sewage into a river– the
demand made upon the assimilative capacity is
reduced for a given level of sewage.
– Capital in the form of a sewage treatment plant substitutes
for the natural environmental function of waste sink to an
extent dependent on the level of treatment that the plant
provides. - Energy conservation: Involves substitution of capital
for the use of (additional) energy inputs from the
natural resource base. - Amenity services: provision by physical capital may
yield substitutes in some dimensions (e.g., swimming
in a pool versus swimming in a lake) - Life support services: very limited substitution
possibilities
– The quantity of human life that could be sustained
in the absence of natural life-support functions is
quite small.
What are some pros and cons with the measure of
ecological footprint?
The ecological footprint is a measure that evaluates the environmental impact of human activities in terms of the amount of biologically productive land and water area required to produce the resources consumed and to assimilate the wastes generated. Important: The footprint size will vary with technology as
well as with levels and patterns of production and
consumption. Here are some pros and cons of using this measure:
Chatten:
Most Important Pros
Comprehensive Overview: The ecological footprint provides a broad measure that captures various aspects of human consumption and waste, offering a clear and understandable picture of overall environmental impact. This holistic approach is valuable for understanding the full extent of human activities on the environment.
Awareness and Education: It raises awareness among individuals, organizations, and governments about their ecological impact. This heightened awareness can lead to more sustainable practices and policies, driving collective action towards reducing ecological footprints.
Policy Development: The ecological footprint is a useful tool for policymakers, helping them design and implement strategies to reduce environmental impacts. By providing clear and actionable data, it supports the development of effective sustainability policies.
Most Important Cons
Data Limitations: The accuracy of the ecological footprint measure depends on the availability and reliability of data. Inconsistencies and gaps in data can lead to inaccurate assessments, which can undermine the effectiveness of the measure.
Simplification: The ecological footprint may oversimplify complex environmental issues, failing to capture the full range of ecological impacts and interactions. This can lead to an incomplete understanding of environmental sustainability and potentially misguided decisions.
Ignores Social and Economic Factors: The measure does not account for social and economic factors that influence resource use and sustainability, such as income distribution, technological advancements, and cultural practices. This limitation can result in an incomplete picture of sustainability and overlook important drivers of environmental impact.
How would you formalize growth and development
in a production function?
Production function:
Q = TFPxf(g(K,L),M)
where
Q= output,
M= materials,
K= capital stock, L= labour,
TFP= total factor productivity
According to ecological economists, M and g(K,L) tend to move together
“Growth” = rise in Q achieved through rise in f (*): requires increase in M
“Development” = rise in Q achieved through rise in TFP without an increase in M
Points of agreement
- Ecological economists do not object to growth
achieved through a rise in TFP (“development”) - Many environmental economists acknowledge that
human-made capital can only substitute for natural
capital as long as the vital life-support services of
the environment is not threatened - Broad agreement that resource productivity Q/M
must be increased to achieve sustainability
What role should rights, duties or obligations play, in your
opinion, when chosing environmental targets or policy?
Integration in Policy-Making
Equity and Justice: Policies should be designed to ensure that the benefits and burdens of environmental actions are shared equitably. This means protecting vulnerable populations from disproportionate environmental harm and ensuring that everyone has access to the benefits of a healthy environment.
Accountability: Clear rights, duties, and obligations create a framework for accountability. Governments, businesses, and individuals can be held accountable for their actions, ensuring that commitments to environmental protection are met.
Holistic Approach: Considering rights, duties, and obligations ensures a holistic approach to environmental policy-making. It balances the need for economic development with the necessity of protecting the environment and upholding social justice.
From this I could decide what is important for me, political and cultural.
Discuss the statement “Only the highest standards of
environmental purity will do.
”
The statement “Only the highest standards of environmental purity will do” reflects a strong commitment to sustainability, but practical implications and trade-offs must be considered. Here are key points:
Advantages
Long-Term Sustainability: High standards preserve natural resources and biodiversity, ensuring ecosystems’ health.
Health Benefits: Reducing pollution improves public health and reduces healthcare costs.
Innovation: High standards drive advancements in green technologies, fostering innovation and leadership in sustainability.
Challenges
Economic Costs: Implementing the highest standards can be expensive, impacting businesses and economic growth.
Feasibility and Trade-Offs: Balancing high environmental standards with practical economic and social considerations can be challenging. Not all regions or industries may be able to achieve these standards without significant trade-offs.
Balanced Approach
Adaptive Standards: Flexible and gradual implementation allows for continuous improvement without imposing undue burdens.
Stakeholder Involvement: Engaging businesses, communities, and governments ensures realistic and equitable standards, promoting widespread support.
Conclusion
While aiming for the highest environmental standards is vital for sustainability, it must be balanced with economic and social realities. A flexible, inclusive approach can achieve significant progress while addressing diverse needs and challenges.
Can you think of other objectives or goals of pollution policy?
We conclude by returning to an issue addressed at the outset:
The objectives of pollution policy.
* Throughout most of these lecture a single criterion,
economic efficiency, has been adopted.
* But it would be wrong to assume that this is, or should be, the
only or even the main objective.
* Each of the following has some claim to be regarded as a goal of
environmental policy, and so might be given some weight in
determining pollution targets:
– Sustainability and ecological goals (e.g. minimum disruption to
ecosystems, maintenance of biodiversity)
– Human health protection as the overriding goal
– Public preferences (e.g. distributional goals)
Is cost-effectiveness in conflict with any of the other criteria
for selecting pollution control instruments?
Cost-effectiveness is a key criterion in selecting pollution control instruments, but it can sometimes conflict with other important criteria. Here are some potential conflicts and how they might be addressed:
Environmental Effectiveness
Conflict: Cost-effective measures might not always achieve the desired level of environmental protection. For instance, cheaper solutions may not sufficiently reduce pollution to meet environmental standards.
Resolution: Ensure that cost-effective solutions are also environmentally effective by setting minimum performance standards and combining various measures to achieve comprehensive protection.
Equity and Fairness
Conflict: Cost-effective measures may disproportionately affect certain populations. For example, pollution taxes could be regressive, impacting lower-income groups more significantly.
Resolution: Implement complementary policies, such as subsidies or rebates for low-income households, to offset the regressive impacts and ensure a fair distribution of costs and benefits.
Political and Public Acceptability
Conflict: The most cost-effective measures may face political resistance or lack public support. For example, carbon taxes are cost-effective but often unpopular.
Resolution: Engage in public consultation and education to build support for cost-effective measures. Consider phased implementation or combining with other popular policies to increase acceptability.
Administrative Feasibility
Conflict: Cost-effective measures might be complex to administer, requiring sophisticated monitoring and enforcement mechanisms.
Resolution: Simplify administrative processes where possible and invest in capacity building for effective implementation. Ensure that the chosen instruments are practical and manageable within the existing administrative framework.
Technological Innovation
Conflict: Focusing solely on cost-effectiveness might discourage investment in innovative but initially expensive technologies.
Resolution: Design policies that also incentivize innovation, such as providing subsidies for research and development or implementing flexible regulations that allow for technological advancements.
Summary
Cost-effectiveness is crucial but must be balanced with environmental effectiveness, equity, acceptability, administrative feasibility, and technological innovation. By considering these criteria together, policymakers can design pollution control instruments that are not only cost-effective but also fair, effective, and sustainable.
On your view, when can institutional approaches to facilitate
internalisation of externalities, such as facilitation of
bargaining, specification of liability, or development of social
responsibility be successful?
Institutional approaches to facilitate the internalization of externalities can be successful when specific conditions and factors are met. Here’s an overview of when such approaches can be effective:
Facilitation of Bargaining (Coase Theorem)
Clear Property Rights: Successful bargaining requires well-defined and enforceable property rights so that parties can negotiate over the allocation of resources or responsibilities.
Low Transaction Costs: For bargaining to be practical, transaction costs (e.g., costs of negotiating, enforcing agreements) must be low. This is more feasible in smaller, less complex settings.
Small Number of Parties: Bargaining is more likely to be successful when fewer parties are involved, making it easier to reach agreements.
Mutual Benefit: Both parties must see a clear benefit from the negotiation and agreement.
Specification of Liability
Clear Legal Framework: A robust legal system must clearly define and enforce liability rules, ensuring that polluters are held accountable for the harm they cause.
Effective Enforcement: Regulatory agencies must have the capacity to monitor compliance and enforce penalties for violations.
Economic Incentives: Liability rules should create economic incentives for polluters to reduce emissions or invest in cleaner technologies.
Public Awareness: Stakeholders must be aware of their rights and the mechanisms available to seek compensation for environmental damages.
Development of Social Responsibility
Corporate Culture: Companies need to cultivate a corporate culture that values sustainability and ethical behavior, integrating social responsibility into their core operations.
Stakeholder Engagement: Businesses should actively engage with stakeholders, including customers, employees, and communities, to align their practices with societal expectations.
Transparency and Reporting: Regular, transparent reporting on environmental performance can build trust and accountability, encouraging companies to internalize externalities.
Market Incentives: Consumers and investors increasingly prefer companies with strong social responsibility practices, providing market incentives for businesses to adopt sustainable practices.
Regulatory Support: Government policies that support and incentivize corporate social responsibility (e.g., tax benefits, recognition programs) can enhance the effectiveness of these approaches.
General Conditions for Success
Public Awareness and Support: Broad public awareness and support for environmental protection can drive the success of these approaches. Educated and engaged citizens can exert pressure on businesses and policymakers.
Strong Institutions: Effective institutions are crucial for implementing and enforcing rules, facilitating bargaining, and supporting social responsibility initiatives.
Collaboration and Partnerships: Collaboration between government, industry, and civil society can enhance the effectiveness of institutional approaches by pooling resources and expertise.
Adaptability and Flexibility: Institutional approaches should be adaptable to changing circumstances and flexible enough to address new challenges and opportunities in environmental management.
Conclusion
Institutional approaches to internalizing externalities can be successful when there is a clear legal framework, effective enforcement, low transaction costs, and strong stakeholder engagement. The right mix of public awareness, corporate culture, regulatory support, and collaboration is essential for these approaches to achieve their desired outcomes.
Suppose instead of a tax that we subsidise abatement and that the target is given.
* What would the regulator need to know?
* As compared to taxing emissions, would anything change?
To attain ANY specific emissions target using a tax or subsidy instrument, knowledge of the aggregate (pre-tax or pre-subsidy) marginal benefit of emissions function (the MAC curve) would be sufficient.
- For ANY emission abatement subsidy (or emission tax) rate, some –
probably unknown – amount of emissions reduction would be
obtained. - However, as all controlled profit-maximising firms will reduce
emissions up to the point where marginal abatement costs are brought
into equality with this subsidy (or tax) rate, marginal abatement costs
are equalised and so emissions reduction is achieved at least cost. - Whatever level of abatement is generated would be attained at
minimum feasible cost. Subsidies (and taxes by an equivalent argument) are, therefore, cost-
efficient policy instruments.
An emissions tax and an emissions abatement subsidy (at the same rate)
differ in terms of the distribution of gains and losses. This has important
implications for the political acceptability and the political feasibility of the
instruments. It also could affect the long-run level of pollution abatement
under some circumstances, via alteration of the size of the industry.
E.g. a subsidy to firms with higher abatement would increase their profit. This would in the general competitive market theory mean that more firms enter the market until the profit is zero. This would on the long term mean more firms and therefore a higher level of emissions. Thus subsidizing firms for abatement is not the best option on the long term. On the short term it could be feasible.
Discuss wether if it is a good assumption that efficiency-based pollution targets so far
assumed that the policy maker knows the relevant cost and benefit functions.
This assumption is often not plausible.
The EPA will often not know with certainty the costs and/ or benefits of
pollution:
- Limited Information: The EPA often lacks complete information on the costs and benefits of pollution control measures. This uncertainty can stem from insufficient data, evolving technologies, and unpredictable economic impacts.
Dynamic and Complex Systems: Environmental and economic systems are complex and dynamic. The costs and benefits of pollution control can change over time due to technological advancements, changes in economic conditions, and shifts in public preferences and behaviors. - Where non-convexities are present, it is not sufficient to know the
values of such things near the current position of the economy; they
have to be known across the whole range of possibilities. - For stock pollutants, stock effects and spatial considerations imply that
the appropriate functions vary from place to place and from time to
time and the EPA may not have full information on this.
