Chapter 3
MEASURING RISK
Decisions in life ruled by Risk and Cost
Take Hwy at 70 or side road at 35?
• How likely will someone or something be
hurt?
• How much will it cost to prevent?
• Probability versus Possibility
Chapter 3
RISK ASSESSMENT
• Facts and assumptions to estimate probability of
harm.
• Well known versus little known actions.
• Animal tests versus human responses. (example:
carcinogens)
– Estimates of probabilities.
– Not all people respond the same.
– Err on the side of safety.
Chapter 3
• RISK MANAGEMENT
• Decision making process:
1.
Which risks have highest priorities?
2.
Cost to reduce risks?
3.
Where to spend limited dollars?
• 4.
How much risk is acceptable?
• 5.
How to enforce?
• Answers to questions are controversial
• Science is often incomplete
• We often don’t understand the risks we accept and
those we won’t.
Chapter 3
TRUE AND PERCEIVED RISKS
• Daily, common events and infrequent but dramatic
events.
• “Experts” and the “public” often differ.
– public trust of experts
• Degree of risk that is acceptable
– zero risk vs. negligible risk
– voluntary vs. involuntary risk
• What is the proper balance?
Chapter 3
ECONOMICS AND ENVIRONMENT
• To achieve long-term economic growth
while improving/sustaining the
environment. Whose goal?
• Economics are associated with
environmental issues---Resource Allocation
Chapter 3
ECONOMIC CONCEPTS
• “Goods” or “services” are those things that are
scarce.
• “Resources” make goods and services available.
• “Supply” is the amount of goods or services
available.
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1.
2.
3.
4.
5.
6.
raw materials
amount available
cost to utilize raw material
competition for raw material
feasibility of recycling material
societal costs
Chapter 3
Demand is the amount of goods or services
that consumers are willing/able to buy at
various prices. Supply is amount available.
Demand
When supply exceeds
demand, must lower
prices to sell product
Supply
Chapter 3
• MARKET-BASED INSTRUMENTS
• Supplement but do not substitute
• Require open dynamic market system, other
aspects of more developed nations.
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1.
2.
3.
4.
5.
Information Program
Tradable Emissions Programs
Emission Fees, Taxes and Charges
Deposit-Refund programs
Subsidies
Chapter3
COST-BENEFIT ANALYSIS
• 1.
ID the project.
• 2.
Determine all impacts (+ and -).
• 3.
Value of impacts.
• 4.
Calculate cost/benefit ratio -- profits?
CONCERNS
• Does everything have economic value?
• How can you determine all impacts (both + and -)?
• Assumes that money is the most important thing.
Chapter 3
SUSTAINABLE DEVELOPMENT
• “Development that meets the needs of the present
without compromising the ability of future generations
to meet their own needs.”
– Is economic growth necessary to finance investments in
environmental improvements?
– Will technological advances solve environmental
improvements?
– These two approaches view the environment as part of the
allocation of resources process.
– Are economic and environmental well-being mutually
reinforcing goals?
Chapter 3
• Economic growth may create its own failing.
• Healthy economies are necessary to invest in
environmental protection.
– Can economic growth be managed such that the
environment is not damaged?
• Different abilities in different countries.
Chapter 3
Sustainable development will require change in
our economic policy:
• GNP currently does not include environmental
costs and benefits.
• Short term gains often have long term effects.
• Politicians are on 2 to 6 year terms.
• Investors have 3 month to a year outlook.
Chapter 3
Sustainability requires:
• 1. Use renewable resources.
• 2. Substitute renewable resources for nonrenewable ones.
• 3. Recognize the interdependence of the large
system.
• 4. Adaptability of system requires diversity.
• 5. Institutional commitment.
Chapter 3
EXTERNAL COSTS (Externalities)
• Expenses generated by producer, but borne by someone
else. That would be you and I.
• Pollution-prevention costs are passed on to others.
– Sewage treatment
• Pollution costs:
– 1. Expenditures to avoid or remove damage once pollution
has occurred.
– 2. Increased health costs or loss of use of a resource.
Chapter 3
THE PROBLEM WITH “COMMONS”
• When something belongs to everyone, it will
almost always be aggressively exploited.
– Burn wastes because air is free.
– Dump in the ocean.
– Fish the ocean.
• Garrett Hardin’s “Tragedy of the Commons”
Chapter 3
ECONOMICS AND THE BIOPHYSICAL
ENVIRONMENT
• Humans change the environment for human gain.
• Population size cause changes such as loss of biodiversity
and climate change.
• Time for biodiversity to develop.
• Rate for reduction in biodiversity.
• Market decisions cannot take into account the innerconnectivity of the environment.
• Uniqueness of some locations is not considered in many
economic decisions.
Chapter 3
DEVELOPING NATIONS
• Most ecological diversity now occurs where
developing nations occur.
• Developing nations borrow money for large
development projects.
– Debt for Nature exchanges
• Tremendous debt forces short-term returns.
• Environmental protection is ignored.
• Long term future is jeopardized.