Chapter 27: Dollars and
Environmental Sense: Economics of
Environmental Issues
The Economic Importance of the
Environment
• In the mid-1990’s US spent ~$115
billion/ year to deal w/ pollution.
– About 2% of GNP
– Many more cost of pollution are hidden
– The EPA has a budget of $6 billion/ year
The Economic Importance of the
Environment
• Effects of pollutants:
– Lower average life expectancies and higher
incidences of certain diseases.
– Particulate air pollution in U.S. cities
contributes to 60,000 deaths annually.
• The value of the benefits from Clean Air
Act amendments is estimated to be $110
billion in 2010, while the costs are
estimated to be $27 billion.
The Economic Importance of the
Environment
• Health damage in tangible factor
– Measurable.
• Other factors such as landscape beauty are also
important
– Hard to quantify
• Environmental decision making often involves
analysis of tangible and intangible factors.
– One task of environmental economics is to develop
methods for evaluating intangible.
The Environment as a Commons
• Often people who use a natural resource
do not act in a way that maintains that
resource and its environment in a
renewable state.
– They do not seek sustainability.
– Profit motive w/not always lead a person to
act in the best interest of the environment.
The Environment as a Commons
• “The tragedy of the commons.”
– When a resource is shared, an individual’s personal
share of profit from exploitation of the resource is
usually greater than that individual’s share of the
resulting loss.
• A commons is any resource owned publicly
with public access for private uses.
– Each user tries to maximize personal gain and must
periodically consider whether to add more cattle to
the herd on the commons.
The Environment as a Commons
– The addition of one cow has both a positive and a
negative value.
– The positive value is the benefit when the herder sells
that cow.
– The negative value is the additional grazing by the
cow.
– The benefit to an individual of selling a cow for
personal profit is greater than that individual’s share
of the loss in the degradation of the commons.
– The short-term successful game plan, therefore, is
always to add another cow.
The Environment as a Commons
• Eventually the common grazing land is so
crowded with cattle that none can get adequate
food and the pasture is destroyed.
– In the short run, everyone seems to gain, but in the
long run, everyone loses.
• Complete freedom of action in a commons
inevitably brings ruin to all.
• The implication seems clear:
– Without some management or control, all natural
resources treated like a commons will inevitably be
destroyed.
The Environment as a Commons
• There are many examples of commons;
– US forest, 38% are on publicly owned lands.
– Ocean fisheries away from coastlines
– Deep-ocean seabed, where valuable mineral
deposits lie
– Antarctica
– The atmosphere
– Great Chagos Bank in the Indian Ocean
The Environment as a Commons
• In the 19th century burning wood in fireplaces
was a major source of heating in the US.
– As population increased.
– Air quality in some local areas declined.
• As a result some communities restrict or
prohibit the use of fireplaces and wood-stoves.
• The local air is a commons and its overuse
required a societal change.
The Environment as a Commons
• Recreation is a problem of the commons
– Overcrowding of national parks, wilderness
areas, and other nature-recreation areas.
– E.g. Voyageurs National Park in MN
• Some environmentalists argue it should be a
wilderness area because it is ecologically
fragile.
• Other group argue that near by Boundary Waters
provide ample wilderness.
Low Growth Rate and Therefore Low
Profit as a Factor in Exploitation
• The second reason individuals tend to
overexploit natural resources held in
common is the low growth rate of the
resource.
– E.g., whales and whale oil.
– How can whalers get the best return on their
capital?
– We will examine two approaches:
• resource sustainability and maximum profit.
Low Growth Rate and Therefore Low
Profit as a Factor in Exploitation
• Whalers adopt a simple, one-factor resource
sustainability policy
– Only harvest the net biological productivity each
year and thus maintain the total abundance of
whales at its current level.
– They will stay in the whaling business indefinitely.
• In contrast, if they adopt a simple approach to
maximizing immediate profit
– They will harvest all the whales now, sell the oil,
get out of the whaling business, and invest the
profits.
Low Growth Rate and Therefore Low
Profit as a Factor in Exploitation
• Economically speaking the second scenario
is more profitable.
• Whaling on the open seas can be also
viewed as a problem of a commons,
complicated by low growth rate.
Externalities
• Also called an indirect cost,
– An effect not normally accounted for in the
cost–revenue analysis of producers.
– Not recognized by them as part of their costs
and benefits.
– Costs or benefits that don’t show up in the price
tag.
• Consumers must compared true costs or the
price will be wrong.
Externalities
• Air and water pollution provide good
example of externalities.
• Production of nickel.
– Direct costs include purchasing ore, energy to
run the smelter, building the plant, and paying
employees.
– Externalities include degradation of the
environment from plant emissions.
Externalities
• How do we get the value of clean air and
water and other environmental benefits to
be recognized socially as greater than zero?
• Quantitative evaluation of the tangible
natural resources
– Such as air, water, forests, and minerals
– Prior to development or management of a
particular area is now standard procedure.
Externalities
• Some suggest that environmental and
ecological costs should be included in costs
of production through taxation or fees.
– Expense borne by the corporation that benefits
directly or would be passed on to consumers.
– Others suggest that these costs should be shared
by the entire society and paid for by general
taxation
– Economists generally agree that the “polluter
pays” approach provides much stronger
incentives for cost-effective pollution reduction.
Public Service Functions of
Nature
• It is estimated that bees pollinate $20 billion
worth of crops in the US.
– Cost of pollinating these crops by hand would
be exorbitant.
– A pollutant that eliminated bees would have
large indirect economic consequences.
– Recently, outbreak of bee parasites in the US
reduced the abundance of bees, bringing this
once-intangible factor to public attention
Public Service Functions of
Nature
• Only when our environment loses a public
service function do we usually begin to
recognize its economic benefits.
• What had been accepted as an economic
externality (indirect cost) suddenly may
become a direct cost.
• Public service functions have been estimated to
provide between $3 trillion and $33 trillion per
year.
– Natural capital
Valuing the Beauty of Nature
• Often referred to as landscape aesthetics
• One of the perplexing problems associated
with aesthetic evaluation is personal
preference.
• Philosophers differ on what key elements
are important to aesthetic quality
– Coherence, complexity, and mystery
– Unity, vividness, and variety
How is the Future Valued
• Because we know we are mortal we tend
to value personal wealth and goods more
if they are available now than if they are
promised in the future.
– But many people still argue we have a debt
to future generations
• Can we place an economic value on
future existence of anything?
How is the Future Valued
• Economists observe that it is an open
question whether something promised in the
future will have more value then it does today
• So in terms of the future, the basic issues are:
– (1) We are so much richer and better off than our
ancestors that their sacrificing for us might have
been inappropriate.
– (2) Even if they had wanted to sacrifice, how
would they have known what sacrifices would be
important to us?
Risk-Benefit Analysis
• The riskiness of a present action in terms of
its possible outcomes is weighed against the
benefit, or value, of the action.
Acceptability of Risks and Costs
• Some behaviors are far riskier than others.
– Ultimate fate for everyone is death
Acceptability of Risks and Costs
• Looking at Table 27.1 we can make a
couple of conclusions.
– Value of lowering air pollution is an
improvement in the quality of our lives,
rather than an increase in the time we are
alive.
– Natural indoor air pollution is much more
deadly than most outdoor air pollution.
Acceptability of Risks and Costs
• Generalizations about the acceptability of
various risks:
– Number of people affected.
– Novel risks appear to be less acceptable than
long-established or natural risks.
– People’s willingness to pay for reducing a
risk also varies with how essential and
desirable the activity associated with the risk
is.
Acceptability of Risks and Costs
• On the basis of direct effects on human
health, it costs more to increase longevity
through a reduction in air pollution than to
directly reduce deaths through the addition of
a coronary ambulance system.
• The issue boils down to whether we should
improve the quality of life for the living or
extend life expectancy regardless of the
quality of life.
Acceptability of Risks and Costs
• US Toxic Substances Control Act
– No one may manufacture a new chemical substance
w/o obtaining a clearance from the EPA.
– Act establishes procedures to estimate the hazard to
the environment and to human health.
• The EPA examines the data and judges the
degree of risk associated w/ all aspects of
production;
– Extraction of raw materials, manufacturing,
distribution, processing, use, and disposal.
– Can be banned or restricted if it will pose an
unreasonable risk.
Global Issue: Who Bears the
Cost?
• The less developed countries did not share
in the economic benefits of the burning of
fossil fuels during the first two centuries of
the Industrial Revolution, but they are
sharing in the disadvantages of this activity.
How do we Achieve a Goal?
• Means to implement a society’s policies are
known among economists as policy
instruments.
– Moral suasion - i.e., persuading people by talk,
publicity, and social pressure)
– Direct controls, which include regulations
– Market processes, which affect the price of goods
and include taxation of various kinds, subsidies,
licenses, and deposits
– Government investments, which include research
and education.
Control of Pollutants
• In controlling pollutants, marginal cost
is the cost to reduce one additional unit
of pollutant.
– Often increases rapidly as the percentage
of reduction increases.
Control of Pollutants
• Three common methods of direct
control of pollution:
– (1) setting maximum levels of pollution
emission
– (2) requiring specific procedures and
processes that reduce pollution
– (3) charging fees for pollution emission
Control of Pollutants
• The problem with the first approach is that
careful monitoring is required indefinitely to
make certain the allowable levels are not
exceeded.
• The disadvantages of the second approach;
– Severe financial burden on the producer of the
pollutant
– Restrict the kinds of production methods open to an
industry
– Become technologically obsolete.
• Sale of licenses or permits has been found to be
among the more successful recourses.