Assessing Costs for Environmental Decision Making

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Assessing Costs for Environmental Decision Making

• Chapter 8

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Environmental CostsConceptual Issues

• Incremental costs are the change in costs arising
  from an environmental policy initiative
• Economic costs include
• Explicit (or monetary) costs
• Implicit (or nonmonetary) costs
• Ideal measure is the social costs of policy
• Expenditures needed to compensate society for
  resources used so that its utility level remains
  the same

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Explicit Costs

• Administrative, monitoring, and enforcement
  expenses incurred by the public sector plus
  compliance costs incurred by all sectors
• Capital (or fixed) costs
• spending on plant, equipment, construction, and
  process changes for pollution abatement
• Operating (or variable) costs
• costs of operating and maintaining abatement
  processes

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Implicit Costs

• Value of nonmonetary effects that negatively
  affect societys well-being
• Examples included diminished product variety,
  time costs of searching for substitutes, reduced
  convenience, etc.

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Modeling Incremental Costs

• Find baseline TSC before policy
• Find TSC after policy is implemented
• Subtract baseline from new TSC
• TSC can be found as area under MSC
• Recall MSC MACMKT MCE

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MSC and TSC of Abatement
MSC 4 0.75A
MSC MACMKT MCE
MSC (millions)
4
TSC
0
A1
A (abatement )
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Modeling Incremental Costs
MSC 4 0.75A
MSC MACMKT MCE
22.75
19
MSC (millions)
4
0
20
25
A (abatement )
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Modeling Incremental Costs
TSC
TSC (millions)
TSC 4A 0.375A2
334.375
230
0
20
25
A (abatement )
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Estimating Explicit Costs

• Two methods
• Engineering Approach
• Survey Approach
• Common to use a combination approach

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Engineering Approach

• Estimates abatement spending based on least-cost
  available technology
• Relies on experts in abatement methods
• Drawbacks
• difficult to use for proposed policy due to
  uncertainty
• must be customized to suit each production
  setting or suffer from averaging
• unable to capture firm heterogeneity as a
  generalized estimate
• likely understates true costs because it assumes
  all firms are cost-effective

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Survey Approach

• Derives estimated abatement expenditures from a
  sample of polluting sources via surveys
• Drawbacks
• assumes sources are sufficiently well-informed
• polluters have an incentive to exaggerate costs
  to officials to increase the probability that the
  proposed regulation will be rejected

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Cost Classifications

• By economic sector
• Shows cost distribution across public and private
  sectors
• By environmental media
• Shows how costs vary across air, water, and solid
  waste abatement activities