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Dollars and Environmental Sense: Economics of Environmental Issues


Chapter 27 Dollars and Environmental Sense: Economics of Environmental Issues Learning Objectives: When and how is it possible to put a dollar value on the environment? – PowerPoint PPT presentation

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Title: Dollars and Environmental Sense: Economics of Environmental Issues

Chapter 27
  • Dollars and Environmental Sense Economics of
    Environmental Issues

Learning Objectives
  • When and how is it possible to put a dollar value
    on the environment?
  • What is the tragedy of the commons and how does
    it lead to overexploitation of resources?
  • How does the perceived future value of an
    environmental benefit affect our willingness to
    pay for it now?

  • What are externalities and why is it important to
    evaluate them in determining the costs of actions
    that affect the environment?
  • What factors may be involved in determining a
    level of acceptable environmental risk and risk
    to human life?
  • Why it is difficult, yet important, to evaluate
    environmental intangibles, such as landscape

Value of Environmental Spending
  • The U.S. presently spends about 170 billion,
    including spending by consumers, to deal with
  • This investment yields comparable health and
    other benefits. Valuation of benefits involves
    both tangible and intangibles, the latter being
    far more difficult to quantify.
  • The annual budget of the EPA (Environmental
    Protection Agency) 6 billion

Case Study The Economics of Mahogany
  • Mahogany worth 1500-100,000 per tree
  • Roads must be built to transport logging
  • Loggers bring pollution and disease
  • Land turned to farm lands- wiping out forests
  • America- biggest consumer of Mahogany

Mahogany Imports 'Are Wiping out Peru Tribes'
  • Trees provide food, shelter and resources for
    people, animals and plants that live in the
  • Loggers bring disease and pollution previously
    unknown to tribes (no immunity)

The Environment as a Commons
  • Commons
  • Land or another resources owned publicly with
    public access for private uses

  • Often people using commons do not seek
  • People are selfish and think short-sided
  • Atmosphere and oceans are considered commons
  • Recreation is a problem of the commons-
    overcrowding of National Parks

What is the appropriate public use of public
  • Should all public lands be open to all public
  • Should some public lands be protected from
  • The United States has a policy of different uses
    for different lands

  • Externality (Indirect Cost)
  • An effect not normally accounted for in the
    cost-revenue analysis of producers and often not
    recognized by them as part of their costs and
  • Direct Costs
  • Those borne by the producer and passed directly
    on to the user or purchaser

Direct Costs (Nickel Ore)
  • Traditionally, the economic costs associated with
    the production of commercially usable Nickel from
    an ore are the direct costs- costs of purchasing
    the ore, buying energy to run the smelter,
    building the plant and paying employees (Cost
    included in price)

Indirect Costs (Externalities)
  • Degradation of the environment from the smelter
    plant- destroyed vegetation, increase in erosion
    (loss of trees and damage to overall ecosystems),
    air pollution of the local area, and pollution of
    the local water systems

  • Evaluation of environmental intangibles is
    becoming more common in environmental analysis
  • Losing Public Service Functions will convert
    from indirect to direct costs
  • Public Service Functions of Nature
  • Bees pollinate 20 billion worth of crops in the
    United States yearly
  • Bacteria fix Nitrogen in the oceans, lakes,
    rivers and soil
  • Bacteria clean water by decomposing toxins
  • The atmosphere converts toxic Carbon Monoxide to
    harmless Carbon Dioxide

Risk-Benefit Analysis
  • Def The riskiness of a present action in terms
    of its possible outcomes
  • The relation between risk and benefit affects our
    willingness to pay for an environmental good
  • What is the future worth? How much are you
    willing to risk for today?

Examples of Life/Death Risks
  • Cigarette Smoke- 8 in 100 deaths
  • Automobiles - 1 in 100 deaths
  • Sunlight Exposure- 2 in 1000 deaths
  • Outdoor Air Pollution- 4 in 10,000 deaths
  • Airplane Passenger- 1 in 1,000,000 deaths

Pollution Risk
  • Pollution directly affects more than just our
  • Ecological and Aesthetic damage can also
    indirectly affect human health
  • We might want to to choose a slightly higher risk
    of death in a more pleasant environment rather
    than increase the chances of living longer in a
    poor environment

Degree of Risk- Legal Processes
  • U.S. Toxic Substances Control Act- requires a new
    chemical to obtain clearance from EPA.
  • EPA determines if it can be used based on
    reasonable risk- what is considered reasonable?
  • Example DDT

Global Issues Who Bears the Costs?
  • Example Fossil fuels- Global Climate Change
  • The less developed countries did not share in the
    economic benefits of the burning of fossil fuels
    but they are sharing in the disadvantages of this

Who pays, and how?
  • It may be necessary to reduce the total
    production of greenhouse emissions- who pays, and
  • Who is responsible for cleaning and keeping clean
    our global commons?

Environmental Policy Instruments
  • Moral suasion- publicity, social pressure
  • Direct controls- regulations
  • Market processes- taxation, subsidies, refundable
    deposits, allocation of property rights

Environmental Policy Instruments
  • Government investments- damage prevention
    facilities (treatment plants), regenerative
    activities (reforestation), dissemination of
    information (pollution control, profitable
    recycling), research, education (general public
    and professional specialists)

Marginal Costs
  • In controlling pollutants, marginal cost is the
    cost to reduce one additional unit of pollutant.
  • With pollution control, the marginal cost often
    increases rapidly as the percentage of reduction

  • Economics of environmental issues are
  • Future worth compared with present worth can be
    important in determining levels of exploitation
    of resources
  • Evaluation of intangibles is important in
    environmental analysis