tm env economics sustainable development

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Published on November 27, 2007

Author: Cuthbert

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Slide1:  Project GCP/SYR/006/ITA – Phase II FAO-ITALIAN GOVERNMENT COOPERATIVE PROGRAM Environmental Economics and Sustainable Development Donato Romano Department of Agricultural and Land Economics University of Florence and International Consultant to the FAO Slide2:  Objective: sustainability of rural development policies  relevant concepts and methods outline and reading list: contents. schedule and references course notes Background: Basic microeconomics Materials: Slide3:  Evaluation: homeworks quizzes: 1 per week final test: Wed. Nov 27th Schedule: Slide4:  Population Every year. more than 93 million people are being added to the world’s population of 6 billion More than 82 million of these additional people per year will be born in Third World countries Rapid population growth can have serious consequences for the well-being of humanity worldwide Slide5:  Population historical records Slide6:  Population historical records Slide7:  Population historical records Slide8:  Population geographic distribution Slide9:  Population geographic distribution Slide10:  Population age structure Slide11:  The hidden momentum Slide12:  The demographic transition (in W. Europe) Slide13:  The demographic transition (in LDCs) Slide14:  The microeconomic theory of fertility Slide15:  The microeconomic theory of fertility Policy implications: an increase in the education of women and a consequent change in their role and status, an increase in female non-agricultural wage employment opportunities, which raises the price or cost of their traditional child-rearing activities, a rise in family income levels through the increased direct employment and earnings of a husband and wife or through the redistribution of income and assets from rich to poor, a reduction in infant mortality through expanded public health programs and better nutritional status for both parent and child, the development of old-age and other social security systems outside the extended family network to lessen the economic dependence of parents on their offspring. Slide16:  Population-Environment-Poverty Links Slide17:  Carrying capacity Slide18:  Carrying capacity Slide19:  Population pressure and technological change Slide20:  Greenhouse effect Slide21:  Greenhouse effect Why should this greenhouse effect be thought of as a problem? The additional warming is what causes concern: many potentially damaging effects some beneficial ones The gases producing this layer around the earth are: water vapor, carbon dioxide (CO2), methane (CH4), nitrous oxide (NO), some chlorofluorocarbons (CFCs), and ozone (O3) Slide22:  Greenhouse effect These gases are a mix of natural events and anthropogenic factors  determining the relative contributions of these gases is complex Slide23:  Greenhouse effect Two features: uncertainty commitment to some degree of warming. Two policy responses: prevention (to reduce trace gas emissions) adaptation Slide24:  Greenhouse effect Projected scenarios (IPCC estimates): scenario A - business as usual: no controls are exercised over current rates of emission growth  global mean temperatures will increase 1°C by 2025 and 3°C by 2100 compared with temperatures in 1990, i.e. a rise of 0.3°C per decade scenario B: deforestation is halted, natural gas is substituted for coal, which has a higher carbon content, and energy conservation measures are adopted  a rise of 0.2°C per decade scenario C: increasingly strict abatement measures are undertaken, and energy from fossil fuels is aggressively replaced by renewable energy  warming is held to 0.1°C, Slide25:  Greenhouse effect Slide26:  Effects of global warming Projected scenarios (IPCC estimates): Rise in regional temperature: mid-latitude regions summer soil moisture may be reduced, and crops could be affected by summer droughts; reduction of water supplies, both of surface water and groundwater aquifers changes in hydrological regimes Rise in sea level: melting mid- and high-latitude small glaciers and ice sheets  mean rise in sea level of 6 cm a decade loss of low-lying land to the sea salt intrusion to freshwater systems and groundwater storm surges that cause floods Frequent and severe events: alteration of the frequency and variability of events related to the weather droughts, storms, and floods may be more frequent and severe Slide27:  Effects on LDCs LDCs more dependent than DCs on NR  more sensitive to changes in climate the agricultural systems of many LDCs are based on low-lying deltaic land  flooding and saltwater intrusion many agricultural systems rely on natural rainfall rather than irrigation systems  problems with changes in rainfall patterns many small LDCs are island communities at special risk from severe weather events such as hurricanes and cyclones the very poverty of many LDCs will preclude them from undertaking the adaptive policies, such as sea defenses, that may be needed Slide28:  Ozone layer depletion Stratospheric ozone blocks ultraviolet radiation from the sun  depletion of the ozone layer increases the incoming UVR: increase of skin cancers suppressions of the immune system in the human body eye disorders reduced or distorted growth in plants Cause (mid 1970s): chlorofluorocarbons (CFCs) depletion of the ozone layer contribute to global warming  1989: Montreal Protocol Slide29:  Loss of Biodiversity Biodiversity is the totality of genes, species, and ecosystems. The term is helpful for reminding us that it is not just the total stock of living things that matters, but the range of different living things. Protecting the world’s biodiversity is a difficult task: 30-50 million species only 1.43 million species have been scientifically described most undescribed species inhabit the tropical forests rate of loss of species is not known, but evidence suggests that the rate of extinction has increased perhaps one-quarter of existing species are at risk of extinction in the next twenty to thirty years Slide30:  Loss of Biodiversity Slide31:  Loss of Biodiversity Causes of biodiversity loss: population growth, ill-defined land and resource rights, market, planning, and government failures If the above factors explain habitat loss, their reversal or containment will assist the conservation process, but in order to avoid to alienate people, it is required community involvement in protected areas Slide32:  The Mediterranean Basin Why the Mediterranean Sea is subject of environmental concern? land-locked surrounded by countries with various combinations of rapid population growth, industrialization, development, massive changes in land use Two kinds of problems (Box 3.1): common problems, i.e. they are shared by two or more countries problems occuring separately in several countries Slide33:  The Mediterranean Basin Both types of problems are reciprocal externalities that require bilateral or collective action Examples: heavily polluted rivers declining fisheries (because of pollution as well as over-fishing) reduced wetland areas (because of land reclaimation, urbanization) loss of forests and natural habitats water deficiencies and water quality problems soil depletion (overgrazing, overcultivation, salinization, water-logging) solid waste poorly managed Slide34:  The Mediterranean Basin Causes : population growth: by 2025 the 1985 population of 350 million persons could have increased by 200 million economic policy: energy and irrigation are subsidized institutional failure: tenurial arrangements, weak controls over development, poor political awareness of environmental issues Actions: contain population pressure on natural resources reduce tenurial conflicts getting resource prices right (i.e. reflect social costs) strengthen institutions Slide35:  Water Resources in the Middle East Why the water resources are so important for the Middle East? No other region of the world embraces such a large area, with so many people striving so hard for economic growth on the basis of so little water The Mashrek lies in a transition zone. The dominant hydrological characteristic is the combination of: aridity and uncertainty Whereas regions of higher rainfall sometimes suffer droughts and regions of lower rainfall sometimes experience floods, this region has to cope with both Slide36:  Water Resources in the Middle East Slide37:  Water Resources in the Middle East Slide38:  Water Resources in the Middle East Three water crises at the same time: quantity: demand for fresh water in the region exceeds the naturally occurring, renewable supply quality: much of the region’s limited water is being polluted from growing volumes of human, industrial, and agricultural wastes equity: the same water is desired simultaneously by different sectors in some society or wherever it flows across (or under) an international border Slide39:  Water Resources in the Middle East Actions: quantity: much more attention should be paid to the low-capital-decentralized options than to the high-capital-centralized ones. To a large extent, the former are not only technically proven but typically more cost effective, given the marginal costs of new conventional water supply quality: intervene to fix the major causes of pollution, i.e. overpumping of aquifers, runoff from agriculture, discharge of human and industrial wastewater, and loss of habitat equity: develop internal as well as international institutions to manage conflicts Slide40:  Land Degradation and Desertification What is land degradation? soil erosion waterlogging salinization land use change What is desertification? land degradation in arid, semi-arid and dry sub-humid areas resulting from various factors, including climatic variations and human activities Slide41:  Land Degradation and Desertification Why is land degradation a problem? during the 1980s, the amount of per capita arable land declined by 1.9% per annum that is, every year, around 70,000 km2 of farmland are abandoned because the soils are too worn out and degraded for crop production; another 200,000 km2 suffer from reduced productivity about 1.4 billion hectares of arable land have been taken out of agricultural production because of urban sprawl between 1980 and the turn of the century overall land degradation of various sorts is estimated to be causing an annual loss of 12 million tons of grain output: almost half of all the gains in grain output each year Slide42:  Land Degradation and Desertification Why is desertification a problem? one-third of the earth’s land is arid or semi-arid some 600 million people live there more than 20% of the earth - home to 80 million people - is directly threatened by desertification some 100 countries are affected. Slide43:  Land Degradation and Desertification Causes of land degradation/desertification: population growth: populations are increasing as fast in arid lands as elsewhere overcultivation, overgrazing, deforestation, poor irrigation people takes too much from the soil and puts too little back Traditional rainfed cropping systems break down under pressure from growing populations and the increased planting of cash crops Slide44:  The Human-Environment Relationship THE ECONOMY Firms (Production) Households (Consumption) Inputs Outputs THE ENVIRONMENT ENERGY AIR WATER AMENITIES AIR POLLUTION SOLID WASTE WASTE HEAT WATER POLLUTION RAW MATERIALS Slide45:  Functions of the Environment Source of raw materials: depletable renewable Sink for waste: biodegradable/short-lived/non-toxic toxic/persistent General life support: water cycle carbon cycle ozone layer Slide46:  The First Two Laws of Thermodynamics First law of termodynamics: energy and matter cannot be created or destroyed the mass of materials flowing into the economic system has to either accumulate in the economic system or return to the environment as waste excessive wastes can depreciate the asset: limited absorptive capacity Second law of termodynamics: entropy increases no conversion from one form of energy to another is completely efficient and that the consumption of energy is an irreversible process over the very long run, the growth process will be limited by the availability of solar energy and our ability to put it to work Closed vs. open systems: exchange of energy and matter Earth as a closed system Slide47:  A Classification of Natural Resources What is a resource? utility vs. altruism natural vs. man-made renewable vs. non-renewable (or exhaustible): - growth and reproduction - carrying capacity (max stock) - rate of extraction conditionally vs. uncoditionally renewable Slide48:  A Classification of Natural Resources Natural resources Renewable Non-renewable Unconditionally renewable Conditionally renewable Non-biological flow resources Non-biological cycling resources Simple biological resources Complex resources oil coal minerals solar energy tidal energy wind energy water nitrate CO2 O2 mammals fish crops soil ecosystems Slide49:  Special Features of Agricultural Resources What are, if any, the special features of agricultural resources? inter-temporal or long-run nature  optimal time path of use  uncertainty close linkages between the physical system and biological system complexity of involved resources  renewable + exhaustible  quality differentiated spatial nature of resources Slide50:  Ideas of Development 1950s-60s: economic growth 1960s-70s: growth with redistribution 1970s-80s: basic needs 1980s-90s: sustainable development Sustainablity is concerned with thes ‘3 Es’: economic dimension: efficiency ecological dimension: ecosystem functioning and environment maintenance equity and ethical dimension: distributional consequences of policy alternatives Slide51:  Views on Sustainable Development “Sustainable economic development involves maximizing the net benefits of economic development, subject to maintaining the services and quality of natural resources over time” (Pearce et al., 1987) “Sustainable economic development … refers to the optimal level of interaction between three systems - the biological, the economic and the social - through a dynamic and adaptive process of trade-offs” (Barbier, 1989) a) Economists: Slide52:  Views on Sustainable Development “Sustainability (is) the ability to maintain productivity, whether as a field, farm or nation, in the face of stress or shock” (Conway and Barbier, 1990) “Sustainable development based on prevailing patterns of resource use is not even theoretically conceivable ... a new definition of sustainable development … is development that minimizes resource use and the increase in global entropy” (Rees, 1990) b) Ecologists: Slide53:  Views on Sustainable Development Demand on the environment that are culturally determined … Are the institutions which are used to manage the environment subject to local control and have they evolved to meet local needs? The underlying global economic and political factors which encourage environmental degradation need to be addressed, and a global redistribution of wealth has to occur. Only then can sustainable development on a global scale become a realistic possibility. c) Sociologist: Slide54:  Views on Sustainable Development “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987) Two different meanings: the stock of natural capital in particular must be left intact for the next generation the aggregate stock of manufactured and natural capital must not decline between one generation and the next  trade-offs Brundtland Commission Slide55:  Views on Sustainable Development “Sustainable Development is the management and conservation of the natural resource base, and the orientation of technological and institutional change in such a manner as to ensure the attainment and continued satisfaction of human needs for present and future generations. Such sustainable development (in the agriculture, forestry and fisheries sectors) conserves land, water, plant and animal genetic resources, is environmentally non-degrading, technically appropriate, economically viable and socially acceptable” (FAO, 1989) FAO Slide56:  Agriculture in Economic Development Green revolution: Objectives: increasing per capita income rising per capita food production Three interrelated actions: staple cereals that produced early maturing, day-length insensitive and high-yielding varieties (HYVs) packages of high payoff inputs, such as fertilizers, pesticides and water regulation implementation in the most favorable agro-climatic regions and for farmers with the best expectations of realizing the potential yields Slide57:  Agriculture in Economic Development Post green revolution problems: equity: widely adopted irrespective of farm size and tenure soil quality, access to irrigation water, etc. have been formidable barriers to adoption stability: monocropping associated with increased output variability (pests, diseases, and weeds) year-to-year fluctuations in input use arising from shortages or price changes productivity: diminishing returns to the HYVs and high pay-off inputs Slide58:  Agriculture in Economic Development A new phase in Ag Dev?: Agricultural Sustainable Development World Bank: ‘successful’ Ag Dev sustainable, by insuring the conservation and proper use of renewable resources promote economic efficiency its benefits must be distributed equitably CGIAR: technological and research priorities to make agricultural production in the Third World more sustainable IFAD: strategies for implementing sustainable Ag Dev in resource poor environments strategies for spreading benefits to the rural poor Slide59:  Agricultural Sustainability RESOURCES Human Man-made Natural AGRICULTURE PRODUCTS Food and fiber Slide60:  Agricultural Sustainability A) The sustainability of resources: renewable vs. exhaustible resources  husband renewable resources in such a way as to provide a long-term sustainable base for production frontier and poor societies  unsustainable resources use, that is intensive application of: - capital - technology - (labor) LDCs cannot afford the technological investment, nor do they have dependent countries which they can exploit Slide61:  Agricultural Sustainability B) Mismatched technologies : within the agricultural production system lack of knowledge or appropriate skills  low efficiency  higher costs outside the agricultural production system  agrochemicals  human diseases, pollution, etc. What is agricultural sustainability? The ability to maintain productivity, whether of a field or farm or nation, in the face of stress or shock ( resilience). A stress may be increasing salinity, or erosion, or debt; etc. Slide62:  Agricultural Sustainability a) Sustainability ( resilience) Function of: the intrinsic characteristics of the system, the nature and strength of the stresses and shocks, the human inputs which may be introduced to counter these stresses and shocks Slide63:  Agricultural Sustainability b) Productivity Output of valued product per unit of resource input : • land (solar energy), • labor (human energy), • capital (fossil fuel energy) Slide64:  Agricultural Sustainability c) Stability The constancy of productivity in the face of small disturbing forces arising from the normal fluctuations and cycles in the surrounding environment: • climate, • market demand, • etc. Slide65:  Agricultural Sustainability d) Equitability The evenness of distribution of the productivity of the agricultural system among the human beneficiaries Trade-offs Slide66:  Agricultural Sustainability e) Efficiency Maximum economic efficiency is equivalent to maximum profit Maximization with sustainability constraints Slide67:  Spatial and Hierarchical Dimensions Trade-offs Slide68:  FAO Criteria for SARD Meeting the basic nutritional requirements of present and future generations, qualitatively and quantitatively while providing a number of other agricultural products Providing durable employment, sufficient income, and decent living and working conditions for all those engaged in agricultural production Maintaining and, where possible, enhancing the productive capacity of the natural resource base as a whole, and the regenerative capacity of renewable resources, without disrupting the functioning of basic ecological cycles and natural balances, destroying the socio-cultural attributes of rural communities, or causing contamination of the environment Reducing the vulnerability of the agricultural sector to adverse natural and socio-economic factors and other risks, and strengthening self-reliance Slide69:  Macro Policies and the Environment Slide70:  Macro Policies and the Environment Slide71:  Macro Policies and the Environment Slide72:  Macro Policies and the Environment Slide73:  Macro Policies and the Environment Slide74:  Macro Policies and the Environment Common Roots of Economic and Environmental Problems Policy failures growth without safeguards lack of proper sector policies Market failures monopolies imperfect information externalities Governance failures lack of monitoring and control weak management lack of transparency collusion Financial sector problems excessive exposure to risk weak portfolio unsustainable business practices Environmental problems excessive pollution excessive NR depletion unsustainable industrial, agricultural, and NR management practices Slide75:  Macro Policies and the Environment if one traces the impacts of a macroeconomic policy change, one can find effects across many sectors, not always self-evident the environmental impacts of economic policies will depend critically on the economic institutions that are in place and that govern the use of the resource base and the environmental sinks of the economy where there are market imperfections of one kind or another, and where these cannot be resolved at source, it is desirable to use economic instruments specifically to address the environmental issues Conclusions: Slide76:  Some Introductory Concepts What is economics about? scarcity, allocation, and trade-offs values: total economic value: - market vs. non-market - use vs. non-use positive vs. normative economics environmental vs. natural resource economics neoclassical vs. ecological economics Slide77:  Some Introductory Concepts Slide78:  Some Introductory Concepts Slide79:  Neoclassical Economics sustainable growth natural resource can be substituted for capital technical progress will relax the limits to growth maximum sustainable yield recycling sustainability of economic development golden rule: resource growth potential  discount rate - rate of exogenous technical progress irreversibilities Slide80:  Ecological Economics sustainable growth the substitution of capital for natural resources is limited technical progress will relax the limits to growth functions of the environment are essentially intertwined  additional restriction on economic growth full recycling of energy is not possible sustainability of economic development continuous co-evolutionary feedback between economy and environment the economy has to adapt itself economy + natural environment + culture + technology + political system + population = ecological complex Slide81:  Recalling Some Basics Demand: downward sloping willingness to pay (WTP) reservation price: max WTP marginal benefits Slide82:  Recalling Some Basics Consumer Surplus: gross total benefits total purchasing costs net total benefits Slide83:  Recalling Some Basics Marginal Costs: costs of each additional Q MC are rising why? MC and supply curve Slide84:  Recalling Some Basics Firm equilibrium: max p  MC = MR competitive market  MR = P* why? willingness to accept (WTA) Slide85:  Recalling Some Basics Market supply: horizontal sum of all firm supply curves Slide86:  Recalling Some Basics Producer Surplus: gross total benefits (revenue) total production costs: cost of the goods sold net total benefits Slide87:  Recalling Some Basics Market equilibrium: market vs. individual curves price that clears the market why? equilibrium price equilibrium quantity decentralized mechanism Slide88:  Recalling Some Basics Welfare: why to exchange? benefits of exchanging costs of exchanging net social benefits NSB = CS + PS optimality economic efficiency at the equilibrium: - P = MC - WTP = MC - MB = MC Slide89:  Recalling Some Basics Max NSB: max CS + PS a competitive equilibrium is a social optimum Pareto optimality FTWE: “under a set of speci-fic assumptions, any compe-titive equilibrium is Pareto optimal” Slide90:  Recalling Some Basics Market failures: market power: e.g. monopoly externalities: uncompensated effect on a third party, e.g. pollution, protection from floods ill-defined property rights: e.g. pollution, open access public goods: non excludability + non rivalry, e.g. landscape, knowledge imperfect information: incompleteness or asymmetries, e.g. decisions under uncertainty, contract design (moral hazard, adverse selection) Slide91:  Recalling Some Basics Government failures : Government intervenes to: - correct for market failures - achieve non-efficiency objectives trade-off between efficiency and equity: e.g. price ceiling intervention two kinds of policy failure: - underpricing natural resources: e.g., timber or water subsidies - rent-seeking or directly unproductive profit-seeking (DUP) activities Slide92:  Recalling Some Basics Efficiency vs. equity: price ceiling policy PS CS Tot -c-b -a+b -a-b Slide93:  Environmental Economics Pollution: negative externality social marginal costs (SMC) private marginal costs (PMC) total social marginal costs: TSMC = SMC + PMC total vs. marginal costs internalizing a -ve externality social vs. private optimum - no 0 pollution - balancing market and non- market goals what if a +ve externality? NSB = C +D + E Slide94:  Environmental Economics Env. Improvements: marginal benefit curve marginal benefits of envir. improvement vs. marginal costs of pollution demand curve for envir. quality improvement WTP for environmental quality improvement trade-off between environm. improvement and other things we could do with income total benefits to the society total benefits vs. CS Slide95:  Environmental Economics Env. Improvements: marginal cost curve environmetal improvement does not come for free Slide96:  Environmental Economics Optimum level of pollution/environm. improvement: max NSB from environmental improvement: NSB = TB – TC  MB = MC socially efficient quantity of pollution who should enjoy the benefits and who should bear the costs? Slide97:  Environmental Economics Abatement vs. pollution damages: Two ways to look at the same problem: - max NSB  MB(A) = MC(A) - min TSC  MD(Q) = MC(Q) socially efficient quantity of pollution who should enjoy the benefits and who should bear the costs? Slide98:  Natural Resource Economics Biological Model: population growth curve: X=f(t) logistics curve carrying capacity: XMAX minimum viable population: XMIN Slide99:  Natural Resource Economics Biological Model: population growth rate: dX/dt =f(X) identify A, B and XMAX maximum sustainable yield MSY  highest possible harvest Slide100:  Natural Resource Economics Economic Model: effort if E   X  and viceversa doubling effort does not mean doubling harvest Slide101:  Natural Resource Economics Economic Model: harvest H=f(E) what about X? Slide102:  Natural Resource Economics Economic Model: total revenue: TR=PH total costs: TC=WE single owner equilibrium: (HPROF, EPROF) - max p vs. MSY - conservation open access (i.e. no owner) equilibrium: (HOA, EOA) - OA vs. max p vs. MSY - conservation Slide103:  Natural Resource Economics Economic Model: total revenue: TR=PH total costs: TC=WE single owner equilibrium: (HPROF, EPROF) - max p vs. MSY - conservation open access (i.e. no owner) equilibrium: (HOA, EOA) - OA vs. max p vs. MSY - conservation The “Tragedy of the commons” (Hardin 1968) Slide104:  Natural Resource Economics Introducing time: discounting Marginal product + Rate of capital appreciation = Discount rate X0  P0 = V0 X1  P1 = V1 Slide105:  Property Rights Coase Theorem: what is a property right? Pareto improvement sufferer’s property right polluter’s property right problems: - transaction costs - open access - information gathering costs - distributive impacts Slide106:  Resource Management Regimes private: - individuals have a duty to observe the rules of use determined by the controlling agency - the agency has the right to determine those rules state: - individuals have the right to undertake socially acceptable uses and a duty to refrain from unacceptable uses - others have a duty to respect individual rights common: - a management group has the right to exclude non-members - non-members have a duty to abide that exclusion - co-owners comprise the management group and have rights and duties related to the use of resources open access (no property): - no users or owners are defined - individuals have the privilege but not the right to use resources Slide107:  Renewable Resources and Games prisoners’ dilemma game: - non-cooperative game - isolation - no binding agreement - the resource must be privatized or be subject to some form of state regulation and control assurance game: - cooperative game - interdependence - binding agrrement - overexploitation of renewable resources in open access and common property situations can be solved by cooperative agreement extensions: - incentives/institutions - repeated over time - no single regime is universally best suited to the wise NR management Slide108:  Economic Instruments for Envir. Policy Pigovian tax: optimal tax need to know: - MNPB - MEC information aymmetries? Slide109:  Economic Instruments for Envir. Policy Pigovian tax: low-cost solution to standard setting standard at S2: TACst = OAS2 + OBS2 + OCS2 tax t*: TACtax = OXS1 + OBS2 + OYS3 TACst - TACtax = S1XAS2 - S2CYS3 S1XAS2 > S2CYS3  TACst > TACtax Slide110:  Why to Prefer Environmental Taxes? directly into the prices of the goods, services or activities polluter-pays-principle create incentives for producers and consumers more cost-effective pollution control than regulations spur to innovation raise revenues which can be used directly to improve the environment Why Are Envir. Taxes Not Widespread? uncertainty about the justice of Pigovian taxes lack of knowledge of the damage function Slide111:  Economic Instruments for Envir. Policy Envir. Standards: command-and-control need to have: - monitoring agency - penalties only by accident optimal for being optimal: - standard at Q* - penalty equal to P* - certainty of penalty Slide112:  Taxes vs. Standards taxes as least-cost solutions taxes are dynamically efficient administrative costs? outright prohibition Slide113:  Economic Instruments for Envir. Policy Marketable Permits: Q*: optimal number of permits P*: optimal price of permits S* is the supply curve MAC curve = demand curve Slide114:  Economic Instruments for Envir. Policy Marketable Permits: cost minimization low-cost polluters sell permits and high-cost polluters buy them Slide115:  Economic Instruments for Envir. Policy Marketable Permits: new entrants opportunities for non-polluters inflation and adjustment costs technological ‘lock-in’ spatial issues types of permit systems: - ambient permit system (APS) - emissions permit system (EPS) - pollution offset (PO) system Slide116:  Agricultural Pollution Non-Point Source Pollution: spatial diffusion high variability: in space and time - polluter’s responsibility (who?) - pollution level at the source (how much?) - ecological and economic damage caused (how?)  traditional instruments cannot be used Slide117:  Agricultural Pollution Input-based instruments: input taxes and subsidies - the regulatory agency should know the private production function, but - information asymmetries input proxies and empirical models - information asymmetries - other uncertainties Slide118:  Agricultural Pollution Ambient-based instruments: concentration of pollutant in the environment collective penalties - Segerson’s (1988) scheme, but - likely penalization of farms if close to the optimum - dynamic incentive disappears - costs of information and monitoring borne by farmers Slide119:  Cost-Benefit Analysis What is Cost-Benefit Analysis (CBA)? CBA is a set of operational rules, that guides public choice among several project alternatives CBA is a method to make decisions decision-making involves always more than one alternative (at least two: with and without) the evaluation process is made comparing advantages and disadvantages advantages and disadvantages are evaluated with reference to certain objectives CBA is applied mainly in the public sector Slide120:  Cost-Benefit Analysis Two types of analysis private sector: financial analysis public sector: economic and social analysis different objective function  different contents same evaluation phases and decision rules Slide121:  Cost-Benefit Analysis Financial analysis vs. economic analysis Slide122:  Cost-Benefit Analysis Why Cost-Benefit Analysis? because the market fails to reach the social optimum to overcome the paternalistic approach at public policy Slide123:  Cost-Benefit Analysis How CBA must be carried out? two fundamental principles: - welfarism: individual preferences - Pareto principle: potential Pareto improvement two issues: - how to compare different individual welfare status? Kaldor-Hicks compensation criterion - how to measure the impacts of different alternatives? Money as numeraire Slide124:  Discounting Why do we need discounting? projects usually have a duration longer than 1 year current consumption is valued higher than future consumption (inter-temporal preference) How to discount? cash flow: stream of benefits and costs on the time scale how much a future amount of money is worth today: Vn=V0·(1+r)n  V0=Vn·(1+r)-n Slide125:  Discounting Discounted cash flow Slide126:  Investment Criteria Net Present Value (NPV) sum of all items in a discounted cash flow, i.e. it is the value obtained summing all discounted net benefits decision rules: acceptability: NPVi    i choice: NPVi*  NPVj  i  j It is a monetary value It depends on the value of the discount rate (exogenous) Slide127:  Investment Criteria Benefit/Cost Ratio (B/C) ratio between the sum of discounted benefits and the sum of discounted costs decision rules: acceptability: B/Ci  1  i choice: B/Ci*  B/Cj  i  j It is a pure number It depends on the value of the discount rate (exogenous) Slide128:  Investment Criteria Benefit/Cost Ratio (B/C) the discount rate that yields NPV equal to 0 or B/C equal to 1 decision rules: acceptability: IRRi  r  i choice: IRRi*  IRRj  i  j It is the average yearly return of a given investment It does not depend on the value of the discount rate (?) Slide129:  Investment Criteria Comparison Slide130:  Investment Criteria Comparison Slide131:  Sensitivity Analysis CBA abuse can be rampant SA is explicit discussion of the sensitivity of NPV and B/C ratios to changes in - assumptions - figures - calculation methods highlight all parts of an analysis that may be controversial or uncertain provide scenarios based on range of those figures it should be automatic in any good CBA Slide132:  Total Economic Value What does environmental valuation mean? Valuation means monetary valuation WTP or WTA  preferences economic value measurements help to identify the social optimum: - ex ante, i.e. before deciding on environmental regulation - ex post, i.e. after a regulation has been imposed demand curves: Marshallian vs. Hicksian exact measures: compensating vs. equivalent Slide133:  Total Economic Value Slide134:  Total Economic Value A taxonomy of components Slide135:  Total Economic Value TEV and Decision-Making Damage and benefit are obverse sides of the same concept Cost-benefit analysis: - proceed with the development: (BD - CD - BP) > 0 - do not develop : (BD - CD - BP) < 0 TEV measures BP Slide136:  Total Economic Value Evaluation Techniques Indirect: - change in the vector of price: HPM - change in the vector of quantities: TCM Direct: - hypotetical: CVM - experimental weak complementarity condition Slide137:  Evaluation techniques Hedonic price method (HPM) look for a market in which private goods (e.g. real estate) or factors of production (e.g. labour), that are linked to the environmental good through a complementarity relationship, are bought and sold the good is fully described by its attributes, which influence the price of the good example: real estate property Slide138:  Evaluation techniques Hedonic price method: PP = f (PROP, NHOOD, ACCESS, ENV) implicit price for the one unit of the environmental characteristic:  PP/ ENV marginal WTP Slide139:  Evaluation techniques Travel cost method (TCM) whenever the consumption of an environmental good involves some travel costs visitors to a given natural area enjoy an amount of gross benefits at least equal to the costs they incur knowing travel costs, it is possible to infer the use value of the natural area example: outdoor recreation Slide140:  Evaluation techniques Travel cost method: two step procedure: I) Kj=ixij/Aj= ifi(TCij, wij) II) demand for OR: x(P)=ijAjfi(TCij+P, wij) use value of OR: V=ijAj 0P* fi(TCij+P, wij)dP where P* is the reservation price, i.e. fi(TCij+P*, wij)=0 Slide141:  Evaluation techniques Contingent valuation method (CVM) use survey questions to elicit WTP for provision of an environmental good hypothetical market: - description of the good - hypothetical circumstances (level of provision, payment vehicle, available substitutes, etc.) - questions to elicit WTP also respondent’s characteristics  benefit transfer example: any environmental good Slide142:  Evaluation techniques CVM formats: open-ended: iterative bidding game payment card close-ended, single bounded close-ended, double bounded Slide143:  Evaluation techniques CVM formats: open-ended: iterative bidding game payment card close-ended, single bounded close-ended, double bounded Slide144:  Evaluation techniques CVM formats: open-ended: iterative bidding game payment card close-ended, single bounded close-ended, double bounded Slide145:  Evaluation techniques CVM issues Reliability: extent to which the variance of an estimate, such as mean WTP, is due to random sources  survey design Validity: extent to which an instrument measures the concept under investigation, i.e. presence of systematic errors (bias) - strategic bias  incentive compatibility - hypothetical bias  scenario - design bias  ordering & wording; focus groups/pre-test Slide146:  Evaluation techniques Conclusions Indirect: only if weak complementarity  only use values Direct: all components of TEV  CVM more versatile tool How important is to estimate single TEV components? Operationally we focus on the TEV of a resource, not on its components

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