Environmental Economics Vijaya Raj Sharma, Ph.D.

LECTURE NOTES ON PART I: BASIC CONCEPTS AND THEORY

These notes are not edited. They also do not necessarily cover everything that would be discussed in the class. Students are responsible for any additional materials discussed in the class. These notes frequently refer to exhibits and tables in the textbook - Environmental Economics, An Introduction by Barry C. Field, Second Edition, Irwin/McGraw Hill, 1997.

I. INTRODUCTION (Chapters 1 and 2)

Environmental Economics
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Application of principles of economics to study use of environmental resources Distinguish between environmental resources and natural resources Environmental resources o indivisible. o Examples: ozone layer, ecosystem, air quality. o not consumed directly, only their services are consumed o focus on optimal quality of a resource o this course is about these resources Natural resources o divisible into smaller units. o Examples: barrels of oil, tonnes of fish, cubic feet of wood o consumed directly o need labor, capital, and/or energy inputs to utilize them o focus on optimal quantity of extraction of a resource o such resources are a subject matter of Natural Resource Economics

Scarcity of Resources
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All fields of economics, including environmental economics, deal with issues arising out of scarcity of resources Households, firms, societies, countries, and the entire World face scarcity of resources Societies face scarcity of environmental resources also o Example: air resources  need clean air to breathe, remain healthy, and survive  need air to discharge emissions of numerous vehicles and factories  conflicting uses of air resources force societies to determine how clean thry want their air to be

Social Choice between Market Goods and Environmental Quality

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Tradeoff between market goods and environmental quality Production possibility frontier of two goods: market goods and environmental quality The more the production of market goods, the lower the environmental quality, given a state of technical knowhow Values placed by a society on environmental quality and on market goods determine the choice of the society where to locate in the PPF Value of environmental quality vis-a-vis market goods may differ among societies according to educational level, income, and information. A short-run choice can affect long-run choices between environmental quality and market goods o Excessive emphasis to market goods in the short run may damage the assimilative capacity of the environment and thus future productive capability of an economy (this shifts the PPF inwards).

Economics Approach
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Two principal characteristics of "economics approach" o Rationality o Anthropocentricity Rationality o Assumes that when a decision maker faces choice among alternatives, he or she compares benefits and costs of each alternative and chooses the alternative that yields the largest net benefits (benefits net of costs) o Example 1: Should you fly or rent and drive a car to Chicago?  Flying costs more than renting and driving, but air travel is comfortable and saves travel time.  If the value of time saving and comfort exceeds the additional cost of flying, you will fly. Else, you will rent a car and drive. o Example 2: How many hours a week to allocate to study of environmental economics?

For each additional hour devoted to economics, you compare the possible gain in grade in economics with the possible loss in grade in other courses (because fewer hours available for other courses).  You will choose the allocation that maximizes total grade (GPA). Anthropocentricity o Economics approach is completely human-centered. o Evaluate environmental issues based on value of resources to people. o Example 1: should we preserve an animal species?  A species is worth saving only if benefits of saving the species to human beings at least exceed the costs of saving the species.  Contrast this with the Principle of Minimum Interference expounded by ecologists  A species should be preserved regardless of the cost and importance of the species to the people. o Example 2: should we allow mineral extraction in the Yellowstone National Park?  Mining activities can destroy natural features of this Park  Any mineral has no value apart from the purposes to which people intend to put it. The same is true of the services of a national park that mining would destroy.  The issue is to compare benefits of mining with its costs, including the loss of benefits of the services of the Park. Do you agree with the following statement? o In economics, someone who privately owns a forest but will not allow any trees to be cut for lumber despite offers would not be considered to be using the resource efficiently. o Invite discussion  The statement is wrong because economics compares benefits of letting trees stand with its costs (forgoing the revenue from sales of lumber). If benefits exceed costs, it is very well efficient to let trees stand.  However, the problem is that many services of standing trees (e.g. ecological benefits) cannot be marketed, and hence the forest owner does not earn revenue from nonmarket benefits of standing trees. On the other hand, the forest owner can easily sell lumber by cutting trees. Therefore, it is very well possible that the owner finds cutting trees more advantageous than letting them stand.  If nonmarket benefits are indeed greater than the potential revenue from sales of lumber, economics would consider this an example of market failure to allocate resources efficiently. It is therefore important that nonmarket benefits of standing trees be estimated. Do you agree with the following statement? o Value of life is a hard to determine controversial estimate. What economists do is placing a monetary value on a life lost as a result of emissions, pollution, etc. How could you put a value on the loss of a child as a result of lead contaminated drinking water?


Invite discussion  A couple of issues here  Mostly we seek to value a statistical life, i.e., value of a life saved (the saved life could be yours or others - a random happening). For example, how much are you willing to pay for reducing highway speed limit from 75 mph to 55 mph, if it reduces probability of highway deaths from 7 to 6 in 100,000? Obviously, the value you put on a statistical life is likely to be far different from the amount you may be willing to pay to save your life from a criminal who is pointing a gun on your head.  There are people who prefer 75 mph to 55 mph speed limit, and obviously they are valuing risk to their life less than the perceived benefits of the higher speed limit. In many occasions, people consciously and subconsciously are putting values on risk to life (e.g. mountain climbers, labors choosing to work in risky jobs for higher wages). Economists simply try to estimate what is the value placed by these people on risk to life.

Private and Social Opportunity Costs

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There are two types of costs - private costs and social costs - depending on who is evaluating costs, a private individual or the society. If an individual or a firm or an institution pays money for something (e.g., labor, materials, taxes, etc.), the transaction enters into its book of accounts as a cost. However, a social planner may or may not consider the transaction as a cost or may consider it a cost after some modification. Consider costs of baking breads from the perspective of a baker and from the perspective of a social planner (who is determining the optimal quantity of bread for the society). o The cost of flour ($0.30 a pound) purchased from a competitive flour market is considered a cost by both the baker and the social planner. o A sales tax of $0.05 on each pound of bread sold is a cost to the baker, but not a cost for the social planner. For every $0.30 paid, the baker gets a pound of flour in exchange. But for a tax of $0.05, the baker gets no good or service in exchange. Tax is simply a payment obligated by law and, therefore, a transfer from the baker to the taxpayers. o Payment of the Federally mandated minimum wage of $5.15 an hour to labor is a cost to the baker. Suppose the baker could hire a labor at a competitive wage rate of $4.50 an hour if this minimum wage was not mandatory. Then the social planner would consider $4.50 as the true labor cost, instead of the Federally mandated wage rate. Wages and prices in a competitive market reflect the true values of goods and services. Government interventions generally distort the competitive values of goods and services. o The part time voluntary (unpaid) help of the spouse of the baker would not appear as a cost in the book of accounts of the bakery. But the social planner would include her services as a cost (probably at a rate of $4.50 an hour).

The baker uses a diesel-fired oven to bake breads, which causes air pollution and is likely to create some health damages to neighbors. In the absence of regulations against pollution, health costs of neighbors do not appear in the book of accounts of the bakery. But, the social planner includes it as a cost. The above examples illustrate possible divergences between private costs and social costs. Private costs are also called monetary costs or accounting costs, and social costs are also called economic costs. Economic costs represent the real and full value of resources used. Let us consider costs of driving a car. Private costs consist of fuel, oil, maintenance, and depreciation expenses on the car and time expenses of the driver. Social costs include, besides the above private costs, costs of congestion and pollution created by the car. In environmental economics, we always evaluate environmental projects or issues from the perspective of the society. Therefore, we consider social benefits and social costs, instead of private benefits and private costs.
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Marginal Cost versus Average Cost

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Marginal cost is the cost of one additional unit, whereas average cost is the total cost averaged over the number of units produced. Let us clarify this with an example. Example 1: DIAMOND SELLER IN A COMPETITIVE MARKET

Quantity Price, $ MC, $ Net Marginal Total Profit, $ Sold, carat Profit, $ 15144 25237 35329 4 5 4 1 10 5 5 5 0 10 6 5 6 -1 9 7 5 7 -2 7 8 5 8 -3 4 9 5 9 -4 0
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What is the average cost of producing 5 carats? ($1+$2+$3+$4+$5)/5 = $3 per carat. Marginal cost of the 5th carat is $5 per carat.

The average cost of producing 7 carats is ($1+$2+$3+$4+$5+$6+7)/7 = $4 per carat. Marginal cost of the 7th carat is $7 per carat.

Efficiency and Cost Effectiveness

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According to the rationality assumption, a decision maker compares alternatives for benefits and costs and chooses the alternative that is associated with the largest net benefit. In environmental economics, the emphasis is on maximization of collective net benefits to the society. Maximization of collective net benefits to the society is called economic efficiency. Let us now establish a rule of achieving efficiency (MB=MC rule), using two examples. Note that an individual decision maker also attempts to maximize total net benefits to the individual, by equalizing private MB to private MC. On the other hand, a social planner attempts to maximize total net benefits to the society, by equalizing social MB to social MC. The outcomes of the individual's evaluation and the social planner's evaluation may be the same, or they may differ. Whether the outcomes differ depends on whether there is divergence between social MB and private MB and also between social MC and private MC differ. Example 1: Costs and Benefits of Diamond Production

Quantity Price, or MC, $ Net Marginal Total Net Sold, carat MB, $ Benefit, $ Benefit, $ 15144 25237 35329 4 5 4 1 10 5 5 5 0 10 6 5 6 -1 9 7 5 7 -2 7 8 5 8 -3 4 9 5 9 -4 0 How many carats should be extracted? Either 4 or 5 carats. Up to 4 carats, MB>MC , so the seller should extract more. Above 5 carats, MB < MC, so the seller should extract less. Ideally, the seller should extract 5 carats where MB = MC to maximize total net benefit.
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Example 2: A CRAZY MONEY EXCHANGER

Exchange Get MB MC Net Total Benefit Net Benefit First $1 $1.60 $1.60 $1 $0.60 $0.60 Second $1 $1.50 $1.50 $1 $0.50 $1.10 Third $1 $1.40 $1.40 $1 $0.40 $1.50 Fourth $1 $1.30 $1.30 $1 $0.30 $1.80 Exchange $4, Get $5.80 Average for $1, Get $1.45 Fifth $1 $1.20 $1.20 $1 $0.20 $2.00 Sixth $1 $1.10 $1.10 $1 $0.10 $2.10 Seventh $1 $1.00 $1.00 $1 $0.00 $2.10 Eighth $1 $0.75 $0.75 $1 -$0.25 $1.85 Exchange $8, Get $9.85 Average for $1, Get $1.23 Ninth $1 $0.65 $0.65 $1 -$0.35 $1.50 Tenth $1 $0.50 $0.50 $1 -$0.50 $1.00 Exchange $10, Get $11.00 Average for $1, Get $1.10

How many dollars would you exchange? $10? Why not, for every $1, you receive average $1.10? You mean average benefit or average cost is not important for the decision? In total you gain $1 by exchanging $10?

How many dollars would you exchange? The answer should be: either $6 or $7. Because up to $6, for every $1, your MB > MC. For more than $7, MB < MC, you do not like this. Ideally, you want to exchange where MB=MC, i.e., $7. That maximizes total net benefits.

Cost effectiveness o Distinguish cost effectiveness from efficiency o Cost effectiveness - achieving a given target at the minimum possible cost o Suppose a city decides to reduce air pollution by 50%. A number of alternatives exist to achieve this target, like reducing auto emissions, reducing factory emissions, or a combination of the two. o Benefit of each alternative is the same, no matter which alternative is chosen (because each alternative cleans air by 50%). This allows us to focus on cost of reducing pollution only. o The objective then would be to choose the alternative that achieves the given target at the minimum cost possible. The Equimarginal Principle of Cost Effectiveness o To minimize the total cost of abating pollution by a given level, allocate abatement among multiple sources such that marginal costs of abatement are equalized. o Discuss an example to show the equimarginal principle: MCa =MCb=... across all plants. o Depending on the time available, discuss the textbook example (Figure 3.8, Page 58) of the minimum cost allocation of a given level of total output (say 100 units) among multiple plants to show the minimum cost allocation is achieved by equalizing marginal costs across plants.

Economic Incentives Work

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Since people compare benefits and costs of undertaking an action, public policies that change either benefits or costs or both are likely to influence the decision of individuals to undertake that action. Exhibit 1-1 of the textbook. o Exhibit 1-1 talks about reducing household wastes. It compares a monthly flat fee system with a pay-per-bag system of household waste disposal. Under the monthly flat fee system, every household pays the same fee, irrespective of the amount of waste generated by the household. The pay-per-bag system encourages recycling and composting and saves waste disposal cost. The system is more beneficial to poor households because they generate less wastes. The introduction of this system (an incentive to recycle) worked in Chester Township, NJ. The possible demerit of this system is illegal dumping of wastes. Exhibit 1-2 of the textbook o Exhibit 1-2 talks about reduction of auto emissions and traffic congestion. The suggested policy is "roadway pricing," i.e., charging drivers the full cost of use of roads. Costs drivers impose on the society are smog, congestion, and increased probability of accidents. Full pricing will offer incentives to drive less, and it will generate fund for developing mass transit. The possible demerits of this policy are social engineering, more taxes, and greater regulation. Exhibit 1-3 of the textbook

Exhibit 1-3 talks about the failure of the Mexican Clean-Air Law. The Law prohibited driving of cars on certain days according to their license numbers. The even-numbered cars were allowed on some days every week and the odd-numbered cars only on other days of the week. The objective was to reduce the number of cars driven on any day and thus to reduce auto emission in the Mexico City. The Law failed to achieve the objective because the regulation provided perverse incentives to households to purchase of more than one car, which increased the total number of cars and thus auto emissions.

Linkage Between Economy and Environment

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Draw a box diagram to show linkages between Nature and economy. Nature provides raw materials and energy to the economy. Economy uses the resources to produce goods which are then consumed. During both production and consumption processes, residuals are emitted to Nature. Environmental economics is the study of the flow of residuals (see the box diagram) and its impact in the natural world. According to the First Law of Thermodynamics (also known as the Law of conservation of matters), matters only change in shape, size, or phases, the total weight is conserved. What goes in must come out. Thus, the total weight of raw material and energy inputs to economy must be balanced by the total amount of residuals flowing to the environment.

Materials Balance Concept

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The "materials balance" concept tells us that there are only three ways of reducing residuals in the environment. o Reduce output  Reduction of output reduces amount of inputs; therefore, some people advocate "zero population growth." o Improve productivity of inputs  Improvement of technology or productivity leads to requirement of less inputs for the same amount of output. It may as well change the composition of outputs to reduce inputs

(for example: a change from manufacturing sector to information or service sector). o Increase recycling of residuals (refer to the box diagram)  Increased recycling of residuals also reduces the amount of virgin inputs. Land, water, and air are the three different environmental medium that receive residuals. Materials balance concept also tells us that emissions in one medium are reduced by increasing emissions in another media.

Few Terminologies
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Distinguish between ambient quality and environmental quality. o Ambient quality is the quality of surrounding air and water, whereas environmental quality includes visual and aesthetic quality of the environment. o Effect of emissions on ambient quality depends upon physical, chemical, biological, and meteorological processes of the natural system, which may change from day to day. o Besides depending on the different processes of the natural system, damages resulting from degradation of environmental quality also depend on human choices of where and how to live and on susceptibility of living and nonliving systems. Source would mean the location where emissions occur, such as a factory, an automobile, or a leaking landfill. o Some sources can easily be identified; for example, power plants as sources of SO2 emissions. Such sources are called point sources. o Sources that are difficult to identify are called nonpoint sources; examples are agriculture runoff polluting streams and rivers, urban storm water runoff, etc. o When emissions from two sources mix up and cannot be separated, design and implementation of environmental policy may be problematic. Assigning reduction in emissions among sources would be difficult. Depending on whether a pollutant accumulates over time, it is categorized as a cumulative or non-cumulative pollutant. o For example, noise is a non-cumulative pollution. o Nondegradable wastes, such as radioactive wastes and plastics, are cumulative pollutants; they may bring inter-temporal problems. Noise is a local pollution, but acid rain is a regional pollution, whereas greenhouse effect is a global pollution. Emissions from power plants are continuous, but oil spills and Chernobyl nuclear disaster are episodic emissions. Certain environmental damages are not related to emissions, e.g. logging or strip mining, the conversion of land to housing or commercial purposes.

II. REVIEW OF MICROECONOMIC CONCEPTS (Chapters 3 and 4)

Demand, or Marginal Willingness to Pay, Curve

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The higher the price, the lower the quantity demanded. Draw a downwardsloping demand curve to show this negative relationship. Demand curve is also a representation of marginal willingness to pay. It is also a marginal benefit curve. Implicit in the demand curve is the law of decreasing marginal returns. The more apples you eat, the less tastier is the next apple. Marginal benefit from a good decrease with increasing consumption of the good. Therefore, people are willing to pay larger quantities only at lower prices. The value you place on a good depends on how much you have already consumed. Height of the d-curve measures the marginal willingness to pay. Area under the d-curve measures the total willingness to pay for a given quantity. Area also measures the benefits (of, say, improvement in environmental quality). Different persons may have different demand curves, reflecting different values placed by them on the same good, either because of different preferences or income levels. A person's demand may change over time with changes in knowledge (experience or information) about the good or with changes in income. The same individual can place more value on the same good when income increases. Demand for normal goods increases with income, and environmental assets are generally considered normal goods. Higher income people are likely to have higher d-curve for environmental quality. o An implication is that the same improvement in environmental quality is tagged a lower value if implemented in an area inhabited by poor, compared to the value when implemented in an area inhabited by rich. o This difference in value arises from the lower ability to pay of poor people. Market demand (demand of all individuals in a market aggregated together) is the horizontal summation of individual demands. For each price add quantity demanded of all consumers to obtain the market demand. Show the addition graphically.

Supply, or Marginal Cost, Curve

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The higher the price, the greater the quantity supplied. Draw an upwardsloping supply curve.

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The supply curve is also a representation of marginal cost of production. For a producer to supply a given quantity, the producer must be offered a price at least equal to the marginal cost at that level of quantity. o Note that marginal cost includes a normal return on equity capital (a return that could have been earned if invested elsewhere; this return is considered a part of profit by accountants). Implicit in the supply curve is the law of increasing marginal costs, i.e., marginal cost increases as more and more of a good is produced. o Increase in MC with increase in production is a general case, but there are cases of decreasing MC (for at least up to a certain level of production, primarily due to economy of scale). In some cases, MC may remain constant with production. o Consider supply of clean water as an example. The marginal cost of supplying water depends on degree of cleanliness sought. The cleaner the water supplied, the greater the marginal cost of supply. Cleaning costs increase progressively. Water can be easily cleaned of solid residues and suspended particles by filtering it through a filter or strain (a physical process). If further cleanliness is desired to get rid of dissolved substances in water, water may have to be boiled or distilled (a relatively more expensive procedure). If still more cleanliness is sought to get rid of chemicals in the water, it may need still more expensive chemical processes. Height of the supply curve is a measure of marginal cost (the opportunity cost of production). Improvement in technology lowers marginal cost, or shifts the s-curve to the right. Area of the supply curve is the total cost of supply. Firms may differ in their marginal costs (s-curves) because of different technologies they use. Example: new and old firms. Accordingly, the total cost of providing the same improvement in environmental quality may be different for different firms. The cost of a firm may also go down with improvement in technology of the firm. Market supply curve is the horizontal summation of firms' supply curves (just as in case of market demand).

Competitive Market Generally Achieves Economic Efficiency

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Competitive market generally achieves economic efficiency. When demand curve measures both the private MB and the social MB and when supply curve measures both the private MC and social MC, market equilibrium coincides with the efficient allocation. Discuss graphically.

Issue of Equity
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Economic efficiency guarantees maximum possible net benefits to the society.

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But, economic efficiency does not guarantee equitable distribution of net benefits among members of the society. In a market system, one who has the ability to pay gets most of the goods and services and, therefore, gets most of net benefits available to the society. In other words, market allocation is generally efficient, but not necessarily equitable. This is the reason, many times governments interfere in a market place through price floors and price ceilings to affect distribution of market outputs. But in the process, the government intervention makes the market outcome inefficient. That is the society is now left with a lower amount of net benefits (because net benefit is not maximized). Efficiency guarantees the largest possible pie, but poor are likely to get a smaller share of the pie. On the other hand, government intervention in market for the purpose of increasing the share of poor reduces the size of the pie. Equity is a normative issue.

Performance of Market in the Presence of Negative Environmental Externalities

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A competitive market fails to achieve economic efficiency in certain cases. There are two such cases of interest in environmental economics. o Production of goods associated with environmental externalities o Production of public goods (many environmental services are public goods) Firms in their production decision consider only private costs and ignore external costs (those costs that are not borne by the firm but are true costs to the society). Market S-curve only represents private MC, whereas the social MC would be higher because it includes external costs. Draw a figure to show this. To the society, costs are higher and therefore fewer amount of such goods should be produced. Market output exceeds the efficient level of output. This presents a rational for the government to intervene to correct the market failure to produce efficient quantity. o We will discuss many types of government interventions related to pollution (a negative externality) control. o One such intervention can be a pollution tax. Let us consider an example of open-access externalities presented in the textbook. o Four similar firms are situated on a lake (an open-access resource). o Each firm uses water of the lake as an input to production and discharges emissions back into the lake. o Treatment costs of each firm depend on the ambient quality of water in the lake. o Let the treatment costs be $40,000 per year for each firm. o A new firm is contemplating to begin operations on the lake. o With the new firm, treatment costs of each firm would go up to $60,000 per year. o What is the cost of operating a new firm on the lake?

The new firm adds $60,000 of treatment costs to its other costs to determine its operating cost. It will ignore the fact that each of the other four firms will now have to spend $60,000 a year on treatment, instead of the current expenditure of $40,000 a year.  But a social planner includes the increase in treatment costs of existing firms, which amounts to $80,000 a year. $80,000 is the external cost imposed by a new firm on existing firms. Since market outcome would not be efficient, the government may intervene in this case. A possible method may be to impose a tax of $80,000 a year on the new firm. This tax internalizes the external cost.


Public Goods
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A public good, if made available to one person, automatically becomes available to other persons. For example, national defense, radio signal, clean air, clean rivers, ecological benefits of forests, etc. You can be excluded from consuming a hamburger if you are not willing to pay for hamburger. But, a nonpayer cannot be excluded from consuming a public good. Since no one can be excluded from consuming a public good, there is an incentive to free ride (consume without making full payment, or making payment below the level of benefits). Very few people pay the full price of a public good. The amount of payments (contributions) received to supply a public good in a market place - therefore a demand curve estimated from such contributions understates the true benefits of the public good, because of free riding. The true social MB is higher than what such a market-revealed demand curve shows. Market is therefore likely to supply less than efficient quantity of public goods. Show graphically. Market demand of a public good is the vertical summation of individual demands (unlike private goods we discussed earlier). For each quantity of public good, add prices or marginal willingness to pay of all individuals to obtain the market demand, or true marginal willingness to pay of the society. It is very likely that a private entrepreneur is unwilling to supply public goods because the entrepreneur cannot exclude nonpayers from consuming the goods. Therefore, public goods are provided by either the government or activists nonprofit organizations. Whenever an activist organization supply environmental goods of public nature (e.g. protecting forests), their effectiveness is dependent on contributions they can raise for the cause. You can expect that the amount of contributions would be lower than the true value of such environmental goods, because of free riding.

Possibility of Government Failure

Implicit in a request to government to formulate, implement, and monitor environmental policies is the assumption that public officials pursue public interest. One may, however, question this assumption. The assumption that public officials pursue public interest while making public policies contravenes our more general assumption that economic agents are self-centered. o Public officials while making a decision in a market place weigh personal benefits and personal costs associated with an activity. o How do we then expect that the same individual, in his or her capacity as a public official, essentially ignores personal benefits and personal costs and focuses only on public interest while formulating or implementing public policies? o It is possible that personal interests of a public official conflict with public interest while formulating a public policy. Public interest requires appropriate control of pollution, but polluting firms want least control and are willing to contribute a large amount of money for the forthcoming election campaign of the politicians involved in the issue of pollution control policies. Is campaign contribution likely to affect pollution control policy? Perhaps, yes. o Lobbyists, politicians, bureaucrats, and voters are engaged in the process of public policy formulation and each of these may be influenced by their private interests in this process. There are some systematic tendencies and incentives within legislatures and enforcement agencies that work against the attainment of efficient and equitable public policy. o Rational Voter Ignorance  Voters vote for electing politicians and also vote at times on issues put to referendum. Mostly voters are uninformed; consequently, they either do not vote or make uninformed choices during voting.  A voter finds that the cost of being informed is substantial whereas the benefit of being informed for voting is generally very small.  Consider from the perspective of a voter, what is the probability that the person or the issue preferred by the voter wins in an election or referendum just because of his or her vote? This probability is almost negligible. In other words, the benefit of being informed and voting is very small. On the other hand, the voter needs to spend substantial amount of time and perhaps some money too to become informed.  Since cost of informed voting far exceeds benefit, voters generally make a rational choice to remain ignorant. This phenomenon is called "rational voter ignorance." This can lead to many economically sensible issues losing in referendum. o Short-sightedness Effect  A politician is generally concerned with his or her electability in the next election. To improve electability, the politician is eager to show before the next election at least some policy achievements that are positive or beneficial to his or her constituents. The pursuit of personal interest of improving

electability for the next election makes politicians often short sighted. In their legislative agenda, they tend to favor projects that generate immediate benefits even at the expense of large future costs. Special Interest Issue  Certain issues are of interest to special interest groups. A limited number of people will benefit from such issues. On the other hand, costs associated with these issues are often shared among a large number of people.  An example is the proposed financing of Broncos' stadium from sales tax collected in six counties of Colorado.  The Broncos franchise and people associated with football (owners, players, coaches, sportscasters, etc.) make up the special interest group who will benefit from sales tax financing of the proposed stadium.  Costs, however, are shared by taxpayers of the six counties. To each individual taxpayer the cost would be minuscule.  Taxpayers (who are also voters) tend to ignore the cost because it is minuscule. Most probably they also choose to remain uninformed on economic desirability of the financial proposal (rational voter ignorance effect). So, taxpayers or voters care less on this issue. For this reason, politicians too do not see a threat of voters' backlash if they support the tax financing proposal - a special interest issue.  On the other hand, the group which is likely to benefit would lobby and contribute to campaign funds of politicians.  Therefore, politicians tend to give precedence to special interest issues in the legislative process, although it may be a bad economics. Regulators often become captive of the regulated.  Public officials depend on those regulated (polluters) for information on cost of abating pollution.  Polluters may have incentive to mislead or confuse officials to avoid stiffer regulations.  Polluters may attempt to convince public officials (and even coerce or threaten them, depending upon how strong they are politically) that high pollution taxes or stiff regulation would force the polluting sources to close operations, rendering many workers jobless.  Public officials often do not dare political risks and they succumb to polluters' political pressure while setting emission standards and while sanctioning violators of existing regulations. The above problems should, at least, convince you that government intervention is not necessarily the best answer always  The government can as well fail in achieving efficiency.

Before proposing government intervention, you should pause and think about alternative market-oriented approaches to solve environmental problems.

III. A SIMPLE MODEL OF POLLUTION CONTROL (Chapter 5)

Marginal Damage Function

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Pollution causes many types of damages. The benefit of pollution control is reduced damages. Let us define marginal damage. Marginal damage is the additional damage caused by an additional unit of emission. o Example:  If total damages increase from $30,000 to $35,000 when emissions increase from 10 tons per week to 12 tons per week, marginal damage is $2,500 per ton. [($35,000-$30,000)/(12 tons-10 tons)]=$2,500 per ton. Marginal damage function is a relationship between quantity of emissions and the damage caused by it. Draw an upward-sloping marginal damage curve. The curve assumes that marginal damage increases with increasing emissions. There is a threshold below which marginal damage is zero. The area below the function measures total damage. Marginal damage is a time-specific function; it may shift with time because of changes in natural environment. Let us focus marginal damage from a non-cumulative pollutant (a pollutant which does not accumulate over time). The function is a population-specific function; it may shift with an increase in the number of people exposed to the pollutant.

Marginal Abatement Cost Function

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This function denotes the additional cost of achieving a one more unit decrease in emission level. It is sloping upward to the left. Draw a marginal abatement cost curve. The higher the emission reduction, the greater the marginal abatement cost. At its right end, the curve starts from the maximum level of emissions with no abatement efforts, i.e., from the uncontrolled level of emissions. This function reflects the minimum costs of achieving different levels of emission reduction. In other words, pollution abatement is being carried out in a cost-effective manner. Note that there is always an upper limit on abatement costs, which is the cost of stopping the operations of the polluting plant (zero emission). Area below the curve measures total abatement costs of achieving a reduction in emissions.

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Different sources may have different MAC functions because of different technology of operation. For the same source, the function may shift with time periods because of improvement in technology of pollution control. Aggregate marginal abatement function of the industry is the horizontal summation of the MACs of individual firms.

Efficient Level of Emission

y y

Let us assume that MD and MAC have been evaluated from the perspective of society. MD can be interpreted as the marginal benefit of reducing emissions (damages saved), and MAC is the marginal cost of reducing emissions. o That is, they are social marginal benefits and social marginal costs of reducing pollution. o The efficient level of emissions (the level that maximizes social net benefits) would then be where MD and MAC are equal (MAC=MD), the point of intersection of MAC and MD. Explain graphically. Alternatively, we can interpret both MD and MAC as costs. o No matter which level of emissions a society chooses, it has to incur costs on bringing down emissions to that level, and at that level, there are some damages remaining. At any level of emissions, therefore, the society incurs abatement costs plus costs of damages. o The society would be efficient if it chooses that level of emissions which is associated with minimum possible total of abatement costs and damages. o The area below the MAC is total abatement costs and the area below the MD is total damages. Show in the graph that only at the intersection of the two curves (MAC and MD), the sum of the two costs is minimum. Here, we ignored costs of enforcing emission standards. o Sources (polluters) may not follow the chosen emission standards voluntarily, and the society may have to incur costs on enforcement. If so, enforcement costs should be included while deciding the efficient level. o The more emissions polluters are asked to cut back, the more expensive it gets to them to cut back each additional unit of emissions. (This is because of the increasing MAC). o Therefore, polluters are more likely to cheat on cutbacks when the efficient level involves larger emission reductions. o Consequently, the cost of enforcing cutbacks is also likely to increase with requiring additional reductions of emissions. That is, marginal enforcement cost would be increasing with increasing abatement. o Thus, there are two types of cost: cost of abating and cost of enforcing the abatement target. In other words, the total marginal cost (TMC) of emission reduction is the sum of MAC and marginal enforcement cost (MEC). TMC=MAC+MEC. Show in a graph. o Note that the gap between the TMC and MAC increases progressively with additional reductions (the gap is increasing as move to the left

o o o

along the MAC), reflecting increase in MEC with increase in emission reductions. Efficient emission level is then given by the intersection of the TMC and the MD curve. This efficient level would be lower than the previous efficient level with no enforcement costs. This tells us that the society should be willing to accept lower emission reductions for the sake of enforceability of emission standards.

Cost-Effective Allocation of Emission Reduction Target

y

Once we have decided the target level of emission reduction, we can use the equimarginal principle to allocate emission reduction among different sources. We have already discussed this principle. We will equalize marginal abatement costs across sources for the given level of emission reduction.

Long-run sustainability
y y y y

Efficiency is maximization of net benefits, and cost effectiveness is the minimization of costs. Evaluation of efficiency, however, measures costs and benefits from the perspective of the present generation. This raises a concern whether benefits and costs to future generations are appropriately considered. Is the efficient level sustainable over generations? If all environmental resources were renewable and if all pollutants are noncumulative, sustainability would not be an issue. What is efficient today would always be efficient, assuming that preferences remain the same over generations. If pollutants are cumulative, damages are likely to increase over time. Time dimension of damages and abatement costs (i.e., long-run and short-run impacts) should be incorporated in MD and MAC. o But, how would you compare present effects with future effects? It is a human nature to value less or discount future effects. If it is the same amount of benefit, you prefer to receive the benefit sooner than later. If it is the same amount of cost, you prefer to pay the cost later than sooner. In other words, the damages that happen in future and the benefits that accrue to future generations are likely to carry relatively lower weight to present generation. o There may be a problem of lack of information on long run effects of a proposal. This would then hamper inclusion of such effects in MAC or MD. There may be a probability of serious or irreversible future consequences, like extinction of a species. It may be necessary to use caution if there is a possibility of irreversible long run effects.

Criteria for Evaluation of Policies (Chapter 9)

y

There are five criteria generally used to evaluate environmental policies. o Efficiency/cost effectiveness o Equity o Incentives for long run improvements o Enforceability o Moral considerations

Efficiency/cost effectiveness
y

We know these two terms. If there are alternative methods of abating pollution, cost effectiveness is to choose the method associated with the lowest MAC curve. Explain this graphically. Efficiency is to balance marginal abatement cost and marginal damages, i.e. to determine the point of intersection of the MAC curve and the MD curve. Show this in a graph. o This maximizes net benefits from emission reduction. o The MAC curve that is considered for efficiency should be the lowest possible curve, if there exist alternative methods of abating pollution. In other words, efficiency also implies cost effectiveness, but cost effectiveness does not necessarily imply efficiency.

Equity
y

y y

Equity evaluates the distribution of net benefits of environmental policies across different sections of the society, mostly the distribution between poor and rich, and many times also the distribution across ethnic groups. Relative weights of efficiency and equity in the evaluation of policies is a normative issue and often controversial. Some take the view that resources are scarce but environmental problems pervasive, so we should emphasize efficiency to achieve the greatest possible net benefits from the use of scarce resources. On the other extreme, some argue for even avoiding efficient policies if they are regressive in equity. Let us discuss the following table.

Program A B C D

Total Cost,$ 50 50 50 50

Total Benefits, $ 100 100 140 140

Net Benefits,$ 50 50 90 90

Net Benefits to Poor, $ 25 30 20 40

Net Benefits to Rich, $ 25 20 70 50

There would be differences of opinion in the class on which program is better. o Program B is better than Program A because it is equally efficient but relatively more progressive. However, some may consider A fairer because both income groups get the same amount of net benefits. o The choice between B and C is likely to be very controversial because C is more efficient but regressive. o Controversy between B and D should be milder because D is more efficient and also provides more net benefits to poor; however, net benefits to rich increase proportionately more than those to rich. o Obviously, the choice among programs can differ from person to person according to their individual notion of fairness. Some studies have raised doubts that toxic wastes in the U.S. have been generally dumped at sites mostly inhabited by poor and minorities. But, some other studies have refuted this. o A study commissioned by the Environmental Protection Agency (EPA) found no relationship between hazardous waste sites and income level of the community. The EPA has now suggested adding "population distribution analysis" to benefit-cost analysis of environmental projects.
o

Incentives for Long-Run Improvements

y

y y

Besides efficiency or cost effectiveness, it is preferable to have a policy that also provides incentives to the private sector to find new and innovative ways of reducing emission. This would help shift the MAC curve downward, reducing over time the cost of controlling emissions. Incentives become more effective, when policies are perceived stable and when the envirotech industry (the industry that develops and manufactures pollution control technologies) is competitive.

Enforceability
y y y

Policies have to be enforced to become effective, and enforcement requires energy and resources. Polluters may try to outwit or confound the pollution monitoring process. The general enforcement practice in the U.S. is: o self reporting of emissions by firms to the central pollution control authority o periodic audit of firms' records by the authority o periodic, but generally very infrequent, testing of emissions by the pollution control inspectors o sanctioning violators through penalties and even litigation, if necessary. Like any other government agency, the pollution control authority often faces budget constraint. o According to a study done by the Resources for Future, enforcement is expensive. See the table below.

Air Pollution Control Range: 40 to 8,140. Average 4,550 $155 $1,725

Water Pollution Control

Number of Agencies monitored by an agency

Range: 220 to 3,900. Average 1,770

Average costs per visit, with no emission test Average costs per visit, with emission test

$301 $955

According to a General Accounting Office study in 1993, about one-third of major water waste dischargers were not in compliance of regulations. o This highlights the need of enforcement. o Rather than having a dazzling but nonenforceable emission standard, it is better to have a modest standard that is enforceable. o While determining the efficient level of emissions, the marginal abatement cost should also include the marginal enforcement cost. Show this in a graph. o When enforcement is also considered, the efficient level would be lower, compared to the level with no enforcement.

Moral Considerations
y y

Proposed policies are not likely to gain support if they are not considered morally right. This may explain the general lack of emission subsidy programs that subsidize sources for reducing emissions. Instead, emission taxes may be preferred to control pollution. People perceive subsidy to polluters morally incorrect, a reward to culprits. Moral considerations are also important in international environmental problems. o There is no agreement on developed and developing countries' shares of costs of reducing greenhouse effect.

Chapter 26. Dirty Industries: A Challenge to Sustainability in Africa

Document(s) 25 of 29 Femi Olokesusi and Osita M. Ogbu

Introduction
Developed countries have been acclaimed for achieving a high level of socioeconomic growth and development, largely as a result of industrialization. This is precisely because industrialization has certain positive effects: it creates employm ent, wealth, and sources of foreign exchange; it develops infrastructure and endogenous technology; and it builds human capacity. In the same vein, it has certain negative effects (negative externalities): it pollutes; it causes ill health and disabilities ; it degrades the environment; and it induces natural disasters. The so-called dirty industries have become an object of concern, largely because they are perceived as critical in the infrastructure and industrial base for possible takeoff of development (Rostow 1960). However, the promotion of dirty industries by African nations and bilateral and multilateral agencies is questioned on a number of grounds. Dirty industries pose serious challenges to sustainability in Africa because the physical environment has very limited carrying capacity, as well as the debilitating effects of dirty industries on the biosphere and people. Equity and other moral issues are being raised by some; others argue that we should take the development path followed in the West and, lately, in Japan and South Korea, before we tackle the problem of industrial pollution.

The research problem

Literature on the subject can best be described as diverse and contradictory, although we observe some neutrality among some researchers. It is being argued that the higher environmentalprotection standards and costs of pollution abatement are pushing dirty industries and their entrepreneurs from the developed countries into the developing ones. To further buttress this argument, some environmentalists argue that free trade (part of the current liberalization policies) undermines environmental legislation, agreements, and protection in the developing countries. Closely related to this is the notion that developing nations have high assimilative capacity (that is, the natural capacity to absorb wastes and render them harmless). This school holds that developing countries should be content to have low or zero environmental protection standards because (1) the assimilative

capacity of their environment is high (they are at relatively low levels of industrialization); (2) they are poor (they need any type of industry); and (3) they have a low demand for environmental services (see Pearson 1987). A controversial memo on Africa, written by the World Bank's chief economist, echoed these viewpoints (Summers 1992). The m emo discussed low wages and the high economic costs of increased illness and death resulting from pollution, but it argued that Africa was still mostly unpolluted and, hence, ought to be able to serve as a hazardous-waste dump for the developed countries a nd as an appropriate location for dirty industries. Some African policy-makers and prodevelopment activists claim that the increasing concern about global environmental issues in developed countries is a ploy to distort international trade and retard the pace of developing countries' economic growth. Another argument (developed even by some Africans) is that being a poor continent, Africa needs all the help it can get, and pollution and environmental degradation are the price of development. Many African governments' ambivalence about environmental protection is, perhaps, an expression of this view (see Olokesusi 1987a, b, 1988; Mwangi 1993). Finally, there is the apparently orthodox economic argument that uniform international environmental regulations will shift dirty industries from countries where marginal pollution damages are high to those where such damages are low. If dirty industries relocate to Africa and other low-wage countries, they are merely doing so on the basis of traditional trade theory comparative advantage (see Balassa 1979; Duerkseen and Leonard 1980; Low 1992). Dirty industries are characterized largely by (1) high intensity of energy use per unit of output; (2) high intensity of toxic release per unit of output; (3) high cost of pollution abatement per unit of operating cost; (4) high level of environmental pollution; and (5) high socioeconomic costs (e.g., ill health) relative to the benefits (e.g., employment). Undoubtedly, dirty industries both create and contribute to global environmental problems like the greenhouse effect, ozone depletion, and acid rain. At the national level, land degradation, lake eutrophication, human illness, biotic destruction, and forced relocation are common problems. Forced relocation, in particular, i s common in the mining industry a major dirty industry in Africa. Table 1 shows that mining activities can create barriers in the path of sustainable development.

Table 1. Environmental effects of minerals extraction. Activity Excavation and ore removal Potential effects Destruction of plant and animal habitat, human settlement, and other surface features (surface mining) Land subsidence (underground mining) Increased erosion; silting of lakes and streams Waste generation (overburden) Acid drainage (if ore or overburden contains sulfur compounds) and metal contamination of lakes, rivers, streams, and groundwater Waste generation (tailings) Organic chemical contamination (tailings often contain residues of chemicals used in concentrators) Acid drainage (if ore contains sulfur compounds) and metal contamination of lakes, rivers, streams, and groundwater Air pollution (sulfur dioxide, arsenic, lead, cadmium, and other toxic substances) Waste generation (slag)

Ore concentration

Smelting and refining

Source: After Young (1992). The environmental damage resulting from the excavation of any mineral is a function of the ecological character of the mining site, the quantity of material moved, the depth of the deposit, the chemical composition of the ore and of the surrounding rocks a nd soils, and the nature of the processes used to extract the minerals from the ore. Moreover, the scale and type of damage vary dramatically with the type of mineral being mined (Young 1992). The energy consumed by industries and the volume and types of pollutants emitted are determined by the production technology and pollution-control technology in place. The choice of production technology is determined by the local availability of raw materials; energy sources; patterns of trade in semifinished produc ts; rawmaterials input (e.g., recycled aluminum waste instead of bauxite in aluminum production); host-country environmental legislation, enforcement, and related policies; entrepreneurial awareness; etc. Dirty industries are dirty partly as a result of the unclean technologies used in extraction, processing, and production. Such unclean technologies are inimical to sustainable development, as indicated by Figure 1.

To ascertain the truth of these viewpoints, various researchers carried out studies in Latin America, Asia, and the United States (see Walter 1975; Pearson 1976; Portier 1979; Leonard 1984; Agarwal et al. 1985; Lucas et al. 1992). Often, the contention is that dirty industries have deliberately relocated from Western countries, but others claim otherwise, stating that the cost of pollution control is 13% of industrial costs; hence, other factors should be held accountable for any relocation observed.

Objectives of the study

The general objective of the study was to ascertain the reality and extent of international migration of dirty industries to Africa and its implications for sustainable development in the continent. The specific objectives were the following:
y y y y y

definition of the concepts of dirty industries and sustainable development; examination of the linkages between sustainable industry and industrial development; examination of the rationale and evidence for dirty industries' migration to Africa; identification of issues and trade-offs (if any) associated with the dirty industries' migration; identification of the policy and sustainable development implications of dirty industries' migration and the trade -offs associated with it; and identification of a pertinent research agenda for more rigorous empirical studies.

Methodology
The data for this study were collected from secondary sources, that is, a review of current literature on the theme. The scope of analysis was dictated by the nature of the available data in general and of Africa, in particular.

General discussion
A number of empirical studies have been carried out on the relocation of dirty industries to developing countries. The studies differ in methodologies and data: some use regression analysis of investment data by location and industry; others use inferential analysis of environmental-control costs; a few rely on surveys of firms, surveys of business literature, case studies of firms and countries, or anecdotal evidence. Pearson (1976) used the costs of environmental control in 18 US industrial sectors to estimate the possible increase in exports that developing countries might expect to result from differences in

environmental-control costs. He reported that the range of likely increases in developing countries' exports was 129 257 million United States dollars (USD) annually from 1973 to 1977. For 1978 82, the annual increase was from 116 million USD to then-existing levels of developing countries' exports of manufactured products. These increases appear modest because of an 8% annual increase in the growth of manufacturers' exports occurring in the developing countries in 197382. In a study of the effect of environmental regulations and the location of US industries, Duerkseen and Leonard (1984) found that
y y

US foreign investment in pollution-intensive industries grew no more rapidly than in all other manufacturing; host countries that received the most overseas investment in pollution-prone chemicals, paper, metals, and petroleum refining were other industrial countries, not developing ones; and the share of US foreign direct investment in pollutionintensive industries that went to developing countries did not increase significantly, compared with that going to other industrial countries (see also Bartik 1988; Leonard 1988).

By the same token, Walter (1975) asserted that there was a trend to locate new capacities of the Japanese aluminum industry abroad because of environmental considerations, together with considerations of availability of raw materials and cheaper electric power in the host developing countries. In 1977, for example, Kawasaki Steel opened a sintering plant in Mindanao (the Philippines) to refine imported iron ore for its blast furnaces in Chiba, Japan. However, the Japanese Stop the Pollution Export Committee wanted the sintering plant closed. The plant has not closed, but the Mindanao people are still bitter about the acute socioeconomic and environmental impacts of the plant, according to Rocamora (1983). Portier (1979) observed that in the United States there was a trend to relocate industries producing asbestos, mercury, pesticides, and other environmentally hazardous substances to Mexico and Brazil. Leonard (1984) found evidence of some migration of hazardous industries (for example, asbestos, textiles, and building supplies) to Mexico from the United States. The author rationalized the migration and expansion on the basis of low wage rates, proximity to the US market, and Mexican government incentives for domestic processing of materials. UNEP (1981), on the other hand, has given examples illustrating that relocation is essentially due to environmental factors.

Castleman (1979, 1985), in an effort to determine the effect of the US Occupational Safety and Health Administration on industrial relocation to the developing countries, came to rather ambiguous conclusions. In the earlier study, Castleman found evidence of imminent relocation of industries with environmentally hazardous work places (e.g., with asbestos, arsenic, and mercury). In the later study, Castleman reported double standards in worker- and community-health protection provided by transnational corporations (TNCs) in developed and developing countries but claimed that this did not encourage relocation by US companies. However, work place abuses are more prevalent in Asia, Africa, and Latin America than in the United States. Following the disaster at Bhopal, India, a number of lawsuits were filed against Union Carbide in US courts in 1984 and 1985. Union Carbide, which owns 51% of the Bhopal plant, was accused of knowingly and wilfully disregarding public safety in the design and operation of the plant. According to Agarwal et al. (1985), Union Carbide's facility in the United States has more safeguards than the Indian plant. The problem of hazardous-waste management cannot be divorced from the dilemma about dirty industries that faces developing countries. For instance, the Mexican government, together with US authorities, developed the Maquiladora Programme in 1965 as a component of Mexico's border -industrialization program, which had the goals of generating employment and acting as a catalyst to industry. The Maquiladora Programme decree stipulated that any hazardous waste generated in processing activities must be shipped back to the country from which the raw materials came, although some recyclable wastes could remain. However, large quantities of untreated hazardous wastes were dumped in many locations inhabited by poor and vulnerable groups in Mexico. There is now a lucrative international trade in hazardous wastes, to the detriment of developing countries (Merk 1990; Shimmin 1990; Asante-Duah et al. 1992). A closely related issue is the rapid rate at which hazardous -waste recycling plants are now being established in developing countries, particularly lead recycling plants in Brazil, Taiwan, Mexico, India, China, South Korea, and South Africa. Debt-for-equity swaps enable US companies to buy very cheaply into Chilean operations and open up new, large-scale mines (Metal Bulletin, 1990). The use of incentives is also continuing to ensure developed countries' access (see Young 1992). Knodgen (1979) examined the influence of environmental regulations and pollution-control costs on industrial location and foreign investment from the former West Germany. The author

indicated that there is no explicit evidence that firms in the former West Germany relocated production to "pollution havens" in the developing countries. She argued that the cost advantage is narrowing because firms must now build to meet high standards expected in developing countries in the future. One of the major findings is that 90% of the firms surveyed claimed to use similar environmental-protection techniques in and outside the former West Germany to be internationally competitive. Lucas et al. (1992) examined how the structure of manufacturing varies across countries and time as a function of the toxic emissions of the component industries. The underlying assumption of the study was that industrial-pollution intensity is the effect of product (or industry) mix. The authors found, however, that industrialpollution intensity is also influenced by the processes used for each of the goods and the treatment of the waste that results from these processes. To this end, the author addressed three main lines of analysis: 1. Development and sectoral composition to compare patterns of pollution intensity in manufacturing with the level of economic development as measured by per capita income (the assumption is that pollution exhibits an inverse U -shaped relationship with capital income; that is, pollution is believed to, at first, rise faster than output at low levels of income and then rise more slowly than output above a critical income threshold); 2. Organization of Economic Co-operation and Development (OECD) environmental regulation and displacement to examine broad differences in trends across differing periods to determine whether production relocation of dirtier industries has been more rapid during occasions of enhanced OECD environmental regulation; and 3. Economic policies of developing countries and pollution intensity to ascertain whether periods of trade liberalization have led to more rapid growth in the pollution-intensive industries in the developing countries. Lucas et al. (1992) concluded that across countries, there does exist an inverse U-shaped relationship between gross domestic product (GDP) per capita and the total estimated toxic releases from manufacturing relative to GDP. That is, toxic releases per unit of production tend to fall in higher income cou ntries, although throughout the 1960s intensity remained constant, being independent of income. This decline was claimed to be a consequence of the declining share of GDP accounted for by industrial output, rather than a consequence of any shift toward a

less toxic mix of manufacturing industries. Growth in toxic intensity has been more rapid in the developing countries. The study gave evidence of relocation of dirty industries from the OECD member countries to developing nations. The authors concluded that fastgrowing, closed economies were very rapidly adopting toxic intensive industries in the 1970s and 1980s. On the other hand, fast-growing, open economies had an essentially toxic -neutral structural change in the 1970s and a strong shift toward a less -toxic structure in the 1980s. It is worth noting that, quantitatively, these effects were more important during the 1980s than the 1970s. Again, the strength of the openness effect in the 1980s was more than twice that in the 1970s. In another recent study, Low and Yeats (1992) used actual trade flows and a modification of Balassa's (1965, 1979) revealed comparative advantage (RCA) model to determine whether there was a locational pull of dirty industries toward developing countries and, if so, to assess its magnitude. The study measured a country's RCA in a specific industry by the share of that industry in the country's total exports relative to the industry's share in total world exports of manufactures. The authors examined how the composition of countries with RCA in dirty industries changed over the period 196588. The findings are interesting: 1. In 1988, the environmentally dirty products accounted for about 16% of world trade. 2. In the same year, industrial countries accounted for approximately 285 billion USD, or 75% of all shipments of these products, with almost 40% of world exports coming from the European Economic Community (EEC). The African countries exported about 12.8 billion USD of these goods, representing about 3% of world trade. Petroleum and nonferrous metals accounted for about 12.16 billion USD, or 95% of the African exports. 3. The environmentally dirty products' share of industrial countries' exports is falling, but the share observed for eastern Europe, Latin America, and west Asia is increasing. 4. Of the 25 largest exporters of environmentally dirty products in 1988, the only African country is South Africa (Table 2). For this country, the metals product group accou nt for 80.50% of the dirty goods. This is an indication of the prevalence of large-scale metalliferous mining and processing in South Africa. 5. Low and Yeats (1992) noted a disproportionately large increase in the average number of developing countries with RCAs of >1 in dirty industries and that this expansion occurred in almost all of the polluting sectors. The increase in

the number of developing countries with RCAs of >1 was about three times that of the developed countries. 6. Natural resource endowments seem to have a significant influence on RCAs, particularly in the nonferrous-metals sector: 33% of the dirty industries appeared to have a locational pull toward natural resources. In contrast, labour intensity was not found to be an important factor: only 15% of the sample goods (e.g., metal products) were manufactured by labour-intensive processes, and none counted as 10% more labour intensive than the US average for all manufacturing activity. The generally low cost of compliance with environmental regu lations (13% of total costs or turnover) has not caused large-scale migration of dirty industries to developing countries. Nonenvironmental factors, such as competitive strengths and weaknesses in labour, capital, technology, and natural -resource endowments, and other factors contribute to location decisions. Table 2. The twenty-five largest exporters of environmentally dirty goods in 1988. Share in total exports of environmentally dirty goods (%) 1988 exports of environmentally dirty goods Shar e in count ry expor ts (%) 15.8 10.5 23.8 14.6 23.5 20.2 8.1 14.1 13.8 33.0 52.3 29.0 24.3 Wor ld trad e shar e (%) 11. 9 7.4 6.6 5.7 5.4 5.3 4.9 4.5 4.2 4.0 2.6 2.2 Valu e (1 06 USD ) 45.6 28.5 25.2 22.0 20.8 20.3 18.9 17.3 16.0 15.3 10.0 8.3 7.9

Ferro us Nonferr Exportin metal ous g country s metals Germany , Fed. Rep. United States Canada France BelgiumLuxembo urg Netherla nds Japan 25.8 7.3 7.3 32.7 36.7 13.8 50.5 23.4 25.0 20.3 10.5 8.0 44.7 13.8 14.8 23.2 13.3 16.1 14.9 8.8 17.1 8.3 6.1 6.9 26.2 16.4

Refined petrole um 3.1 11.1 6.1 6.7 10.1 31.2 1.2 14.4 10.5 5.7 4.2 52.7 11.4

Met al mfg . 20. 4 15. 1 6.4 12. 7 9.8 9.6 20. 5 13. 8

Pap er mfg . 10. 2 9.4 27. 7 9.5 6.6 8.9 5.4 7.7 7.2 34. 1

United Kingdom Italy Sweden Finland Soviet Union Brazil Austria Spain Korea, Rep. of Taiwan, China Norway Australia Switzerla nd China, Peoples Rep. Rep. of South Africa Singapor e Venezuel a Saudi Arabia

27.6 28.7 48.0 12.9 1.7 7.4 12.9 17.9 31.6 3.2 5.5 0.4

12.5 9.5 5.8 7.4 42.8 48.3 21.0 17.3 48.9 3.7 17.1 0.6

0.8 18.5 6.5 2.3 7.8 5.6 1.0 14.4 1.2 73.7 72.6 95.1

25. 1 10. 4 2.6 0.5 3.2 16. 8 14. 5 24. 4 49. 3 4.4 4.4 27. 7 21. 8 1.4 6.4 0.9 0.7

56. 1 1.9 7.5 22. 4 5.6 3.9 2.7 15. 2 1.4 8.9 2.6 3.7 1.8 0.5 0.0

24.6 18.4 11.8 10.0 27.3 19.8 11.2 9.6 41.0 19.2 49.7 14.9

2.1 1.8 1.8 1.7 1.6 1.6 1.5 1.5 1.4 1.3 1.3 1.1 1.1

6.9 6.8 6.6 6.2 6.0 5.7 5.6 5.2 5.0 4.8 4.3 4.1

Source: Low et al. (1992).

Discussion of the African situation

In view of the significance of the mining industry in Africa, it is best to start our discussion of the African situation from there. Moreover, the share of mining in the GDP at constant-factor cost is high 60 317 and 57 865 USD in 1980 and 1990 but manufacturing accounted for 25 497 and 34 410 USD in the same years, respectively (ECA 1991). Many developed nations have been making strenuous efforts to ensure continued access to cheap mineral supplies through international trade and aid policies. To this end, most of the European governements and the Japanese government subsidize foreign mineral projects through loans with preferential interest rates, loan guarantees, and direct foreign investment.

The Bureau de recherches gologiques et minires, a Fre nch government agency, helps French companies with funding for exploration and development of overseas projects. Germany offers investment guarantees, minimum rate-of-return guarantees, and favourable loans for its companies' offshore mineral investments. These governments, along with the government of Japan, often align with the US government in supporting efforts by the World Bank, the International Monetary Fund, and International Development Agency to fund mineral development projects in developing nations, sometimes even with the explicit goal of having access to future mineral resources. Developing countries that have benefited from this strategy in Africa include Zambia, South Africa, Nigeria, Zaire, and Central African Republic. Despite the nationalization policies of the 1970s, most African mines are owned and operated in collaborations with foreign companies. The management is nearly always in the hands of the foreign company. The TNCs dominate the international marketing of Africa's minerals because of the need to integrate the production process with marketing operations. This raises the issues of equity, economic domination, loss of national decision -making power, and, especially, the extent of the refining done in the country and, thus, the value added. These issues, along with those of greater exploration and production in the face of declining demand for and prices of most African minerals in the world market, the environmental problems, local job losses, and weakened industrial linkages, hamp er sustainable development in Africa. Table 3 shows the employment characteristics of industries in tropical Africa. Essentially, the table shows that African dirty industries are labour intensive. The manufacturing value added per worker was highest for the glass industry in 1980, followed by nonferrous metals. In 1990, pottery and china topped the list, followed by rubber products. Although there was not much variation over the decade, there were diverse and irregular shifts among individual industries, with a significant increase in employment. Table 3. Tropical Africa: manufacturing employment (1970, 1980, 1990). Employment 1970 Food 176 1980 285 1990 355 MVA/workera 1980 91.3 1990 90.8

Beverages Tobacco Textiles Apparel Leather Footwear Wood and cork Furniture Paper Printing Industrial chemicals Other chemicals Petroleum refining Petroleum and coal products Rubber Plastics Pottery, china Glass Nonmetallic minerals Iron and steel Nonferrous metals Metal products Nonelectrical machinery Electrical machinery Transport equipment Professional and scientific goods Other Total

38 24 153 42 6 15 70 22 10 28 13 23 5 0.2 18 6 1 4 31 11 3 52 8 13 29 0.3 9 812

74 39 264 67 13 25 110 45 25 51 26 56 9 0.7 26 42 2 6 52 22 7 97 19 33 65 1.4 15 1476

94 33 285 126 18 31 67 35 35 51 30 71 14 1.1 20 29 2 8 55 36 6 93 16 31 59 2.4 20 1625

89.7 83.4 88.5 84.7 127 98.1 124 114.3 91 101.3 83 118.8 68.2 34.7 97.4 81.1 135.3 150.3 87.1 142.5 57.5 101.7 100.2 96.4 263.4 77.9 89.6 99.7

93.9 110.5 76.5 84.6 117.7 106.3 162.9 103.4 69.3 85.3 91.5 100.2 56.1 26.5 172.6 95.3 219.7 98.6 115.4 101.2 96.4 110.8 138.1 118.5 155.4 130.4 76.2 99.7

Source: UNIDO (1991). a manufacturing value added/worker index; 1970 = 100.

Critical issues and trade-offs

Issues Africa's transition to sustainable development is imperative. Sustainable development can only be achieved by the decisions and actions of each member nation, on the basis of its own interests, needs, and priorities, including its responsibilities to the r egional and wider international communities. A major challenge is to develop an acceptable and successful strategy for sustainable development. The transfer and development of technology are crucial aspects. The use of environmentally sound technologies, whether exogenously or

endogenously developed, can contribute significantly to productivity and the sustainability of resources through renewable -energy generation, pollution control, and waste reduction. The relationship between inputs and outputs and th e holistic impact of economic activity on the environment is not static but dynamic. Consequently, the question is whether the positive forces of substitution, technological innovation, and structural change can compensate for any deleterious effects of th e overall growth in scale. The process of industrialization should always take into account the true monetary value of the environment and its protection. Formulating an environmental policy on the basis of the costs to society of environmental damage res ts on the assumption that environmental conditions will worsen without pollution control. It is crucial to the determine the monetary costs of damage and protection. What factors influence the value individuals in different countries place on environmental protection? As shown by the memo written by the World Bank chief (Summers 1992), the perception of the assimilative capacity of the developing countries' environment raises some pertinent questions. How can developing countries be convinced beyond reason able doubt that the World Bank, its affiliates, and similar agencies have not been secretly encouraging the transfer of unclean technologies from developed countries through loans? If so, it would mean that these banks have been earning interest on loans a nd credits given for the transfer of environmentally unfriendly industrial technology. Available evidence suggests there is rapid environmental degradation in Africa, coupled with poverty and the unmet basic needs of the people. How will this development pattern create jobs and what type of jobs? Will these generally be blue- or white-collar jobs? Is there evidence to show that dirty industries generate more employment per unit cost of investment than "clean" industries? African governments are generally ambivalent about environmentalprotection issues, and this is closely related to the ease with which unclean technologies are imported into African countries. What factors are responsible for this ambivalence? Why are environmental policy instruments weak or poorly enforced? Are there enough local capabilities to establish environmental -protection standards based on locally determined norms, values, and acceptable pollution levels? Most African countries are undergoing structural adjustment and trade liberalization in various forms. To what extent will the drive

for export diversification put pressure on governments to neglect environmental protection issues and industrialize at all costs? Export-oriented industrialization in the absence of endogenous technology has made Africa dependent on foreign markets, capital, and technology. Would this process not merely be a closed loop? Would it not lead the region to incur more debts, deeper environmental degradation, greater poverty, and a more pervasive erosion of its sovereignty, democratic institutions, and policies? Will African industrial entrepreneurs, governments, donor agencies, and foreign technical partners respond by importing clean technologies and adapting existing technologies? The answers to these qu estions will help to decide whether the structural adjustment programs and trade liberalization have been helpful to sustainable development in the continent. The occupational-health and industrial-safety standards in TNC firms in host countries are generally lower than in TNC plants in their home countries, which is of particular importance in a poor region, where emergency and health-care facilities are poor and water and sanitation facilities can be at best described as rudimentary. Why do we encounter this divergence, and what can be done to ensuring better housekeeping and safety? The empirical work on the issue of dirty-industry relocation to Africa needs to be strengthened. Stricter environmental-protection instruments, including high-cost disposal, are creating a push effect in developed countries. On the other side, the desire of cash -poor African nations to import waste acts as the pull factor. This trade is an unwholesome one and raises the issues of double standards, equity (present and intergenerational), and weak (or nonexistent) monitoring and enforcement of international environmental laws. The national environmental-protection agencies are either unable or unwilling to enforce established instruments. The appropriateness of these instruments and the capabilities and staffing of the national environmental institutions are critical to sustaina ble development. Strategies that promote more environmentally sound technologies and discourage environmentally damaging ones must involve the appropriate combination of market instruments and public intervention at each stage in technology acquisition and adaptation and the industrialization process. The environmentally sound technologies (ESTs) are not discrete entities but a system that encompasses procedures, processes, products, and services, as well as equipment. This implies that to be sustainable, transfer of technologies to Africa must address human resource development and local capacity -building aspects of the technology options. The process of technology transfer and

development should be equitable for nations, gender, and social status, bearing in mind the linkages and interdependency of all in the context of sustainable development. How can African countries achieve a long-term partnership with suppliers and users of technology? This would be crucial for training, institutional linkages, and technology adaptation. The rate at which new technologies spread is largely determined by the pace of new investment. For example, retrofitting of existing facilities, the replacement of poorly performing equipment and machinery, and the addition of new equipment to the stock require initial investments in ESTs, which are often greater than those in existing polluting technologies. How can poor African countries secure the resources to acquire environmentally sound technologies or develop their own endogenous capacities? How can poor African countries best use technology and environmental -impact assessments (EIAs) in industrialization? The transition to sustainable development requires effective access to technological information, including technology asse ssments. Especially crucial is information on environmentally sound technologies and on environmental risks from technologies on the international market. Africa needs to build up a critical mass of research and development (R&D) based on adequate and appropriate information. R&D facilitates an anticipatory approach. Research activities and strategies to promote ESTs require a multidisciplinary approach and close collaboration across countries, firms, governments, research institutions, and nongovernmental organizations. How can Africa improve its policies and strategies for both R&D and technology assessments? How can external funding, R&D, ESTs, EIAs, technology transfer, technology choice, technology assessments, and environmental-protection instruments complement, supplement, and support host-country initiatives, actions, and priorities? To what extent can indigenous knowledge of the environment, industrial development, and pollution control be tapped by R&D and appropriately used? Trade-offs The relocation of dirty industries to Africa may contribute to an increase in some African countries' GNP, but the negative effects of the pollution and degradation on other sectors of the economy and on human productivity need to be examined carefully. Th ere could be a labour and income advantage for some heavily polluting industries, but these advantages would be tenable only in the short term. In the long term, the effects of this comparative advantage

rests largely on the opportunity costs of investing the resources in other sectors of the economy. Would greater employment have been created by alternative investments? The type of benefits accruing to society determines the trade-off between environment and income. Examples of such benefits are health and quality of life, esthetically pleasing landscapes, monetized benefits, and the conversion of monetized benefits to other income -generating activities. Under proper management, the income optimization and time horizon of benefits should be compatible with many environmental, conservation, and improvement projects, plans, and programs. The income-elastic nature of the willingness to pay to avoid environmental damage and ensure protection and the correlation of rising income with environmental quality explai n why the poor and rich perceive some environmental problems and their solutions differently. This again has to do with the type of technology involved. Although rural Africans might be willing to tackle erosion problems, they may not be too interested in industrial pollution unless it directly affected their livelihoods. Some pollution-control and resource-conserving technologies will be profitable to society and firms and others won't. Lack of profitability could be a result of distortions in the market prices of inputs. Corrective policies would reverse such trends, particularly in Africa, which largely depends on natural resources. Resource -conserving technologies should have greater priority. Furthermore, Africa has a lower level of capital, hence hig her opportunity costs. High priority may not be given to projects with a long-term horizon of benefit because priority is already given to satisfying basic needs. As a trade-off, there is likely to be greater interest in projects and technologies with monetized benefits. The African environment is a resource, as well as being a constraint on development; as a constraint, the level of poverty deepens. Hence, ceteris paribus, an attack on poverty should lead to environmental improvements and resource conserv ation. Creating employment is a priority in the quest to alleviate poverty. Creating employment with environment-enhancing projects and allied technologies should be a desirable trade -off. This concerns particularly labour-intensive technologies, although they may be less attractive investments than capital -intensive alternatives. Because human capital has to be improved to achieve sustainability, alleviation of poverty should be perceived as a social investment in the short-term consumption needs of the poor. It is equally a means of improving their own contribution to the accumulation of

capital in the future. With respect to income generation in the future, a trade-off is implicit. This is because the degree of poverty alleviation has to be significant enough to generate productivity, consumption, income, and welfare; otherwise, the opportunity costs will be negative. Finally, trade-offs among types of risk are often involved in dealing with waste. Deciding whether to incinerate waste or to bury it can make a difference in the degree and type of risk to which communities are exposed. Further work on the "best practicable" waste management system would be desirable.

Conclusions
Dirty industries are increasing in Africa and declining in some developed countries. Agencies from developed countries aggressively promote mining, a very dirty industry. We have been able to establish that dirty industries do generate a reasonable level of employment. However, we have not been able to establish that their expansion in Africa is due to nonexistent or weak environmental-protection standards and high pollution -abatement costs. If dirty industries are needed for Africa's development, then further empirical research should be done on the issues they raise. What follows is an overview of such research entry points.

Recommendations
1. Researchers should elaborate the concept of sustainability in the African context: define it and test it with operational hypotheses. 2. Researchers should study environmental considerations and issues in the context of industrial technology choice and transfer and options for overcoming identified shortcomings in the technologies and for sustaining their desirable characteristics. Such a study should include comparisons of technical agreements (across countries, time, and industrial groups) to determine if there has been a focus shift in legislation and economic instruments toward environmental considerations. 3. There is a need for multicountry studies of industrial structure. Such studies should compare dirty industries with clean industries and examine how they operate, use raw materials, and pollute; their environmental management policies, plans, and programs; their ownership structure; and their types of technology. What are the factors in their differences? The comparison studies should be broad enough to include costs

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of pollution abatement; incentives; pollution -control measures; and the patterns of water and energy consumption. There is an obvious need to study the nature of the employment generated by industries, including the gender and productivity of labour, within and between industrial sectors. Researchers should critically examine and compare existing environmental-protection instruments and institutions, with the aim of finding ways to strengthen them. Some of the issues would be the extent to which new risk-control initiatives undercut existing ones, whether this undercutting hinders existing control efforts or enhances bureaucratic resistance to new ones. There is the need to critically examine the issue of environment versus development to arrive at a more objective valuation of environmental resources and services. Such information is crucial in estimations of natural -resource carrying capacity, real GNP, project costbenefit analyses, and EIAs. Researchers might also study alternative scenarios. Should Africa be left undeveloped industrially so that its environment is protected? If it is industrialized, then at what pace should industrialization proceed? Should African nations move on the assumption of an inverted U-shaped curve for pollution and income or an inflection relationship? There is a need to determine whether substitute technologies or products, particularly environmentally benign, endogenous ones, are available or likely to be developed to use in place of products or technologies that presently produce significant pollution. A comparison of the substitutes and the existing ones should include identificatio n of hazards and assessment of risks.

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