EGEE2302: ENVIRONMENTAL ECONOMICS TUTORIAL 6 ASSESSING BENEFITS FOR ENVIRONMENTAL DECISION MAKING 1.

In response to acid rain damage to Chesapeake Bay, a collaborative federal and state program has been proposed. You have been hired to evaluate the benefits of the plan as part of a formal benefit-cost analysis. Use the Travel Cost Method (TCM) to accomplish this goal, based upon a $20 admission fee and the following pre- and post-policy recreational demand functions: Pre-policy: P = 72 0.04V0 Post-policy: P = 90 0.04V1, where V is number of visitors in thousands and P is the admission fee. 2. Contrast the averting expenditure method (AEM) with the travel cost method (TCM) and discuss the relative strengths and weaknesses of each. One of the strengths of the contingent valuation method (CVM) is its ability to capture existence value. How can the researcher take advantage of this, yet avoid some of the biases of such a survey-based approach? Suppose you are part of a research team evaluating a proposal to clean up a hazardous waste site. You are in charge of assessing the incremental benefits. Which method would you choose to derive the estimation? Explain briefly. Based on your selection, outline your research plan for this specific estimation problem. Be sure to identify the following in your outline: a general description of your model, the relevant market for your model, the primary variables of interest, the data requirements, and any potential bias in your results.

3.

4a.

b.

ASSESSING COSTS FOR ENVIRONMENTAL DECISION MAKING

1. Consider a policy proposal to impose more stringent controls on automobile tailpipe exhausts. Distinguish between the explicit and implicit costs of this proposal, and support your discussion with several specific examples of each. Of the two approaches to cost estimation, which in your view likely produces the most reliable estimates? Explain. Suppose the MSC of cleaning Puget Sound is modeled as MSC = 10 + 1.4A, where A is the percentage of phosphorus abated, and MSC is measured in millions of dollars. Find the incremental costs of a policy initiative that increases the phosphorus abatement level from its baseline of 30 percent to 45 percent. Graphically illustrate using the MSC function, labeling clearly where incremental costs are shown. Repeat part (b) using the TSC function directly. Assume you are responsible for assessing whether the air quality standard for carbon monoxide (CO) is set at the efficient level for some region. To accomplish this task, you have estimated the following marginal benefit and marginal cost functions for CO abatement: MSB = 20 0.25A MACmkt = 6 + 0.25A MCE = 2 + 0.1A, where A is the percentage of CO abatement, and MSB, MACmkt and MCE are measured in millions of dollars. a. b. c. Find the MSC of abatement function. Solve for the efficient level of abatement, and illustrate graphically. Show the importance of the MCE by determining the effect on the solution if these government costs were ignored. Support your answer algebraically and graphically.

2.

3.

a.

b.

c. 4.

TUTORIAL 7

AIR QUALITY 1. Suppose economists estimate the following cost and benefit functions associated with the 1990 CAAA: TSB= 75A 0.4A2 TSC= 25A +0.85A2 MSB = 75 0.8A MSC = 25 + 1.7A,

where A represents the percent of pollution abatement, and costs and benefits are measured in millions of dollars. a. Find the TSB and TSC associated with an abatement standard of 30. Based solely on the relative values of TSB and TSC, can you state definitively whether this abatement level is efficient? Explain. Find the efficient level of pollution abatement (AE). Briefly explain the significance of prevention of significant deterioration (PSD) areas to the setting of air quality standards. From an economic perspective, explain the paradox associated with setting standards in PSD areas versus nonattainment areas. Show how an inefficient result may arise using an MSB-MSC model. In the 1990 Clean Air Act Amendments, Congress and the EPA rely on the automobile industry to develop a cleaner automobile. At the same time, the government imposes a relatively minor federal tax on gasoline. Do you see any problem with the implicit signals the federal government is sending to American auto manufacturers and to American car drivers through these policies? Briefly discuss. Formulate a hypothetical economic policy to motivate automobile manufacturers to advance the technology of cleaner motor vehicles. New source bias may exist for mobile sources. Briefly discuss why this bias leads to a solution that is not cost-effective. What policies would you implement to eliminate this bias? In the United States, a buyer of a new electric car is eligible for a one-time federal income tax credit of up to $4,000. Show the effect of this tax credit graphically, assuming the $4,000 credit is a Pigouvian subsidy. Label carefully.

b. 2a. b.

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a.

b.

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5.

TUTORIAL 8 GLOBAL AIR QUALITY: POLICIES FOR OZONE DEPLETION AND CLIMATE CHANGE 1. To meet its commitments under the Montreal Protocol, the United States implemented certain market-based policy instruments, including an excise tax on ozone depleters. Consider the following market for CFC-12 before the excise tax is imposed, where P is price per pound. Demand: Q = 18.40 0.5P Supply: Q = 10.00 + 2.5P

Now assume that a 60 cent excise tax is used, which shifts the supply curve to Q = 8.50 + 2.5P. a. b. Find the equilibrium price before and after the tax is implemented. What do you conclude about who bears the primary burden of the tax buyers or sellers? Briefly explain the economic sense of this outcome in this particular context. Other than financial assistance, how might industrialized countries help developing countries to control ozone depletion? Suppose that two major manufacturers of commercial refrigerants, Firm J and Firm K, face the following marginal abatement costs (MAC) for HCFCs. MACJ = 1.2AJ MACK = 1.8AK

2. 3.

In the aggregate, the two firms do not hold enough HCFC allowances to cover their production activity and must abate a combined level of 20 units. Should each firm abate 10 units each? Explain economically, and support with calculations. 4. Consider the distributional effects of agricultural productivity due to global warming. Discuss some of the ramifications this outcome would have on regional economies, national economies, and world trade. Why is it that a carbon tax is preferred to either a BTU tax or a gasoline tax when the objective is to reduce carbon dioxide (CO2) emissions?

5a.

b.

Instead of enacting a carbon tax, assume that Congress decides to provide tax incentives to noncarbon-based energy sources, such as solar and wind power. Would this instrument be cost-effective in reducing CO2 emissions? Now suppose that the government chooses to initiate tax incentives, (e.g., a tax credit), for these energy alternatives along with the carbon tax. Would this be a more socially optimal solution? Explain briefly. Suppose the marginal benefits and costs per gallon of gasoline in the United States are modeled as follows to illustrate the negative externality of gasoline combustion: MSB = 12.80 0.42Q MPB = 12.80 0.4Q where Q is millions of gallons. MSC = MPC = 1.25 + 0.02Q,

c.

6.

a.

State the equation that represents the market externality. Give the economic interpretation of this equation, using its specific numerical value(s).

b. c.

Find the efficient equilibrium, PE and QE, for this market. (Do not round off.) Find the dollar value of a per unit gasoline tax that would achieve the efficient solution, and calculate the tax revenues generated to the government as a result.

TUTORIAL 9

MANAGING MUNICIPAL SOLID WASTE

1a. Summarize a specific municipal solid waste problem in your home town or one that recently has been reported in the media. Use the specific stages of the waste stream in your discussion. What policies have been proposed or implemented to address the problem you describe? Analyze these policies from an economic perspective. Using what you have learned about market-based incentives, suggest a policy initiative that would discourage land disposal in Malaysia. Diagram a general model of MSW management services. Show the simultaneous effect of the federal restrictions on landfills and rising consumer awareness of the benefits of "green packaging." Assuming a private competitive market, predict the effect on the price and quantity of MSW services. Consider the following model of a hypothetical market for MSW management services: MPB = 25 - 2Q MPC = 4+Q MEC = 0.5Q, where Q is the number of trash containers per household per month. a. Quantitatively determine the effect of the resource misallocation due to: (i) the presence of the negative externality, and (ii) the use of a flat fee pricing system in the presence of a negative externality. Support your answer to part (a) with a graphical model. Determine the dollar value of a waste-end charge that would restore efficiency to this market. Explain your answer intuitively.

b. 2. 3.

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TUTORIAL 10

SUSTAINABLE DEVELOPMENT: INTERNATIONAL ENVIRONMENTAL AGREEMENTS AND INTERNATIONAL TRADE

1.

Critically discuss the following statement:

Without a well-enforced command-and-control regulatory structure, society will not take the necessary steps toward a sustainable future.

2. Summarize in your own words Robert Solows view of using substitutability in applying intergenerational equity to environmental policy. Do you agree with this view? Why or why not? 3. Assume that the following equation quantifies the relationship between a countrys level of air pollution emissions (E) and its per capita income (I): E = 5(I) 0.5 (I)2, where E is measured in thousands of tons of sulfur dioxide (SO2) emissions, and I is measured in thousands of dollars. a) Graph the equation, and explain how it supports the theory of an environmental Kuznets curve (EKC). b) If a countrys per capita income (I) increases from $2,500 to $3,500, what is the associated change in emissions (E)? What do these changes suggest about where the country is operating on its EKC? c) Solve for the level of per capita income that maximizes the EKC. What is the significance of this income level? (Hint: The EKC reaches a maximum when its slope is zero.) 4. In your view, does NAFTA advance or hinder the achievement of sustainable development? Explain.

SUSTAINABLE APPROACHES: INDUSTRIAL ECOLOGY AND POLLUTION PREVENTION

1. Assume you are a city planner working on a new industrial park and contemplating the use of an industrial ecosystem. Discuss the major advantages and disadvantages of an industrial ecosystem that you would consider in making your decision. Choose a product that negatively affects the environment, assuming a linear flow of materials. Then, use a cyclical materials flow approach, and conduct a hypothetical life cycle assessment (LCA), pointing out at least two preventive initiatives that would reduce environmental risk. Identify the economic incentives that motivate private firms to engage in pollution prevention activities. How might the government devise policy initiatives to exploit these natural incentives? Extended Product Responsibility (EPR) assumes that all participants in the product cycle play a role in finding ways to reduce environmental risk. Identify the specific role played by the average consumer in this effort.

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3a. b.

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