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Environmental Management PA484/584 Midterm Study Guide Foundations Normative vs

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Environmental Management PA484/584 Midterm Study Guide Foundations Normative vs. Positive analysis MC and MB curves (individual and aggregate) Equilibrium Public vs Private Good Welfare Marginal Benefit and Marginal Cost Total Benefit and Total Cost Net Benefit Externality (Positive and Negative): Market solution versus efficient solution Dead Weight Loss Efficiency (Definition and when does it occur?) Cost Effective (Definition and when does it occur?) Policy Solutions to Pollution (For each of the policy solutions, know how the policy works, the pros and cons of the policy, plus if it is efficient and/or cost effective) Piguvian (Indirect) Tax Coase Theorem Information-Based Approaches Technology Standard Uniform Quantity Standard (Command and Control) (Direct) Tax on Pollution (Direct) Subsidy on Abatement Emissions Trading (Cap and Trade) Integrated Assessment Model Integrated Assessment Model (for air pollution) Value of Statistical Life Climate Change Stock (global) versus Flow (local) pollutant Climate Change Mitigation Costs and Climate Change Damages Political Economy of Climate Change (Why is it so hard to solve the problem?) Math Aggregating MC or MB curves Finding optimal level of abatement, plus Total Cost, Total Benefit, and Net Benefit Finding the optimal direct tax or subsidy, plus tax revenue or subsidy amount Finding the Cost Effective amount of abatement across firms Readings Main points of readings Class discussion questions Environmental Management PA 484/584 Week 3 Policy Solutions to Pollution Recall: We discussed the level of optimal abatement (or, in other words, the optimal level of pollution). We also discussed our first two solutions to pollution (Coase Theorem and the Pigouvian (Indirect) Tax). We also saw that in the free market case, firms will not abate. So, we need policy to motivate optimal abatement behavior. But first, let’s examine the two normative lenses through which we will analyze how “good” the policies are: 1. Normative Policy Objectives: Efficiency means: Efficiency occurs when: Cost Effectiveness means: Cost Effectiveness (in pollution abatement) occurs when: Note: If a policy is efficient, is IS cost effective (because efficiency wants to maximize the net benefit, so if the cost is not minimized, there is no way you have maximized the benefit minus cost), but if a policy is cost effective, it IS NOT necessarily efficient (because the original policy may not be based on efficiency… cost effectiveness only cares that, regardless of the policy, it was implemented at minimum cost). 1 2. Policy Solution to Pollution III: Direct Abatement Subsidy Direct Abatement Subsidy Definition: Graph The government will pay _________________________ for every unit of ________________________ that the firm undertakes. The firm decides for each unit of pollution: • Should I pollute, pay nothing, and receive nothing? OR • Should I abate, pay my abatement cost, and receive the subsidy? 2 The firm will decide to abate UNTIL: The total amount of subsidy paid from the government to firms is: Is this policy efficient? Is this policy cost effective? Real world abatement subsidy examples: • EPA has Brownfield Development Grants to clean up polluted areas • Federal Tax Credit of $7,500 for buying certain electric cars in the United Sates • USDA has conservation payments to farmers to leave fields uncultivated 3 3. Policy Solution to Pollution IV: Direct Pollution Tax Direct Pollution Tax definition: Note: How is this different than the Pigouvian (Indirect) Tax? The Pigouvian Tax will tax the market for the good, instead of the pollution itself. Graph 4 The firms will pay the government_________________________ for every unit of ________________________ that the firm emits. The firm decides for each unit of pollution: • Should I pollute and pay the tax (but avoid the marginal abatement cost)? OR • Should I abate, pay my abatement cost, and avoid the tax? The firm will decide to abate UNTIL: The total amount of tax paid from firms to the government is: Is this policy efficient? Is this policy cost effective? Real world pollution tax examples: • San Francisco Bay Area has a carbon tax at 4.4 cents per ton of carbon dioxide emitted • Wisconsin, California, and Louisiana have a tax per pound of effluent (sewage discharged into a river) 5 Quantitative Example: Direct Pollution Tax Suppose there is a pollutant, Econozone, which causes nausea and sleepiness. With no regulation, 25 units are emitted. Suppose that 1 unit of abatement will decrease the amount of Econozone by 1 unit. The marginal benefits from abatement are: MB = 50 – 2A. However, the marginal cost of abatement are: MC = 10 + 2A. A. What is the efficient level of abatement? B. What is the efficient level of tax per unit of Econozone pollution that the government should charge? C. What amount of tax revenue will the government receive? 6 4. Policy Solution to Pollution V: Uniform Quantity Standard Also known as “Command and Control” regulation Uniform Quantity Standard Definition: Graph of Firm H and Firm L, where MCH > MCL The firms will abate the full amount that is required, regardless of the MC. 7 Does this policy control pollution? Is this policy cost effective? Is this policy efficient? Note: While society is better off equating the MC across firms, the distributional consequences are different! 8 Quantitative Example: Uniform Quantity Standard Assume the government wants to regulate Envirozone using a uniform quantity based standard. Two firms currently produce the pollutant. The government wants 100 units of abatement, so they create a law that each firm must undertake 50 units of abatement. The firms are different. Firm 1 has higher marginal abatement costs: MC1 = 10A. Firm 2 has lower marginal abatement costs: MC2 = 5A. A. What is the total cost of abatement under the uniform quantity standard? B. What is the aggregate marginal abatement cost curve? 9 C. What is the cost effective “price” of abatement at 100 units of abatement? D. For cost effectiveness, how much should each firm abate? (Hint: Where are their marginal costs are equal AND the total amount of abatement equals 100 units?) 10 E. How much money was saved under the cost effective solution, while achieving the SAME amount of abatement? Real world uniform quantity standard: • MANY! A majority of pollution legislation in the United States • Total Maximum Daily Load levels of key water pollutants in the United States • National Ambient Air Quality Standards at the county-level under the Clean Air Act https://www3.epa.gov/airquality/greenbook/mapnpoll.html From January 31, 2021 11 5. Political Economy of Price (Tax) versus Quantity (Uniform Quantity Standard) Policies From an economic perspective, price-based policies are preferred to a uniform quantity standard because the price-based policy is both efficient and cost effective, while the uniform quantity standard is not efficient or cost effective. However, what is the political economy? Graph Victims Firms Government Society Quantity Standard Price (Tax) Conclusion: Victims suffer the same. Firms will lobby for uniform quantity-based standards to avoid paying the tax. In fact, they would be willing to spend up to the amount D + E on lobbying and campaign contributions. Politicians, keen on being re-elected, will want to follow public opinion. So, uniform quantity standards often win out from a political economy perspective. 12 6. Policy Solution to Pollution VI: Technology Standard Technology Standard Definition: Graph Policy Advantages: Policy Disadvantages: Is it efficient? Is it cost effective? 13 7. Policy Solution to Pollution VII: Information-Based Approaches Information-Based Approaches Definition: Policy Advantages: Policy Disadvantages: Is it efficient? Is it cost effective? 14 The marginal cost (MC) of pollution abatement is: MC = 2A, where A is the quantity of abatement. The marginal benefit (MB) of pollution abatement is: MB = 100 - 0.5A. Suggest one specific policy that would achieve the efficient level of pollution. The marginal cost (MC of pollution abatement is MC-2 where is the quantity of abatement. The marsa benefi(MB) of pollution abatement is: MB-100-OSA a) What is the efficiency of abatement? Supoke that both tunnudach avatud ?? ?? ?? , ????? ? ? following dennd INDE o ator In NEN whereas cancive the long doe water NB 2012 Suppose the supply of wa the supply of woteris 150 What is the dudovoudication List the type of value represented by cach of the following examples Question 8 (2 points) Skiing on Mt Lemmon 2 ny Question 9 (2 points) A bee pollinating flowers that will one day be a supermarket fruit e AJ IH Question 10 (2 points) The value you get knowing that your great-great-grandchildren will see a Blue Whale DOWNLOAD ORIGINAL FILE in AD 4:59 < You 5/5/21, 10:48 PM Part I: Policy Statements (10 points each) For each policy statement, write if you agree or disagree. Also explain why, using logic from our class. Question 2 (10 points) Managing renewable forests to maximize the volume of wood over time would result in a shorter rotation length than if we managed to maximize the economic value. ro Part I: Policy Statements (10 points each) For each policy statement, write if you agree or disagree. Also explain why, using logic from our class. Question 2 (10 points) Managing renewable forests to maximize the volume of wood over time would result in a shorter rotation length than if we managed to maximize the economic value. A/ Question 3 (10 points) An aggregate (fishery-level) catch limit solves the biological problem in fisheries, but • not the economic problem. [In your reply, be sure to define the biological problem and economic problem.] AJ Question 4 (10 points) Non-use values can only be estimated using revealed preference valuation techniques. [In your reply, be sure to define revealed preference valuation.] A/ estion 5 (10 points) The Hotelling rule correctly predicts the historical prices of all fossil fuels, metals, and minerals. [In your reply, be sure to define the Hotelling rule.) ? A II: Types of Value (2 points each) X List the type of value represented by each of the following examples: Question 8 (2 points) Skiing on Mt. Lemmon AJ Question 9 (2 points) A bee pollinating flowers that will one day be a supermarket fruit a ? Question 10 (2 points) The value you get knowing that your great-great-grandchildren will see a Blue Whale Insen Question 10 (2 points) The value you get knowing that your great-great-grandchildren will see a Blue Whale A ? Question 11 (2 points) A pharmaceutical company buying land in the Amazon in case they one day want to check for potential cures ? Question 12 (2 points) The value you receive by knowing something that you have never seen is living on Earth AL Question 13 (10 points) Suppose that both farmers and ranchers live in a watershed. Farmers have the following demand (MB) for units of water (W): MB = 200 - W whereas ranchers have the following demand for water: MB = 200 - 2W Suppose the supply of water is 150 units. a) If water rights are first come, first serve and the Farmers were first in the region, what is the allocation of water? Delete. Insert Priso Ö- Hot F12 F11 d F10 F9 t F8 A FZ ?. + // F6 x F5 4- ?? F4 o pt 1 ? Question 14 (10 points) Suppose that both farmers and ranchers live in a watershed. Farmers have the following demand (MB) for units of water (W): MB = 200 - W whereas ranchers have the following demand for water: MB = 200 - 2W Suppose the supply of water is 150 units. What is the efficient allocation of water between farmers and ranchers? A/ Question 15 (10 points) Suppose that both farmers and ranchers live in a watershed. Farmers have the following demand (MB) for units of water (W): MB = 200-W whereas ranchers have the following demand for water: MB = 200 - 2W Suppose the supply of water is 150 units. What is the shadow price of water under the efficient allocation? insert Prise ?it ?- F12 Question 16 (10 points) The marginal cost (MC) of pollution abatement is: MC = 2A, where A is the quantity of abatement. The marginal benefit (MB) of pollution abatement is: MB = 100 -0.5A.. a) What is the efficient level of abatement? A X ? Question 17 (10 points) The marginal cost (MC) of pollution abatement is: MC = 2A, where A is the quantity of abatement. The marginal benefit (MB) of pollution abatement is: MB - 100 -0.5A. Suggest one specific policy that would achieve the efficient level of pollution AT