The Economics of Pollution

The Economics of Pollution The Economics of Pollution By: OpenStaxCollege From 1970 to 2012, the U.S population increased by one-third and the size of the U.S economy more than doubled Since the 1970s, however, the United States, using a variety of anti-pollution policies, has made genuine progress against a number of pollutants [link] lists users of energy—from residential to industrial—the types of fuels each used, and the emissions from each, according to the U.S Energy Information Administration (EIA) The table shows that emissions of certain key air pollutants declined substantially from 2007 to 2012; they dropped 730 million metric tons (MMT) a year—a 12% reduction This seems to indicate that progress has been made in the United States in reducing overall carbon dioxide emissions, which cause greenhouse gases U.S Carbon Dioxide (CO2) Emissions from Fossil Fuels Consumed 2007–2012, Million Metric Tons (MMT) per Year(Source: EIA Monthly Energy Review) Primary Fossil Purchased Fuels Electric Power Total Primary Fossil Fuels End-use Sector Coal Petroleum Natural Gas Residential (0) (14) (31) (134) (179) Commercial (2) (2) (7) (126) (136) Industrial (40) (62) 31 (118) (191) Transportation (228) (1) (224) Power (464) (36) (122) - - Change 2007–2012 (508) (342) 121 (378) (730) Despite the gradual reduction in emissions from fossil fuels, many important environmental issues remain Along with the still high levels of air and water pollution, other issues include hazardous waste disposal, destruction of wetlands and other wildlife habitats, and the impact on human health from pollution 1/9 The Economics of Pollution Externalities Private markets, such as the cell phone industry, offer an efficient way to put buyers and sellers together and determine what goods are produced, how they are produced, and who gets them The principle that voluntary exchange benefits both buyers and sellers is a fundamental building block of the economic way of thinking But what happens when a voluntary exchange affects a third party who is neither the buyer nor the seller? As an example, consider a concert producer who wants to build an outdoor arena that will host country music concerts a half-mile from your neighborhood You will be able to hear these outdoor concerts while sitting on your back porch—or perhaps even in your dining room In this case, the sellers and buyers of concert tickets may both be quite satisfied with their voluntary exchange, but you have no voice in their market transaction The effect of a market exchange on a third party who is outside or “external” to the exchange is called an externality Because externalities that occur in market transactions affect other parties beyond those involved, they are sometimes called spillovers Externalities can be negative or positive If you hate country music, then having it waft into your house every night would be a negative externality If you love country music, then what amounts to a series of free concerts would be a positive externality Pollution as a Negative Externality Pollution is a negative externality Economists illustrate the social costs of production with a demand and supply diagram The social costs include the private costs of production incurred by the company and the external costs of pollution that are passed on to society [link] shows the demand and supply for manufacturing refrigerators The demand curve (D) shows the quantity demanded at each price The supply curve (Sprivate) shows the quantity of refrigerators supplied by all the firms at each price if they are taking only their private costs into account and they are allowed to emit pollution at zero cost The market equilibrium (E0), where quantity supplied and quantity demanded are equal, is at a price of $650 and a quantity of 45,000 This information is also reflected in the first three columns of [link] 2/9 The Economics of Pollution Taking Social Costs into Account: A Supply Shift If the firm takes only its own costs of production into account, then its supply curve will be Sprivate, and the market equilibrium will occur at E0 Accounting for additional external costs of $100 for every unit produced, the firm’s supply curve will be Ssocial The new equilibrium will occur at E1 A Supply Shift Caused by Pollution Costs Quantity Supplied before Considering Pollution Cost Quantity Supplied after Considering Pollution Cost $600 50,000 40,000 30,000 $650 45,000 45,000 35,000 $700 40,000 50,000 40,000 $750 35,000 55,000 45,000 $800 30,000 60,000 50,000 $850 25,000 65,000 55,000 $900 20,000 70,000 60,000 Price Quantity Demanded However, as a by-product of the metals, plastics, chemicals and energy that are used in manufacturing refrigerators, some pollution is created Let’s say that, if these pollutants were emitted into the air and water, they would create costs of $100 per refrigerator produced These costs might occur because of injuries to human health, property values, 3/9 The Economics of Pollution ... 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Choi, Stahl & Whinston P-1 PREFACE This book is written in the belief that the tenets and teachings of economics are vital to an insightful analysis of the broad spectrum of issues affecting commercial uses of the Internet and the next-generation information infrastructure. Our digital future is being decided on the Internet, where prototypical products and services have been test-driven by an odd collection of individuals. Just a few years ago, commercial uses of this somewhat chaotic and decentralized network of networks seemed highly unrealistic. Today, while the government and large corporations are grappling with proposals on how to build the national information infrastructure, major components of commercial use of the Internet—users, technologies, and digital contents—are already converging, aided by the rapid acceptance of the user friendly World Wide Web. What The Economist called an "accidental superhighway" has become the hottest commercial medium. While there is a considerable uncertainty about who will be the winners and what products and technological standards will dominate this new arena, the basic foundation for a totally unique competitive market has been laid and so has the stage for a fundamental market analysis using economics. Defining Electronic Commerce As a Market Electronic commerce goes far beyond simply "doing business electronically." Doing business electronically means that many conventional business processes such as advertising and product ordering are being digitized and conducted on the Internet. However, the Internet is not a mere alternative channel for marketing or selling products online—i.e. the most recent alternative to mail-order business, catalog shopping, home shopping networks and direct marketing. Instead, the electronic marketplace enables sellers to innovate the whole business processes from production to customer service— which were said to occur in stages—by integrating them in a seamless whole, where, for example, product choices and prices are updated according to consumer information in real-time on Web stores. These process-related changes will significantly impact intra- business organization, business-to-business relationships, and business-to-consumer interactions. On top of all this, old and new products alike are being released from their physical constraints and are being converted into digital products that can be delivered via the global network and paid for using digital currency. With digitization and digital payment systems, the electronic marketplace becomes a separate and independent market needing no physical presence for stores, products, market institutions, or sellers and buyers. New technologies such as the World Wide Web, digital signatures and encryption, and electronic currencies are tools of the trade in the nascent world of electronic commerce. From an economics perspective, our interest in this world lies in analyzing how these tools are used, how the products are chosen, what level of prices and competition will prevail, and ultimately whether a market exists or fails. The Economics of Electronic Commerce © 2003. Choi, Stahl & Whinston P-2 What Is This Book About? This book is not about how to use the Web or how to set up a Web page for a successful business. Instead of presenting a user's guide for electronic commerce tools, this book will introduce readers to the underlying economic aspects of Managing Information Risk and the Economics of Security Managing Information Risk and the Economics of Security Edited by M. Eric Johnson Center for Digital Strategies Tuck School of Business at Dartmouth Hanover, NH, USA © Springer Science+Business Media, LLC 2009 All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, LLC, 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Library of Congress Control Number: 2008936480 ISBN: 978-0-387-09761-9 e-ISBN: 978-0-387-09762-6 Printed on acid-free paper springer.com Editor Dr. M. Eric Johnson Tuck School of Business Administration Dartmouth College Hanover, NH 03755, USA M.Eric.Johnson@tuck.dartmouth.edu List of Contributors Managing Information Risk and Economics of Security M. Eric Johnson, Tuck School of Business at Dartmouth Nonbanks and Risk in Retail Payments Terri Bradford, Federal Reserve Bank-Kansas City Fumiko Hayashi, Federal Reserve Bank-Kansas City Christian Hung, Federal Reserve Bank-Kansas City Stuart Weiner, Federal Reserve Bank-Kansas City Zhu Wang, Federal Reserve Bank-Kansas City Richard Sullivan, Federal Reserve Bank-Kansas City Simonetta Rosati, European Central Bank Security Economics and European Policy Ross Anderson, University of Cambridge Rainer Boehme, Dresden University of Technology Richard Clayton, University of Cambridge Tyler Moore, University of Cambridge BORIS – Business-Oriented Management of Information Security Sebastian Sowa, Ruhr-University of Bochum Lampros Tsinas, Munich Re Roland Gabriel, Ruhr-University of Bochum Productivity Space of Information Security in an Extension of the Kanta Matsuura, University of Tokyo Communicating the Economic Value of Security Investments; Value at Security Risk Rolf Hulthén, TeliaSonera AB Modelling the Human and Technological Costs and Benefits of USB Memory Stick Security Adam Beautement, UCL Robert Coles, Merrill Lynch Jonathan Griffin, HP Labs Christos Ioannidis, University of Bath Brian Monahan, HP Labs David Pym, HP Labs and University of Bath Angela Sasse, UCL Mike Wonham, HP Labs Gordon-Loeb’s Investment Model Xia Zhao, Tuck School of Business at Dartmouth College M. Eric Johnson, Tuck School of Business at Dartmouth College Reinterpreting the Disclosure Debate for Web Infections Oliver Day, Harvard University Rachel Greenstadt, Harvard University Brandon Palmen, Harvard University The Impact of Incentives on Notice and Take-down Tyler Moore, University of Cambridge Richard Clayton, University of Cambridge Studying Malicious Websites and the Underground Economy on the Chinese Web Jianwei Zhuge, Peking University Thorsten Holz, University of Mannheim Chengyu Song, Peking University Jinpeng Guo, Peking University Xinhui Han, Peking University Wei Zou, Peking University Botnet Economics: Uncertainty Matters Zhen Li, Albion Session 9A Introduction to the Economics of Pollution Control: Health Issues John A Dixon johnkailua@aol.com Ashgabad, November, 2005 Adapted from materials prepared by Maureen Cropper The World Bank GEF What Questions Can Economic Valuation/BCA Help Answer?  How stringent should environmental standards be for  Air quality?  Surface water quality?  Drinking water quality?  What about POPs?  Any other pollutant? Caspian EVE 2005/UNDP and WBI John A Dixon, Economics of Pollution Control GEF Benefits and Costs of Pollution Control  Four categories of benefits could be examined:  Human health (the focus here)  Visibility (amenity values)  Ecological Effects (and ecosystem services)  Agricultural Benefits (change in production) Caspian EVE 2005/UNDP and WBI John A Dixon, Economics of Pollution Control GEF Valuing Environmental Health Effects Damage Function Approach    Value of number of cases of illness/death avoided = Number of Cases Avoided * Value per Case Value per Case Avoided should reflect individual’s willingness to pay (WTP) to avoid illness or risk of death Human Capital/Cost of Illness Approach, which focuses on lost productivity, medical costs, generally serves as a lower bound to WTP Caspian EVE 2005/UNDP and WBI John A Dixon, Economics of Pollution Control GEF The numbers can be large! For example, in 2010 the Monetized Benefits from the US Clean Air Act are estimated as follows: Cost Mortality Chronic Bronchitis Other Morbidity Productivity Visibility Agriculture Caspian EVE 2005/UNDP and WBI John A Dixon, Economics of Pollution Control 20 40 60 80 Billions of 1990 US$ GEF 100 120 Steps in Calculating Health Benefits for Air or Water Quality Improvements     Predict change in emissions of criteria pollutants associated with air/ water quality regulations Translate changes in emissions into population-weighted changes in ambient exposures Calculate associated changes in health outcomes  Reduced premature mortality  Reduced hospital admissions  Fewer cases of chronic bronchitis or diarrhea Assign a dollar value to cases of illness, mortality avoided Caspian EVE 2005/UNDP and WBI John A Dixon, Economics of Pollution Control GEF Air Pollution Example: Studies of the Health Impacts  Examine effects of acute air pollution exposure on      Premature death Hospital admissions for heart, lung disease Emergency room visits for heart, lung disease Work-loss days Examine effects of chronic exposure on   Premature death Chronic bronchitis Caspian EVE 2005/UNDP and WBI John A Dixon, Economics of Pollution Control GEF  Interpretation of Dose-Response Function (or DRR) Dose-response function relates health effects to air pollution concentrations and other factors affecting health  Slope of dose-response function measures the percentage change in the health outcome for a one unit change in PM10  For example, a 10 microgram reduction in PM10 reduces deaths by about 4% in studies of the impact of long-term exposure to air pollution on deaths Caspian EVE 2005/UNDP and WBI John A Dixon, Economics of Pollution Control GEF Projected Reductions in Illness due to the US Clean Air Act, Titles I - V Health Endpoint Mortality Age 30+ Chronic Illness Chronic bronchitis Chronic asthma Hospitalization Respiratory admissions Cardiovascular admissions Asthma-related emergency room visits Minor Illness Avoided respiratory illnesses and symptom-days, asthma attacks, work loss days, etc Pollutant 2010 Mean reduction PM et al 23,000 PM Ozone 20,000 7,200 PM, CO, NO2, SO2, Ozone PM, Ozone 22,000 42,000 4,800 PM, NO2, SO2, Ozone Millions of cases/incidence PM, CO, NO2, SO2, Ozone Caspian EVE 2005/UNDP and WBI John A Dixon, Economics of Pollution Control GEF Valuing Environmental Health Effects The Damage Function Approach:  Value of number of cases of illness/death avoided = Number of Cases Avoided * Value per Case  Value per Case Avoided should reflect individual’s willingness to pay (WTP) to avoid illness or risk of ... to where the quantity demanded (the second column) is equal to the “quantity supplied without paying the costs of the externality” (the third column) Then refer to the first column of that row... sued for polluting the water in a river 6/9 The Economics of Pollution Power plants in a specific city are not required to address the impact of their emissions on the quality of air Companies... and after the social cost of production is included Price Quantity Quantity Supplied without Demanded paying the cost of the pollution Quantity Supplied after paying the cost of the pollution