Markets and the environment, second edition

F O U N DAT I O N S O F C O N T E M P O R A RY E N V I RO N M E N TA L S T U D I E S M arkets and the E nvironment second Nathaniel O Keohane edition Sheila M Olmstead Markets and the Environment Second Edition Foundations of Contemporary Environmental Studies Ecology and Ecosystem Conservation Oswald J Schmitz Global Environmental Governance James Gustave Speth and Peter M Haas Coastal Governance Richard Burroughs Water Resources Shimon C Anisfeld Ecology and Religion John Grim and Mary Evelyn Tucker Markets and the Environment Second Edition Nathaniel O Keohane Sheila M Olmstead Washington | Covelo | London Copyright © 2016 Nathaniel O Keohane and Sheila M Olmstead First Island Press edition, 2007 All rights reserved under International and Pan-American Copyright Conventions No part of this book may be reproduced in any form or by any means without permission in writing from the publisher: Island Press, 2000 M Street, NW, Suite 650, Washington, DC 20036 ISLAND PRESS is a trademark of the Center for Resource Economics Library of Congress Control Number: 2015939771 Printed on recycled, acid-free paper Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 Keywords: environmental economics, environmental policy, cost-benefit analysis, externalities, capital assets, natural resources, green accounting, water pricing, carbon market, limits to growth For Frances and Eleanor, and for Gau —N.O.K For Kevin, Finn, and Laurel —S.M.O further reading  295 Freeman, Jody, and Charles D Kolstad 2007 Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience, Oxford University Press, New York Huang, Ju-Chin, John M Halstead, and Shanna B Saunders 2011 “Managing Municipal Solid Waste with Unit-Based Pricing: Policy Effects and Responsiveness to Pricing,” Land Economics 87(4): 645–660 Iudicello, Suzanne, Michael Weber, and Robert Wieland 1999 Fish, Markets and Fishermen:The Economics of Overfishing, Island Press, Washington, DC Keohane, Nathaniel O 2007 “Cost Savings from Allowance Trading in the 1990 Clean Air Act,” in Charles E Kolstad and Jody Freeman, eds., Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience, Oxford University Press, New York, 194–229 Langpap, Christian, and Joe Kerkvliet 2012 “Endangered Species Conservation on Private Land: Assessing the Effectiveness of Habitat Conservation Plans,” Journal of Environmental Economics and Management 64: 1–15 Mansur, Erin T., and Sheila M Olmstead 2012 “The Value of Scarce Water: Measuring the Inefficiency of Municipal Regulations,” Journal of Urban Economics 71: 332–346 McConnell, Virginia, and Margaret Walls 2009 “U.S Experience with Transferable Development Rights,” Review of Environmental Economics and Policy 3(2): 288–303 Newell, Richard G., James N Sanchirico, and Suzi Kerr 2005 “Fishing Quota Markets,” Journal of Environmental Economics and Management 49(3): 437–462 Popp, David 2003 “Pollution Control Innovations and the Clean Air Act of 1990,” Journal of Policy Analysis and Management 22(4): 641–660 Sanchirico, James, and Richard Newell 2003 “Catching Market Efficiencies,” Resources 150: 8–11 Schmalensee, Richard, and Robert N Stavins 2013 “The SO2 Allowance Trading System: The Ironic History of a Grand Policy Experiment,” Journal of Economic Perspectives 27: 103–122 Stavins, Robert N 2003 “Experience with Market-Based Environmental Policy Instruments,” in Karl-Göran Mäler and Jeffrey R.Vincent, eds., Handbook of Environmental Economics,Vol 1, Elsevier Science B.V., Amsterdam, 355–435 Sterner,Thomas 2003 Policy Instruments for Environmental and Natural Resource Management, Resources for the Future, Washington, DC., 363 World Bank Group 2014 State and Trends of Carbon Pricing 2014, World Bank, Washington, DC Available at http://documents.worldbank.org/curated/en/2014/05 /19572833/state-trends-carbon-pricing-2014 Chapter 11 Arrow, Kenneth, Partha Dasgupta, Lawrence Goulder, Gretchen Daily, Paul Erlich, Geoffrey Heal, Simon Levin, Karl-Göran Mäler, Stephen Schneider, David Starrett, and Brian Walker 2004 “Are We Consuming Too Much?” Journal of Economic Perspectives 18(3): 147–172 Brunnermeier, Smita B., and Arik Levinson 2004.“Examining the Evidence on Environmental Regulations and Industry Location,” Journal of Environment and Development 13(1): 6–41 Carson, Richard T 2010 “The Environmental Kuznets Curve: Seeking Empirical Regularity and Theoretical Structure,” Review of Environmental Economics and Policy 4(1): 3–23 296  further reading Ederington, Josh, Arik Levinson, and Jenny Minier 2005 “Footloose and PollutionFree,” Review of Economics and Statistics 87(1): 92–99 Fischer, Carolyn 2010 “Does Trade Help or Hinder the Conservation of Natural Resources?” Review of Environmental Economics and Policy 4(1): 103–121 Frankel, Jeffrey A., and Andrew K Rose 2005.“Is Trade Good or Bad for the Environment? Sorting Out the Causality,” Review of Economics and Statistics 87(1): 95–91 Friedman, Benjamin M 2005 The Moral Consequences of Economic Growth, Knopf, New York Jaffe, A B., S R Peterson, P R Portney, and R N Stavins 1995 “Environmental Regulation and the Competitiveness of U.S Manufacturing: What Does the Evidence Tell Us?” Journal of Economic Literature 33(March): 132–163 Krautkraemer, Jeffrey A 2005 “Economics of Scarcity: The State of the Debate,” in David Simpson, Michael A Toman, and Robert U Ayres, eds., Scarcity and Growth Revisited: Natural Resources and the Environment in the New Millennium, RFF Press, Washington, DC, 54–77 Nordhaus,William D 1992.“Lethal Model 2:The Limits to Growth Revisited,” Brookings Papers on Economic Activity 1992(2): 1–59 Nordhaus,William D., and Edward C Kokkelenberg, eds 1999 Nature’s Numbers: Expanding the National Economic Accounts to Include the Environment, National Academy Press, Washington, DC Solow, Robert M 1991 “Sustainability: An Economist’s Perspective,” J Seward Johnson Lecture to the Marine Policy Center, June 14, Woods Hole Oceanographic Institution, Woods Hole, MA Reprinted in Robert N Stavins, ed., Economics of the Environment: Selected Readings, 6th ed., W.W Norton and Company, New York, 543–550 Solow, Robert 1992 “An Almost Practical Step toward Sustainability,” Lecture on the occasion of the 40th anniversary, Resources for the Future, Washington, DC Stiglitz, Joseph 2005 “The Ethical Economist,” a review of The Moral Consequences of Economic Growth, by Benjamin M Friedman, Foreign Affairs (November/December): 128–134 Weitzman, Martin L 1999 “Pricing the Limits to Growth from Minerals Depletion,” Quarterly Journal of Economics 114(2): 691–706 Index Pages numbers followed by “f ” and “t” indicate figures and tables Abatement, defined, 13 Abatement benefit functions, 16, 17f Abatement cost functions, 14–15, 17f Ability to pay, willingness to pay and, 47 Accounting, green, 232, 245–249 Acid rain, 200, 203 Adoption, innovation vs., 183 Adsorbable organic halides (AOX), 23 Africa, 250 Aggregate marginal abatement costs, 176 Aggregates, 175–176 Alcoa, 223 Aleutian Islands fisheries, 135 Allocations, 145, 219–220 See also Allowance trading Allowance trading, 145 See also Cap-and-trade systems Aluminum recycling, 223 Ansari X-Prize, 185 AOX See Adsorbable organic halides Aracruz Celulose, 23 Arctic National Wildlife Refuge, 31 Arrow, Kenneth, 59 Arsenic, 57 Assumptions in cost models, 39 Asymmetric information, 146–147 Backloading, 220 Bargaining, private, 140–143 Beaver hunting, 134 Benefit-cost analysis critiques of, 57–65 EPA study of lead in gasoline, 58 overview of, 7, 55–57 uncertainty and, 65–68 Benefits See also Marginal benefits;Values defining, 44–48 measuring, 49–55 overview of, of policies to mitigate climate change, 4–5 types of values and, 48 Bering Sea fisheries, 135 Biodiversity, as public good, 85 Bioeconomic models, 114, 128–130, 134 Biological rotation, 115–116, 116f Bottom-up cost models, 38–39 Boundaries, 194–196 Brazil, 125–126, 225 Brundtland Commission, 239 Bush, George H W., 200–201 Bush, George W., 202 Bycatch, 137, 214 Byrd, Robert, 61–62 California condor, 24, 25f CalTrans, 227 Canals, 63 297 298 index Cap-and-trade systems See also Allowance trading advantages of, 178 cost effectiveness and, 177–178 emissions taxes vs., 162–166, 163f, 178–179 hot spot problem and, 190–191 markets for greenhouse gas emission trading, 157–158, 208–210, 209f missing demand curve and, 152–156, 154f, 156f for nitrogen oxides, 192 raising revenues and, 160–162 taxes vs., 182 for U.S sulfur dioxide market, 200–207, 204t water quality trading, 221–223 Capital, interchangeability of, 240 Capital assets, 99–100, 115 Capitalism, 70 Carbon emission abatement See also Greenhouse gas emissions benefits of, 4–6 Clean Power Plan and, 254–255 costs of, 38–39, 39f standards for new power plants, 66–67, 67f Carbon sequestration, 122–123 Cartels, 110 Catalytic converters, 197 Catch shares, 158–160, 187–188, 188f, 207–214 CCX See Chicago Climate Exchange Certification programs, 146–147 CFCs See Chlorofluorocarbons Chesapeake Bay, 221–223 Chicago Climate Exchange (CCX), 157–158 Chile, 210 China, 110–111, 210, 250 Chlorofluorocarbons (CFCs), 28–29 Clean Air Act, 44, 55, 197, 200, 255 Clean Air Act Amendments of 1977, 144, 204 Clean Air Act Amendments of 1990, 61, 201 Clean Development Mechanism, 208, 218 Clean Power Plan, 254 Clean Water Act, 54, 221, 223, 255 Climate change, 2–6 See also Carbon emission abatement; Greenhouse gas emissions; Sulfur dioxide abatement Club goods, 86 Coal industry, 61–62 The Coal Question (Jevons), 101 Coase, Ronald, 139, 140, 167 Coase Theorem, 133–134, 140–143, 159–160 Co-benefits, Collective action problems, 94–97, 97f Columbia River, Command-and-control See also Performance standards; Technology standards advantages of, 197 cost effectiveness and, 172–173 fisheries and, 159 market-based policies vs., 196–198 monitoring and enforcement and, 195 municipal water pricing and, 215 overview of, 139, 144 Common property, open access vs., 132–134 Companies, role of, 256–257 Completeness, market efficiency and, 77–78 Compliance, 206–207, 213–214, 217 Concave functions, 16 Condors, 24, 25f Congestion, 153 Conservation banking, 226–228 Consolidation, 211–212 Consumers, role of, 256–257 Consumer surplus, 74–75, 76–77 Contingent valuation (CV), 52–55, 122–123, 124 Copenhagen Accord, Costanza, Robert, 56 Cost-benefit analysis See Benefit-cost analysis index  299 Cost effectiveness command-and-control approaches and, 172–173 emission taxes and, 174–176, 175f, 176f emission trading and, 177–178 heterogeneity and, 179 overview of, 170–172 Cost reduction command-and-control approaches and, 172–173 cost effectiveness and, 170–172 emission trading and, 177–178 overview of, 169–170 Costs See also Benefit-cost analysis; Marginal costs of compliance in private sector, 36–37 of government sector compliance, 36, 37–40 market-based instruments for reduction of, 169–179, 170f measuring, 35–44 of mitigating greenhouse gas emissions, 38–39, 39f overview of, of policies to mitigate climate change, social welfare, 36, 37 of transitional effects, 36 CV See Contingent valuation Dales, J.H., 159–160 Damage assessment, 54 Deadweight losses, 84–85, 164–166 Dead zones, 222 De Beers, 77 Decentralization, 71, 146 Decision-making, criteria for, 57–59 Deepwater Horizon oil spill, 54 Deforestation, 123–128 See also Forest resources Demand benefits to consumers and, 74–75, 75f markets and, 71–72, 72f for pollution control, 152–156 Demand curves, 71–72, 72f, 152–156 Depletion externality, 137 Desalination, 240–241 Development rights, 225 Diminishing marginal returns, 93 Dioxin, 23 Directional drilling, 102 Director, Aaron, 141 Discounting, 31–33, 59–60 Discount rate, 33t, 41, 42–43, 43f Disease, See also Specific diseases Distortionary taxes, 152, 161–162 Dolphins, 137, 214 Double dividends, 162 Drinking water, 240–241 Driving, externalities of, 153 Drought, municipal water pricing and, 214–217 Dukakis, Michael, 201 Dynamic efficiency, 7, 30–34, 243–244 Dynamic incentives, 168 ECF methods See Elemental chlorine free methods Ecolabeling programs, 146–147 Ecological economics, 252 Economic efficiency See also Efficiency dynamic efficiency and, 30–34 environmental policy and, 20–22 equimarginal rule and, 26–30 overview of, 6, 12–13, 168 sulfur dioxide abatement and, 14–20, 17f technical efficiency vs., 16, 19 Economic growth conclusions from theory and experience and, 249–250 green accounting and, 245–249 gross domestic product and, 250 limits to, 232–238 overview of, 231–232, 253 sustainability and, 238–245, 252 trade, growth, environment and, 251–252 Economic overfishing, 131 Economic scarcity, 100–103 See also Scarcity Economics of Welfare (Pigou), 140 Economies of scale, 21 EDF See Environmental Defense Fund 300 index Education, perception of value and, 46 Efficiency See also Economic efficiency; Market efficiency benefit-cost analysis and, 55–57 competitive market equilibrium and, 70–74 of competitive markets, 74–78 defined, 12–13, 14 overview of, 69–70, 78–79 Ehrlich, Paul, 236 EKC See Environmental Kuznets curve Elemental chlorine free (ECF) methods, 23 Emission rates, performance standards and, 144 Emissions reduction, 155–156, 156f See also Carbon emission abatement; Greenhouse gas emissions; Sulfur dioxide abatement Emissions taxes cap-and-trade policies vs., 162–166, 163f, 178–179 cost effectiveness of, 174–176, 175f, 176f hot spot problem and, 190–191 as market-based policies, 144–145 Emissions trading See Cap-and-trade systems Emissions Trading System See European Union Emissions Trading System Employment See Jobs Endangered Species Act (ESA), 124, 227 Endangered species preservation, 226–228 Endogeneity, 251 Energy efficiency paradox, 15–16, 38, 148 Enforcement individual fishing quotas and, 213–214 market-based policies and, 194–196 municipal water supplies and, 217 sulfur dioxide abatement and, 206–207 Engineering costs, 37 Environmental Defense Fund (EDF), 200, 204, 228 Environmental economics, overview of, 1–2, 254–256 Environmental Kuznets curve (EKC), 235 Environmental policies See Policies Equilibrium, 72–74, 72f, 149–152, 212 Equimarginal rule, 26–30, 34 Equity, intergenerational and intragenerational, 244–245 Equivalence, determining, 228–229 European Union Allowances (EUA), 218 European Union Emissions Trading System (EU-ETS), 157–158, 209, 217–220 Exchanges, markets and, 71 Exclusion, tragedy of the commons and, 160 Expected marginal costs, 163–164, 163f Externalities See also Marginal user costs Coase Theorem and, 139, 140–143 externalities and, 81–85 fisheries and, 137 market failures and, 81–85, 83f Pigouvian taxes and, 151–152 research and development and, 184 Exxon Valdez oil spill, 46, 54 Faustmann, Martin, 122 Faustmann Rule, 118–122, 121f Federal Payments for Hydrological Services, 127 Federal Water Pollution Control Act, 195 Firms, role of, 256–257 Fisheries bioeconomic model of, 128–130 catch shares and, 158–160 cost-effectiveness and, 184–188, 190 efficient management of vs open access, 130–132, 131f incentives for technological change and, 189–190 logistic growth and, 128, 129f market-based instruments for in New Zealand, 207–214 overview of, 137–138 property rights for halibut in Gulf of Alaska, 159–160 real-world, economics and, 135 subsidies, externalities and, 136–137 substitution, sustainability and, 241 use of steady-state approach and, 134–135 index  301 Flexibility, 173, 228 Forest resources Faustmann Rule and, 118–122, 121f forest growth, biological rotation and, 115–116 nontimber benefits, efficient rotation and, 122–123, 123f, 124 overview of, 137–138 overview of economics of, 114–115 public goods, property rights, deforestation and, 123–128 Wicksell Rule and, 116–118 Forest Stewardship Council, 146 Fossil fuel consumption, perverse incentives and, 151 Fracking, 102 Free markets, 3, 78 Free-riding problem, 90 FRONAFOR See Federal Payments for Hydrological Services Future value, discounting and, 31–33 Gasoline, 58, 153 GATT See Global Agreement on Tariffs and Trade GDP See Gross domestic product Genuine wealth, 250 Global Agreement on Tariffs and Trade (GATT), 251 Global climate change See Climate change Global ecosystem services, valuation of, 56 GNP See Gross national product Gore, Al, 69 Governments, role of, 256–257 Grand Banks fisheries, 135 Green accounting, 232, 245–249 Greenhouse gas emissions, 208–210, 209f See also European Union Emissions Trading System Green net national product (green NNP), 246, 247, 248, 249–250 Gross domestic product (GDP), 245, 250 Gross national product (GNP), 245, 247 Gross value, net benefit vs., 11–12 Groundwater as open-access resource, 111–112 Growth See Economic growth; Logistic growth Gulf of Mexico fisheries, 135 Gulf Stream, reversal of, Habitat Conservation Plans (HCP), 227 Habitat management, 224–225 Habitat value, 122, 123f Halibut, Pacific, 159–160, 189 Hardin, Garrett, 91 Harrison, John, 185 HCP See Habitat Conservation Plans Hedonic property method, 50–51 Hedonic wage method, 51–52 Heterogeneity, 179, 190, 251 Hicks, John, 63–64 High grading, 213 Home energy reports, 148 Hotelling, Harold, 109 Hotelling Rule, 108–110, 111, 113 Hot spot problem, 190–194 Hunter River Salinity Trading program, 221 IAM See Integrated assessment models IFQ markets See Individual fishing quota markets Illegal dumping, 224 Implicit pricing, 50 Incentives See also Market-based instruments causes of climate change and, protected areas and, 126 as root cause of environmental problems, 98 for technological change, 180–183, 181f, 185, 189 wrong pricing and, 256 Income, growth, environment and, 235 India, 151, 250 Indirect use values, 48, 54 Individual fishing quota (IFQ) markets, 158–160, 187–188, 188f, 207–214 Indonesia, 151 302 index Information-based approaches, 146–147 Innovation adoption vs., 183 European Union Emissions Trading System and, 218–219 policies aimed at promoting, 183–184 prizes and, 185 Input standards, 195 Integrated assessment models (IAM), 41–42 Interest rates, 108–109 Intergenerational equity, 244–245 Internalization of damages, 84, 145 Invisible hand, 69 James Bay, Quebec, 134 Jevons, Stanley, 101, 233 Jobs, environmental regulations and, 39, 43–44 Kaldor, Nicholas, 63–64 Kaldor-Hicks criterion, 64 Kelvin, Lord, 242 Krupp, Fred, 200 Kuznets, Simon, 246 Kuznets curve, 235 Kyoto Protocol, 157, 208, 217–218 Land as scarce resource, 124 Landfills, 223–224 Landing taxes, 160 Land management, 224–225 Land prices, 119 Land use, forest resources and, 118–119 Lead, in gasoline, 58 Limbaugh, Rush, 69 The Limits to Growth (Meadows), 233–234 Lindbergh, Charles, 185 Linkages, 195, 209 Logistic growth, fisheries and, 128, 129f Longitude Act, 185 Lovins, Amory, 69 Luxottica, 77 Macroeconomics, overview of, 8–9, 231–232 MAI See Mean annual increment Malthus, Thomas, 233 Maori people, 212–213 Marginal benefit functions, 24, 27f Marginal benefits demand curves as measure of, 75, 75f dynamic efficiency and, 34 overview of, 22–24 public goods and, 87–88, 88f total benefits and, 30 Marginal cost curve, 75–76, 75f Marginal cost functions, 22–24, 24f, 171–172, 180 Marginal costs cap-and-trade policies vs emissions taxes and, 162–166, 178–179 cost reduction and, 169–172, 170f, 186–187, 187f dynamic efficiency and, 34 overview of, 22–24, 24f total costs and, 30 Marginal damages (MD), 82–83, 83f Marginal extraction costs, 100 Marginal net benefit costs, 106, 106f Marginal returns, diminishing, 93 Marginal user costs, 104, 107–108, 112, 236 Marginal willingness to pay, 49–53, 56, 71, 74–75, 90 Marine Mammal Protection Act, 137 Marine Stewardship Council, 146 Market-based instruments advantages of, 198 Coase Theorem and, 140–143 command-and-control vs., 196–198 conservation banking, 226–228 cost reduction and, 169–179 creating property rights, 158–160 emissions trading system of E U., 157–158, 217–220 emission taxes and allowance trading, 144–145, 174–178, 175f, 176f for fishing in New Zealand, 207–214 getting prices right and, 147–152, 149f for greenhouse gas emissions, 208– 210, 209f greenhouse gas emissions trading, 157–158 index  303 for habitat and land management, 224–225 information-based approaches to, 145–147 for managing natural resources, 184– 189, 187f, 188f missing demand curve and, 152–156, 154f, 156f monitoring and enforcement and, 194–196 for municipal water pricing, 214–217 nudges and, 147, 148 optimal gasoline tax, 153 overview of, 139, 144–145, 167, 168–169, 198, 199–200, 228–230 Perrier,Vittell and, 143 pollution hot spots and, 190–194 property rights for halibut in Gulf of Alaska, 159–160 raising revenues and, 160–162 setting prices vs setting quantities and, 162–166 technological change promotion and, 179–184, 181f, 185 tradeable development rights, 225 for U.S sulfur dioxide market, 200– 207, 204t for waste management, 223–224 water quality trading, 221–223 wetland mitigation banking, 225–226 Market efficiency, overview of, 69–70, 76–78 Market equilibrium See Equilibrium Market failures See also Externalities; Public goods; Tragedy of the commons importance of correcting, 257–258 market-based policies to overcome, 147–160, 149f overview of, 7, 78, 80–81, 97–98, 147 policies to address, 7–8 Market power, 110–111 Markets demand, benefits to consumers and, 74–75, 75f demand and supply and, 71–72, 72f equilibrium and, 72–74 nonrenewable resources and, 110–111 overview of, 7, 70–71 supply, cost to producers and, 75–76, 75f Market stability reserve, 220 Markey, Ed, 208 Maximum abatement, 18 Maximum contaminant level (MCL) standards, 55 Maximum sustainable yield (MSY), 129–130, 129f, 207 McCain, John, 208 McKelvey Diagrams, 100, 101f, 108, 236 MCL standards See Maximum contaminant level standards MD See Marginal damages Mean annual increment (MAI), 115–118 Mexico, 127, 210 Microeconomics, 8–9, 231 Microsoft, 77 Mileage taxes, 153 Millikan, Robert, 243 Mitigation banking, 225–226, 228–229 Mixing, 190 See also Heterogeneity; Uniform mixing assumption Monetary valuation as cheapening worth of environment, 60–61 Monitoring, market-based policies and, 194–196 Monopolies, 77, 110 Monte Carlo analysis, 65, 68 Morality, valuation and, 60–61 Morgenstern, Richard, 55 MSY See Maximum sustainable yield Municipal water pricing, 107–108, 214–217 Myopic state efficiency, 103–104, 104f NAFTA See North American Free Trade Agreement Natural resources See also Nonrenewable resources; Renewable resources; Specific resources economic scarcity of, 234–238 market-based instruments for management of, 184–189, 187f, 188f rate of extraction of, 252 tragedy of the commons and, 93 304 index NDP See Net domestic product Negative externalities, defined, 80 Nestlé Waters Group, 143 Net benefits, 11–12, 64 Net domestic product (NDP), 246 Net national product (NNP), 246, 247– 248, 249–250 New Zealand, 158–160, 187–188, 188f, 207–214 Nitrogen oxides (NOx), 192 NNP See Net national product No-arbitrage conditions, 109, 116 Nonexcludability, 85–86, 87f, 93, 98 Nonrenewable resources decreased scarcity of, 102 economic scarcity and, 100–103, 101f, 102f efficient extraction and, 105–106, 106f Hotelling Rule and, 108–110 impact of scarcity of, 238 marginal user cost and, 107–108 market power and, 110–111 overview of, 7, 113 overview of economics of, 99 property rights and, 111–113 two-period model of extraction of, 103–105, 104f Nonrivalry, 85–86, 87f Nonuniform mixing, 228–229 Nonuse values, 48, 54 Nordhaus, William, 59 Normative decisions, discount rate as, 33 North American Free Trade Agreement (NAFTA), 251 Northern spotted owl, 65, 122–123, 124 North Sea, 241–242, 248 Northwest Economic Adjustment Initiative, 65 Northwest Forest Plan, 65 Norway, 241–242, 248 Norwegian Central Bank, 242 No Surprises Rule, 227 NOx See Nitrogen oxides Nudge (Thaler and Sunstein), 148 Nudges, 147, 148 Nutrient contamination, 221–223 Obama, Barack, 208 Offset credits, 208 Ogallala Aquifer, 112 Ohio River Basin, 192, 193 Oil Pollution Act of 1990, 54 Oil shocks, 110 Oil spills, 46, 54 OPEC See Organization of the Petroleum Exporting Countries Open access, 130–132, 131f, 132–134 Open-access resources, 93, 112 Opower example, 148 Opportunity costs, 15, 35–36, 119–120 Optimal aging problem, 116 Organization of the Petroleum Exporting Countries (OPEC), 110 Orteig Prize, 185 Owl, northern spotted, 65, 122– 123, 124 Ozone depletion, 28–29 Pacific halibut, 159–160, 189 Pareto,Vilfredo, 63 Pareto efficiency, 63, 69, 244 Parry, Ian, 153 Partial equilibrium analyses, 39 “Pay as You Throw,” 223–224 Pennsylvania Nutrient Credit trading program, 221–223 Perception, value and, 45–46 Performance standards, 144, 173 Perrier, 143 Pervasiveness of markets, Perverse incentives, 151 Petroleum Fund, 242 Pigou, Arthur, 140, 246–247 Pigouvian taxes, 140, 148–152, 160 Planned economies, markets vs., 70 PMC See Private marginal costs Poaching, 126 Policies See also Market-based instruments; Nudges to address market failure, 7–8 benefit-cost analysis and losers from, 61–63 criteria for comparing, 63–65 dynamic efficiency and, 30–34 index  305 economic definitions of sustainability and, 243–245 economic efficiency and, 20–22 factors relevant to design of, implications of economics for, 254–256 for promotion of innovation, 183–184 Pollution, climate change and, Pollution, Property, and Prices (Dales), 160 Pollution havens hypothesis, 251 Positive externalities, 82, 90–91 Potential Pareto criterion, 64 Poverty, protected areas and, 127 Powder River Basin, 61–62, 204 Power plants, 200–201 See also Sulfur dioxide abatement Preference, 49–55 Prescriptive regulation See Commandand-control Present value, 31–33, 33t, 34, 104 Price-dumping, 213 Pricing economic definitions of sustainability and, 243–244 incentives for wrong, 256 market-based policies to overcome market failure and, 147–152, 149f municipal water supplies and, 215–216 setting quantities vs., 162–166 Prisoner’s Dilemma, 96–97, 97f Private bargaining, 140–143 Private compliance costs, 36–37 Private marginal costs (PMC), 83, 83f Prizes, for technological change, 185 PROARBOL See Federal Payments for Hydrological Services “The Problems of Social Cost” ( Coase), 140 Producer surplus, 76–77 Property rights creating, 158–160 fisheries and, 158–160 forest resources and, 115, 123–128 for halibut in Gulf of Alaska, 159 nonrenewable resources and, 111–113 poorly defined, 113 water quality trading and, 223 Protected areas, forest resources and, 126–127 Public goods carbon emission abatement as, defined, 80 as externalities, 90–91 free-riding problem and, 90 market failures and, 85–91, 87f, 88f, 89f private provision of, 87–89, 88f, 89f property rights, deforestation and, 123–128 public goods as, 90–91 Quantities, setting pricing vs., 162–166 Quotas See Individual fishing quota markets Railroads, 63 Rare earth elements, 110–111 Rebound effects, 15 Red-cockaded woodpecker, 20–21 Regional Greenhouse Gas Initiative (RGGI), 209 Regulatory Impact Analyses (RIA), 57, 58, 67 Renewable resources, 7, 238 See also Fisheries; Forest resources Rents, 130–131, 236, 241–242 See also Marginal user costs Research and development, 184, 185 Reserves-to-production ratio, 235–236, 237t Reserve-to-use ratios, 100 Resource depletion, 248–249 Resource rents See Marginal user costs; Rents Revealed preference approaches to valuation, 49–52 Revenues, market-based policies and, 160–162 RGGI See Regional Greenhouse Gas Initiative Ricardo, David, 233 Right-to-know laws, overview of, 146–147 Rockefeller, John D., 77 Rotation, overview of, 115–116, 116f 306 index Safe Drinking Water Act, 55, 57 Salmon, Scale, 41 See also Economies of scale Scarcity, 7, 101–103, 214–217 See also Economic scarcity Scarcity rent See Marginal user costs SCC See Social cost of carbon Schaefer logistic model, fisheries and, 128, 129f Schnelling, Tom, 245 Scientific Certification Systems, 146 Scrubbers See Sulfur dioxide abatement Seattle Stomp, 224 Seawater, 240–241 Seismic imaging, 102 Shale revolution, 102 Sierra Club, 256–257 Simon, Julian, 234, 236 Site value, 119–120 Small, Kenneth, 153 Smith, Adam, 69, 140 Snake River, Social cost of carbon (SCC), 41–43, 43f Socialism, 70 Social marginal costs, 83, 83f Social welfare costs benefit-cost analysis and, 61–63 of carbon, 41–43, 43f overview of, 36, 37–40 Solow, Robert, 60, 110, 239–240 South Africa, 210 South Korea, 210 SpaceShip One, 185 Species habitat value, 122, 123f Spillover effects, 127 Spotted owl, northern, 65, 122–123, 124 Standard Oil, 77 Stated preference approaches to valuation, 49, 52–55 State-owned enterprises, 70 Static efficiency rule, 26–27, 27f, 103 Static reserve indices, 100 Steady-state models, 129 Stigler, George, 141 Stiglitz, Joseph, 231 Stock pollutants, 31 Subsidies, 136–137, 145, 151 Substitution, 237, 240–241 Sulfur dioxide abatement benefits of, 16–18, 17f costs of, 14–16, 17f economic efficiency and, 13, 18–20, 19f market-based instruments for in U.S., 200–207, 204t overview of, 13–14 Sunstein, Richard, 148 Supply, 71–72, 72f, 75–76, 75f Supply curves, 72, 72f Surplus See Consumer surplus; Producer surplus Sustainability defined, 232 economic growth and, 252 environmental policy and, 243–245 investment of natural resource rents and, 241–242 overview of, 238–240 problems with economic definition of, 242–243 substitution, technological change and, 240–241 Sustainable development, 246 Symmetry, market efficiency and, 77 TAC See Total allowable catch Taxes, 149–152, 153, 215–216 See also Specific taxes TCF methods See Totally chlorine free methods TDR See Tradeable development rights Technical efficiency, 16, 19 Technological change cap-and-trade instruments and, 205 market-based instruments promoting, 179–184, 181f, 185, 189 scarcity and, 237 substitution, sustainability and, 240–241 Technology standards, 144, 172–173, 183, 195 Thaler, Richard, 148 index  307 Thatcher, Margaret, 242 TMDL program See Total Maximum Daily Load program Tollbooths, 160 Top-down cost models, 38–39 Total allowable catch (TAC), 207–214 Total benefits, marginal benefits and, 30 Total costs, marginal costs and, 30 Totally chlorine free (TCF) methods, 23 Total Maximum Daily Load (TMDL) program, 221–222 Toxics Release Inventory, 146 Tradeable development rights (TDR), 225 Trading programs See Cap-and-trade systems Trading ratios, 192, 229 Tragedy of the commons as collective action problem, 94–97, 97f defined, 80 as general model, 93–94 individual fishing quotas and, 159–160 market failures and, 91–97 overview of, 91–93 Transaction costs, 142 Transatlantic flights, 185 Travel cost method, 49–50 True costs, defined, 36 Two-period model of nonrenewable resource extraction, 103–106, 106f Uncertainty, 65–68, 67f Uncompensated, externalities as, 81 Uniform mixing assumption, 190 Unintentional, externalities as, 81 United Kingdom, 241–242 United Nations Statistical Commission, 248 Upper Ohio River Basin, 192, 193 Use value, defined, 48 Value of a statistical life (VSL), 51–52 Values, 48, 56 See also Benefits Vittell, 143 Volume-based waste disposal charge, 223–224 VSL See Value of a statistical life Waste management, 223–224 Wasting Assets (Repetto et al.), 248 Water pollution, 143, 191–194 Water pricing, 107–108, 214–217 Water quality trading, 221–223 Watershed protection, 122–123 Waxman, Henry, 208 Weak sustainability, 252 Weitzman Rule, 165 West Virginia, coal industry and, 61–62 Wetland mitigation banking, 225–226, 228–229 Wicksell Rule, 116–118, 117f Widodo, Joko, 151 Willingness to accept (WTA), 46–47, 216 Willingness to pay (WTP) ability to pay and, 47 defined, 45–46 gross value vs net benefit and, 11–12 overview of, 56, 216 willingness to accept vs., 46–47 Woodpecker, red-cockaded, 20–21 World Trade Organization (WTO), 251 WTA See Willingness to accept WTO See World Trade Organization WTP See Willingness to pay Zero pollution, 18–19 Zoning regulations, 225 ... environment and natural resources The title, Markets and the Environment, suggests one of our central themes An understanding of markets why they work, when they fail, and what lessons they offer for the. .. what is new in the second edition In the years since the publication of the first edition, although little has changed in economic theory with respect to environmental quality and environmental... Atlantic thermohaline circulation, better known as the Gulf Stream, which brings warm water northward from the tropics and makes England and the rest of northern Europe habitable Although there