Topic 2: Economic Efficiency and Environmental

Transcript:Topic 2: Economic Efficiency and Environmental:
Topic 2: Economic Efficiency and Environmental Protection Larry Schrenk, Instructor ECON 315: Environmental and Natural Resource Economics Economic Background Introduction Economic Efficiency Sulfur Dioxide Abatement Efficiency and Environmental Policy Equating Benefits and Costs on the Margin Dynamic Efficiency and Environmental Policy Conclusion Overview 1. Economic Background Supply, Demand Curves Shapes Total Analysis Marginal Analysis Marginal cost Marginal benefit Average vs. Marginal Duality: Total vs. Marginal Analysis Economic Background Supply/Demand Excel Spreadsheet Excel Example 2. Introduction Budget 3-day to week-long package Willingness to pay increases, so does cost Net benefit is maximized with max difference: willingness to pay ̶ cost This is $500 4-day trip, worth $900 but costing only $500 for net benefit of $400 Analogy: Vacation Package Options: no pollution control to eliminating all pollution Benefits increasing, costs decreasing in pollution control Max net benefits where MB = MC Greater than zero pollution but less than eliminating all pollution Zero pollution is not efficient Costs outweigh benefits Extension: Environmental Policy 3. Economic Efficiency Maximizing net benefits Benefits ̶ costs Contrast technical efficiency minimizing inputs per unit of output Example: Choosing between energy efficient and standard air conditioner Energy efficiency doesn't account for benefits relative to costs Economist’s Definition Example: Sulfur dioxide emissions Causes acid rain, smog, health effects Policy options range from no control to maximum control Net benefits depend on benefits and costs of control Application: Environmental Policy 4. Sulfur Dioxide Abatement Minor reductions via operational changes Fuel switching Costs low initially Further reductions require end-of-pipe controls Scrubbers Costs increase rapidly at high levels of control Removing last bit of pollution is very expensive Industry costs increase faster than single plants Must rely on higher cost plants as control increases Pattern of increasing costs at increasing rate Convex total cost function Costs of Abatement Costs of Abatement Benefits from avoiding damages Health effects, ecosystems, buildings Damages increase rapidly at high pollution levels Affects more people, worse effects as concentration increases Pattern of increasing benefits at decreasing rate Concave total benefit function Benefits of Abatement Benefits of Abatement Efficient level maximizes net benefits MB = MC Greater than zero pollution; less than 100% control Zero pollution not efficient because costs > benefits 100% control not efficient because benefits < costs Shape of cost and benefit curves drives the result Increasing costs and decreasing benefits common Costs and Benefits Together: Economic Efficiency Costs and Benefits Together: Economic Efficiency 5. Efficiency