Environmental and Natural Resource Economics - Assignment Example

Running Head: ENVIRONMENTAL ECONOMICS Environmental Economics Name Course Tutor Date Question 1 (i) A number of factories producing similar goods are emitting pollutant, crude, to nearby lake. Graphically, an economist can explain how social optimal levels can be achieved. Pollution is a detrimental vice, yet it provides humanity with necessary good to sustain life. It is a side effect of useful and important activities to the survival and growth of humanity. Therefore, it is impossible not to have pollution the only solution is to try and reduce it to acceptable levels. Again, it is debatable in terms of what levels of pollution society should have. Some would argue, none at all. Further, the benefits and costs of pollution should be weighed against each other and the long term effects (Harris & Roach, 2006). In order to determine the optimal social level of crude emissions, it is necessary to have a comparison of the costs and benefits that arise from the activities of the industries. These industries provide goods that are required by society and in this case, the people living around lake. Social costs relate to all health, inconvenience, reduced benefits and any other environmental damages incurred (Bréchet & Jouvet, 2008). Social benefits consist of all gains that are achieved as a result of production using the polluting means. In this case, social costs may include health repercussions from using water from the lake, interruption of activities such as swimming, environmental hazards such as destruction of marine life, and any other costs associated with the lake as a result of pollution. Among the social benefits, gains such as convenience of access to goods and services, cheaper goods from the factories and employment in the factories are good examples. These costs are measured in monetary terms, i.e. dollars. Pollution is also measurable in terms of harm costs to the environment and its associated costs When the polluting factories increase pollution by a single unit, some level of benefit will also increase to society. Additional cost that is suffered when pollution is increased by one unit is refereed to as marginal cost of pollution. On the other hand, the gains that are reaped from increasing pollution by a single unit are referred to as marginal social benefits of pollution (Harris & Roach, 2006). If all the costs of emitting crude to the lake and the benefits that accrue from activities of the factories were to be accounted for effectively, then accurate determination of social optimal quantity of pollution is possible. This would be the quantity of pollution chosen if both costs and benefits are adequately known and included. The MSC or marginal social cost curve is upward sloping due to the increasing pollution levels as additional units are emitted. The MSB or the marginal social benefit curve is downward sloping due to the difficulty of reducing pollution even when total pollution is reduced. The social optimal level of crude emissions would be achieved at the point where the MSC and the MSB intersect. At the optimal social quantity of pollution, the marginal social quantity of pollution (Q) is equal to the corresponding marginal cost of pollution (P) Marginal social benefit/mar- MSB MSC ginal social benefit($) Social optimal point P 0 Q Quantity (units) of crude (ii) An environmentalist claims that the only good level of pollution is no pollution at all. This perception is not good and favorable to the society. First, pollution is necessary to produce goods needed by the society from the communities. Pollution is necessary as the cost of a better life for society. In reference to the diagram above, zero pollution would mean that the both marginal social cost and the marginal social benefit of pollution would be zero. The MSC would a vertical curve represented by the y-axis while the MSB would be a horizontal curve represented by the x-axis. The two would intersect at the origin (0) this means that the optimal point would be at point zero. In such a scenario, society would not have any cost of pollution and consequently, no benefits. It also translates to society meeting the costs necessary to produce goods free of pollution through paying higher prices for the commodities. If pollution is at zero, the factory would have to invest heavily in technology and manpower to facilitate this. Costs incurred would ultimately be transferred to the consumer through higher pricing (Schumacher & Zou, 2008). (iii) a. Increasing amounts if crude per unit of output Marginal social benefit/mar- MSB MSC 0 ginal social benefit($) Social optimal point MSC1 P P1 New social optimal point 0 Q Q1 Quantity (units) of crude An increase in pollution levels translates to increased social cost (Elsner, Frigato, & Ramazzotti, 2012). Assuming that benefits accrued remain the same, increasing the amount of crude would lead to a shift in the MCS curve to MSC1. The optimal social point would also shift to a lower level with a lower price and higher quantities of crude marked by P1 and Q1 in the diagram above b. Water skiing becomes more popular in the lake Marginal social benefit/mar- MSB MSC ginal social benefit($) Social optimal point P2 New social optimal point P MSB2 0 Q Q2 Quantity (units) of crude According to the diagram above, increased water skiing translates to increased social benefit. This leads to an overall shift of the marginal social benefit curve from MSB to MSB2. The social optimal point would also shift upwards Question 2 (i) In controlling environmental pollution and degradation, scholars and policy makers have often wondered the best options to take. The traditional command and control measures of controlling pollution have been seen as ineffective in some ways due to the development of new challenges that have been brought about by the modern dynamics of industrial operations. Though conventional command and control has its benefits in controlling pollution, some scholars have argued that the overall costs are greater than benefits achieved. Command and control regulations were common when countries in Europe and America started becoming more environmental conscious in their industrial operations in the 1970s. The practices were based and targeted on specific pollution aspects, for instance, clean water policies or cleaner air policies (Helfand, Berck, & Maull, 2003). The strategy reduced pollution in massive amounts but it became less useful when focus shifted to point sources of pollutions. However, there are those that argue that command and control approaches have their own measures of success and are workable in certain situations. Conventional command and control regulations Proponents of command and control strategies argue that they have worked and continue to work and have nominal efficiency. Their social benefits are more than the cost and they have proven to be more reliable than other forms of regulations. Command and control policies allow industries to come up with innovative ways putting in mind the set threshold of pollution limits. This allows environmental oriented innovations towards meeting the set limits. The requirements are incorporated in the blueprints of polluting industries hence helping in achieving overall reduced pollution. The cost of controlling pollution is different depending on the type of activities that an industry engages in. the command and control system allows a level playing field for all industries, where one cannot have economic gains by compromising environmental issues over another (Cole & Grossman, 2009). In this view, all competing goods and services in an economy are produced in a fair manner in the pollution perspective. For instance, if one industry is allowed to pollute while another is not, then it would mean that their costs would be lower and hence sell their products at cheaper prices. This would create an unfair economic environment and kill the spirit of competitiveness. The best level of pollution is no pollution at all (Bréchet & Jouvet, Why environmental management may yield no-regret pollution abatement option, 2009). Though this is the best scenario, relevant authorities can determine acceptable levels and impose limits that can be reviewed often to keep total emissions at acceptable levels. One of the down sides of command and control is that it does not give the concerned sake holders the opportunity to be flexible in determining their pollution policies. It s strictly fixed and set threshold levels of pollution have t be met. Contrary to this, consequences such as fines and pollution taxes are imposed on industries. With the world experiencing a boom in industrialization, the aggregate pollution levels have also risen. This regulation has been blamed for this. The fact that each polluter is allowed to emit a certain limit of pollutants, aggregates to huge levels of emissions in total. The end function of pollution will depend on the total number of polluting entities. Unless the scales of limits are sized down frequently, the efforts of the strategy could be worthless. Scaling levels of emissions down would mean that industrial players would have to reinvest in new systems every time a reevaluation is done. This is a costly affair for many polluters (Gallaway, Olsen, & Mitchell, 2010). Firms or industries with greater resource endowment can decide that taxes imposed for polluting beyond set limits may not significantly affect their overall productivity. This may be the case if overall costs of pollution are lower than economic benefits (ii) Regulating industrial pollution using economic instruments In a bid to control the levels of pollution that industries emit to the environment, authorities have come up with economic controls that are meant to control the amounts of emissions released to the environment. Some of these instruments include emission taxes, emissions trading schemes, emission fines, market based incentives among others. These approaches are geared towards making industries gain by reducing emissions. For instance, market incentives award industries that have certain low level threshold of pollution. These include tax incentives and exemptions when the threshold is met. Most of the economic approaches applied to reduce pollute have an effect of reducing overall abatement expenses for the polluters. It gives firms and industries the flexibility aspect which allows them to determine the levels of pollution they can maintain given their cost benefit analysis (Harris & Roach, 2006). The strategies are preferred by environmental economists as they allow authorities to lower the burdens involved in setting strict command and regulation based controls. Consequently, costs are significantly reduced for both the industries and regulators. Industries seek to gain economically and socially by being environmental conscious. One of the main disadvantages is that industries with huge turnovers may chose to pass on the incentives and continue polluting. The cost of polluting in terms of taxes and fines may be an insignificant fraction of the gains from production associated with high levels of pollutions. Reducing pollution may be a limiting factor in their production and hence they may choose to continue polluting and suffer the insignificant losses. Economic incentives allow industries to produce goods at different costs depending on their adherence to the set regimes (Smith & Vos, 2007). At times, products from emission free industries tend to be more expensive due to the overall costs set up in reducing emission. In the long run some producers will have a higher advantage over others in pricing. Similar products end up having different prices based on whether the production system is environmental friendly or not. However, non polluters can take advantage of this and promote their products as ‘green’ or environmental friendly over their competitors’. Some tools such as environmental subsidies and incentives are costly as governments have to pay industries for every unit that pollution is reduced (Oates & Baumol, 2010). Though it is for the greater good, the costs of maintaining such regimes may be unsustainable in the long run. If some industries were to reduce emissions, it would mean them incurring huge costs that may lead to and exit in the industries. Without the subsidies and incentives, some industries would not survive. Where taxes are involved, there is always the issue of tax evasion. If an industry is potentially high taxes because of its emission, it may lead to finding ways to evade the taxes involved. In such case, issues of illegal dumping, given the hefty taxes. Cleary, economic instruments in controlling industrial pollution are associated with high costs of implementing and administration. It is also difficult to measure the exact amount of pollution in specific units to determine taxes, subsidies and incentives (Harris & Roach, 2006). References Bréchet, T., & Jouvet, P.-A. (2008). Environmental innovation and the cost of pollution abatement revisited. Ecological Economics , 65 (2), 262-265. Bréchet, T., & Jouvet, P.-A. (2009). Why environmental management may yield no-regret pollution abatement option. Ecological Economics , 68 (6), 1770-1777. Cole, D. H., & Grossman, P. Z. (2009). When Is Command-and-Control Efficient? Institutions, Technology, and the Comparative Efficiency of Alternative Regulatory Regimes for Environmental Protection. 888-934. Elsner, W., Frigato, P., & Ramazzotti, P. (2012). Social Costs Today:. London: Routledge. Gallaway, T., Olsen, R. N., & Mitchell, D. M. (2010). The economics of global light pollution. Ecological Economics, , 69 (3), 658-665. Harris, J. M., & Roach, B. (2006). Environmental and Natural Resource Economics:A Contemporary Approach. Medford: Tufts University. Helfand, G. E., Berck, P., & Maull, T. (2003). Chapter 6 The theory of pollution policy. Handbook of Environmental Economics , 1, 249-303. Oates, & Baumol. (2010). Regulatory and Non-Regulatory Approaches to Pollution Control. Guidelines for Preparing Economic Analyses , 4-21. Schumacher, I., & Zou, B. (2008). Pollution perception: A challenge for intergenerational equity. Journal of Environmental Economics and Management , 55 (3), 296-309. Smith, S., & Vos, H. B. (2007). Evaluating Economic Instruments for Environmental Policy. London: OECD Publishing. Read More