Environmental Econ Test 2 - Essay Questions
Discuss the problem of corporate power in environmental regulation using the concepts of "regulatory capture", "imperfect information" and control of "technical studies". Give examples.
An unrestrained free-market will produce in too much pollution, suggesting that the government needs to create regulations for the market behavior in order to protect the environment. However, the government itself has its own limitations, obstacles stand in the way of an effective government action. Regulatory capture is a form of political corruption that occurs when a regulatory agency, created to act in the interest of the public, instead advances the commercial concerns of groups that dominate the industry or the section of the industry they are charged to regulate. Imperfect information is when regulators have a difficult time obtaining accurate information about the benefits and costs of pollution reduction. Benefits such as cancers reduction and ecosystems salvaged, as well as costs are hard to quantify. Under these circumstances, it is difficult to impose regulations that achieve cost-effective control of pollution (regulators are not given a clear goal, it is difficult to determine a "safe" level of emission, etc). So regulators often have to turn to the sources they seek to regulate for data. Technical studies is when the ability to hire "experts" to conduct technical studies of benefits and costs is an important channel of influence. Companies have the money to conduct studies of the costs of regulations and they control the studies. As a result, economic models are confusing and their underlying assumptions are buried. Some examples are coal studies done by coal companies, which are often one-sided. Another example are climate models where information can delay implementation of regulations and save polluters money.
How would using measures of "well-being" instead of "per-capita consumption" affect policies toward sustainability?
As compared to our parent's generation, our generation's increase in consumption reflects progress, however, it does not indicate happiness. If material gains do not lead to happiness, then efficient outcomes do not really increase welfare. The Easterlin paradox refers to surveys results showing that increases in income only raises happiness slightly, and only to about a median income level. Satisfaction from consumption depends on one's consumption relative to social norms, which is influenced by effects such a bandwagon, snob and Veblen. In addition, positional competition (or competition for a positional good) can lead to negative consumption externalities, resulting in a negative externality effect on third parties not involved in the consumption. Well-being takes into account happiness, if one focuses on happiness instead of a function of how much goods are consumed, one can get a better idea of how the economy is functioning. Some of the economic tools used to reduce consumption, with well-being in mind, and drive sustainability are consumption taxes, mandate European-style vacations (which provides more leisure time to the employee at the cost of a reduction in wages and consumption) and advertising regulation. People are more likely to accept a tax increase to reduce consumption for a good cause, such as their children's welfare.
Discuss "bandwagon", "Veblen" and "snob effects". What is a Veblen good?
Bandwagon, Veblen and snob effects are all effects created by consumption. The bandwagon effect is when someone consumes a good because others are consuming the same good, as a way of maintaining social status. The snob effect is when someone consumes a good because others aren't consuming it, with the purpose of being different. The snob effect can work in two ways: a person buys a good other people are not using and the good is more expensive, or a person continues to use a good they have to prove that they don't need the most updated version of that good, but could work with what they have. The Veblen effect is when someone buys a good to show off that they are wealthy and are at the highest social class. A Veblen good is a good whose demand increases with an increase in price. People who buy Veblen goods believe that the higher price mean a higher social status, because lower classes are not able to afford it. If the price of a Veblen good decreases, preference and demand for it also decreases, it is no longer a status symbol.
What are consumption externalities? Give some examples.
Consumption externalities are benefits and costs of consumption not borne by the consumer. It occurs when consuming a good results in either a positive or a negative externality to third parties. A positive consumption externality is when consuming a good gives benefits to others. An example is going to university to achieve a higher level of education. One's higher level of education can benefit others in society because one can teach others, create some new kind of technology that improves the lives of others and so on. Another example of a positive consumption externality is taking medicine to prevent the spread of an infectious disease. A negative consumption externality is when consuming a good or service has harmful effects on others. The example mentioned above about going to university to obtain a higher education can also cause positional competition. One's decision to receive higher degree of education can decrease the chances of those without a degree to get a promotion at the workplace. Another example of negative consumption externality is smoking, which can cause harmful effects to those who breathe in the smoke (second-hand smoking).
Discuss and evaluate the arguments of Gretchen Daily and Valenti Rull about pricing nature.
Daily proposes the "ecosystem services" approach to conservation. Undeveloped nature provides services to human society, such as clean water and flood protection. These services can be valued in financial terms that are high enough to justify protecting it. She also believes that this can be achieved by creating financial incentives to make landowners want to preserve the ecosystem. An example used by Daily is paying landowners not to damage the environment. Although critics say that doing so will imply that landowners are entitled to destroy nature (instead of punishing them for not doing the right thing), Daily argues that regulations that punish landowners only serve to anger them and encourages them to remove any endangered species from their property before authorities find out. If we put prices on things, then the market will allocate appropriate resources to conserve it. Rull defends the need to preserve the biosphere because it guarantees future of humankind. Biodiversity research and conservation should be guided not by laws and economic factors, but by science. Rull argues that we need to protect the ecosystem because we have "no reason to destroy it." He favors biosphere valuing and conservation on a scientific approach. We have no right to disrupt millions of years of evolution.
What is the corporatist model of regulation? What is regulatory impact analysis?
In a corporatist model of regulation the regulations are explicitly decided in a bargaining context among representatives of "corporate" groups - the EPA, environmental organizations and private firms. In exchange for being included at the table, all of the groups would agree to abide by and support the final outcome. The EPA would thus be given much more flexibility in determining policy and be insulated from subsequent lawsuits. The corporatist model accepts that "a few big interests" determine the details of government environmental policy and provides a more efficient forum for them to do so. Regulatory impact analyses (RIAs) are cost-benefit studies prepared for new safety standard regulations, even though their results can't legally determine the regulatory decision. The EPA is supposed to examine several different options and, among all the options that achieve a safety goal, pick the most efficient. The EPA is required to conduct formal cost-benefit analysis for any new regulation expected to cost more than $100 million.
Discuss some of the productivity impacts of regulation.
In theory, regulation can improve productivity by improving short-run efficiency of resource use, encouraging firms to invest more for the long-run and by reducing healthcare or firm level clean up costs, which then frees up capital for long-run investment process. The Porter hypothesis argues that regulation, while imposing short-run costs on firms, often enhances competitiviness in the long-run. An example of a regulation impact on productivity is the technology-forcing regulation, which encourages firms to develop more productive manufacturing methods by setting standards they must achieve. As a result of technology forcing, some firms have developed new production methods to aggressively reduce waste, instead of installing equipment to treat their emissions, cutting both costs and pollution at the same time. Regulation may also dampen productivity by imposing direct costs on regulated firms, which may crowd investment in conventional capital. It can also cause higher prices for important economy-wide inputs such as energy and waste disposal, leading to reductions in capital investment in secondary industries directly affected by regulation. Another negative impact is the fact that regulation may frustrate business people with "regulatory burden" and "red tape" associated with regulation, including environmental regulation (filling out forms, obtaining permits, holding public hearings).
Discuss incentive compatible regulation.
Incentive compatible regulation ensures that the incentives faced by the regulated parties are compatible with the regulator's goal. Imperfect information is one of the primary obstacles to effective government regulation of the environment. Due to budget limitations, the Environmental Protection Agency (EPA) can only perform limited research, often they have to turn to the industry for data about expected compliance costs of regulation. This can result in the industry gain from lying. Incentive compatible regulation is a regulatory policy designed to minimize gains from lying, a way of dealing with reporting bias. It is called incentive compatible regulation because the incentive for the regulated party is compatible with the regulatory goal. An example is if regulators were to control pesticide use by taxing rather than banning it, then firms would have an incentive to understand rather than overstate their control costs.
Discuss Juliet Schor's view of "the overworked American" and her solution to the problem. Do you agree or disagree? Why or why not?
Juliet Schor views America's labor as overworked because we consume too much - Americans are working longer hours, not by choice but out of necessity. We spend too much time at work and not enough time at leisure. Consumer credit did more than anything else, establish a cycle of work-and-spend, where spending increases the need for paid hours, which leads to further spending as a compensation for circumstances made increasingly miserable by work. She has compared it to the past working hours in the U.S. and how there is now an increasing trend to work longer hours at one's job. In addition, companies prefer to pay people time and a half (overtime) for more hours of work instead of hiring new people, employers prefer to have fewer workers working longer hours than more workers putting in fewer hours. Her solution is to work less, get a less demanding job and consume less.
What are the major causes of biodiversity loss?
One of the greatest threats to biodiversity is loss of habitat and destruction, which is directly linked to human induced pressures on the environment. Another threat are alterations in ecosystem composition, assemblages of species and their interactions with their ecosystems is critical for saving the species and supporting their evolution. Alterations in ecosystems are contributing factors to species and habitat loss. Another cause is over-exploitation of resources, such as over-fishing, over-hunting and over-collecting of a species, which can quickly lead to it's decline. Invasive alien species, or the introduction of exotic species that replace native species. The annual economic damage cause by invasive species is estimated to be about US$1.4 trillion. Pollution and contamination are another cause, biological systems respond slowly to changes in their environment and pollution and contamination can cause irreversible damage to species. Finally, global climate change can also cause biodiversity loss, when the ecosystem is not provided enough time to adapt to changing climate conditions. It is impossible to estimate extinction rate accurately today, since the exact number of species is unknown. However, extinction rate today is estimated to be 1,000 to 10,000 times the biological "normal" rate.
What are "positional goods"? How do positional goods create consumption externalities? What is an "expenditure cascase"?
Positional goods are goods with a fixed or inelastic long-run supply, such as uncrowded suburbs within an easy community to the city or green space, a spacious vacation home, Rembrandt paintings, clean air and water. Positional goods create consumption externalities by positional competition (competition for these goods). As people grow wealthier, the demand for these positional goods increases, so some sort of rationing scheme is necessary. For privately owned goods, the price rises to eliminate excess demand and clear the market. For public goods the rationing takes place though congestion. In short, to obtain access to certain goods we have to either pay a higher proportion of our income or accept degradation in quality. Price changes do not work for public goods, so with more people using these goods, there is more congestion and more drive for people to be selfish (an example is a person standing at the theater, the person standing forces others to stand up, making everyone worse off). Expenditure cascade is changes in consumption which affect all incomes in response to changes in income distribution. It is a cascade of spending that results from consumption by the wealthy, which triggers emulative spending by the next lower class, which triggers spending by the class below that and so on.
What are rival and nonrival goods? What are the implications of each one for tax policy??????????????
Rival goods is a type of good that may only be possessed or consumed by a single consumer. Using a rival good prevents its use by other possible users. Rival goods can be durable, where users may use them one at a time, or nondurable, where consumption destroys the good, allowing only one user to enjoy it. Because these kinds of goods can only be used by one person, competition is created for their consumption. Consumers become rivals in an attempt to obtain these goods. For example, a skate board represents a durable good because other consumers may use it after the current rider is finished. A non-durable good, such as a cup of coffee, will perish after consumption. Only one consumer will drink coffee, and after it is gone, there will be nothing left for another consumer to use. Non-rival goods are non-excludable goods, one person's use doesn't affect the next person's use of it.
Give evidence for and discuss the Easterlin paradox.
The Easterlin paradox is about how an increase in income only increases happiness slightly and only up to a median level of income. It shows that money can buy happiness, but only up to a certain point, and at a decreasing rate. According to the Easterlin paradox, there's little difference in happiness between the middle class and the upper class. People living in developed countries, with a higher level of income, have reported happiness lower than people living in under-developed countries. There have been reports of people living in Western Europe and their happiness compared to people living in parts of Africa and, surprisingly enough, happiness level of people in Africa seem to be higher, even though Africa is under developed and the people consume significantly less. This shows that increasing one's non-competitive and competitive consumption only makes up happy up to a certain point. Once everyone else starts consuming more, your happiness decreases. Thus, using the example of the happiness levels of people in African, lower levels in consumption can indicate the same level of happiness or a higher level as compared to developed nations. There is indications that the rate of consumption in the US has gone up since the 1950's and, with it the amount of work hours, which results in loss of leisure time and overworked employees.
Briefly state and discuss the Hotelling theorem.
The Hotelling theorem was crated by Harold Hotelling in 1931. It deals with the optimal use of resources. For a renewable resource, the optimal rate of extraction is s = F'(X) + (deltaP/P), where F'(X) is the growth rate of the stock, (deltaP/P) is the growth rate of the resource price and s is the discount rate. In the case of non-renewable resources, the stock isn't growing (we know exactly how much oil is in the ground) so the rule is s =(deltaP/P). The resource should be depleted in such a way that the rate of growth of price of the extracted resource should equal the rate of discount. An alternative variant of the Hotelling theorem is Pt=Po*e^st, where the price of the resource in any period t is equal to the price in the initial period 0 compounded at the discount rate s. Changing parameters such as discount rate s, price of backstop technology (Pb) and the stock of resource affects the optimal price and quantity paths produced by the Hotelling rule. An example of changing the price of backstop technology parameter: when the price of oil gets high enough, some backstop technology (another source of energy) will be as cheap. The price of oil should insure that oil be exactly exhausted when the price of the barrel of oil reaches the price of the backstop technology. You use the last drop of oil just when the price of oil is equivalent to the price of solar energy.
Using a diagram discuss the impact of changing the discount rate on the optimal depletion of a non-renewable resource.
The diagram illustrates the effect of increasing the discount rate on the optimal depletion of a non-renewable resource. P0 is the optimal price and T is the time period in which a resource is exhausted. The 'original price path' shows the price path of a resource over time - the shape of the price path is determined by the Hotelling rule (Pt = P0*e^st). An increase in the discount rate (s) will change the price path as shown in the diagram. On the original price path, if P0 remains the same then Pt will be anywhere above the path and the limit, Pb, will be reached with some of the resource left unexploited. If the discount rate increases, Po is no longer the starting point, a new starting point, Ps', will show below P0. The initial price is lowered, later prices are raised, and T is reduced to T'. Higher discount rates mean a rapid exhaustion of the resource (positive discounting in the future encourages more rapid exploitation of natural resources).
Using a diagram discuss the impact of new discoveries on the optimal depletion of a non-renewable resource.
The diagram shows that if resource discoveries are made on a frequent basis, there will be discontinuities coinciding with a resource discovery. The general trend of prices could therefore be downwards, as the lowest curve in the diagram. An example can be used in new technology discoveries and the petroleum exhaustion: new technology lowers the cost of extracting oil from a field and results in the rise in the production of oil. But the effect also speeds up the exhaustion of oil to recuperate capital costs, so the field is exhausted sooner (Yates field in Texas and the Forties in the North Sea). If the social costs of using fossil fuel are high enough, it implies that some of it should not be used.
Discuss the three hierarchies of the value of biodiversity. How can each hierarchical layer be quantified?
The three hierarchies of the value of biodiversity are economic value, human value and ecosystem value. The economic value of biodiversity involves the value of farmland, fertile soil, wetland and man groves for species development. In addition, economic value includes the value of ecosystems for providing plants and species that can potentially have answers to our biomedical needs. Pharmaceutical companies would have never been able to create effective drugs without such diversity of genetics in rare plant types. The human value, associated with such biodiversity, is the aspect of the unknown and preservation for the future. Humans still look toward nature as something we don't fully understand, thus the preservation of nature is still very important. In addition, human philosophy dictates that we leave resources intact for the next generation, and leave the surroundings the same for our children's generation so they have the same opportunities and guarantee of living. The ecosystem value of biodiversity relates to the value that the ecosystem plays to biodiversity, such as resilience. Diverse ecosystems tend to be resilient to droughts, and can preserve life even in scarce conditions. In addition, ecosystems act as an absorption sink to rainfall and reduce the extreme impacts of floods. However, ecosystems can be dangerous (wild forest fires), although this is sometimes necessary to pollinate certain conifers. How to put value on biodiversity?
Discuss Goodstein's "two broad obstacles" to effective environmental regulation.
The two broad obstacles are poor information and the opportunity for political influence. Regulators are never given a clear-cut goal for environmental regulation. For most pollutants, it is very difficult to define "safe" emission levels in purely scientific terms. Thus, a political definition of safety, based on technical information must be worked out. More generally, the available risk assessment give only rough indications of health risks and cost estimates can be equally unreliable. In addition, regulators often turn for information to the very sources they seek to regulate, which is known as reporting bias. Many economists have focused on improving regulator's access to information as a crucial strategy for improving regulation. Uncertainty about the facts means that any decision to promote safety or efficiency leaves room for bureaucratic discretion. With the opportunity for discretion comes the opportunity for political influence. Government officials have motivations other than fulfilling the letter of the law, these include: career building, satisfying ideological preferences and job satisfaction. Industry and environmental groups deploy substantial resources to affect elections, government legislation and regulatory decisions, due to bureaucratic discretion.
Using graphs discuss the problem of regulation with imperfect information.
Using the example of the ban on the use of pesticides in high-risk countries, the diagram illustrates the problem of regulation with imperfect information. The true marginal benefits and costs of the ban are represented by MC and MB on the diagram. If the EPA has access to this information from companies, efficiency would require a ban applying to A* acres. However, suppose that the EPA must rely on agrichemical company sources for information about how much it will cost farmers to switch over to alternative pest-control methods. Industry has a clear incentive to lie and overstate the most marginal cost (MC'). If the industry does so, and the EPA uses the industry estimates, the agency will ban A' acres, which is an inneficiently low number. Two responses to imperfect information are in-house analytic capability of the EPA and to rely on incentive-compatible regulation.
