The demand and supply for Environmental quality_ Demand or ...

By April Alexander,2014-02-10 00:02
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The demand and supply for Environmental quality_ Demand or ...

The demand and supply for Environmental quality:

    Demand or Damage curve

- Environmental quality is considered a function of society’s economic.

    - The demand for any particular good is related to its price or cost to beneficiary

    as environmental quality.

    - The amount a community would be willing to pay to make a slight (marginal)

    improvement in the air quality will be equal to the decline in damage costs due

    to that improvement (Fig. 2., a.2.b).

    - Price in improvement in environment = value of improvement to society.

    - Current research in this area involves estimating damage functions or curves

    and then interpolating a demand curve from such estimates.

Societal Demand Curves in a heterogeneous Community.

    - The basis of estimating the demand curve for environmental quality is that it

    based on interpolating.

    - Most of the environment fit within a public good or common property


    - Since nonpayer cannot be excluded, the only solution is that such goods be

    consumed collectively.

    - The society or community demand curve is a collective demand curve and

    consider to be homogeneous, and the problem will be minimized.

- Individual demand curve = community demand curve.

    - Societal demand price at any level of pollution = individual X number.

    - Pollution or environmental degradation does not contain itself to homogenous

    characteristics in realistic world as individual demands are not identical.

    Hence measuring a social damage curve is extremely difficult.

    - Any community demand curve or function must invariably be the creation of

    some political process, as the outcome is that when decisions are implemented,

    some individuals will be paying a higher price for environmental quality,

    while other gain more than they pay.

    - Anti-environmental sentiment”.

The costs of Pollution Abatement

    - In order to complete any analysis of correct or optimum allowable pollution

    level, one must know what the supply curve of environmental quality looks

    like. “Marginal social opportunity costs are of improving environmental


    - Social opportunity costs: goods and services that the society must give up to

     achieve an improvement in environmental quality.

     - Costs of pollution control devices

     - Abatement cost

     - Total costs of pollution abatement rises and similar to demand a supply for

     environmental quality (Fig. 2-3).

- Technology advancement and time.

- Time Factors “short-run and long-run”. Six months or two years.

    Who bears the burden of Abatement Cost

    - Cost or supply curves are useful analytical tools for decision maker. However

    they ignore the equity consideration that the decision maker face.

- The need to look for “hidden cost”, “who pays the burden”.

    - General equilibrium models that ties consumers and industries.

    - Current models are complex and relatively crude, as dealing with different

    states of the economy (consumer, producer, labor).

- It is clear that costs are widely spread throughout the economy, making them

    hard to identify.

Achieving The Social Optimum

Demand and supply and Minimum Social Costs:

Marginal Benefits = Marginal Costs

- Figure 2 4

    - Total abatement costs or total environmental damage have no relevance with

    regard to the optimal level of pollution.

    - If the marginal cost of pollution abatement is greater then the marginal

    benefits, this indicates that we have gone too far in our clean-up efforts.

    Initial Empirical Findings

- Estimating cost and demands Functions is not easy tasks.

    - For complete analysis it required to have estimates for major polluting

    industries and for each form of residual pollutants.

    - However, at present not enough detailed analysis exists for policy makers to

    actually estimate the reasonable “optimal” amount of allowable pollution for

    any particular type. “No longer this is statement is valid”.

    - Given the varying environment empirical studies may have been conducted on

    a replicate basis for all sub regions of a local area.

- Standard analytic procedures.

    Alternative policies to Achieve the optimum

    - Variety of techniques has been considered for ameliorating the environmental


    - Space limitations do not allow for either a comprehensive discussion of all

    possible policies or detailed description of those chosen for discussion.

    Performance Standards

    - The notion of a “standard” itself creates all sort of problems, as it require of

    obscuring “Q” that achieves the optimal level of pollution.

    - Current applied standard has been based on “no perceivable damage” concept,

    but not indicate “Zero Pollution”.

    - Standard are generally applied informally across firms, industries and regions.

    Given differences in real costs and demand function, this will lead to non-

    optimal resources allocation.

    Direct Controls

- Type that requires the use of the “best method” available given the current

    state of technology.

- Direct controls often stipulate the technology required “ex. catalytic converters

    on automobile”, which strongly deters the development of other more

    promising technology.

    - It fails to consider the trade off between costs and benefits or the excess

    burden placed on society to pursue non-optimum paths.

    - The benefit of this approach is that it does consider much more the

    peculiarities of industries and is thus somewhat more flexible than

    environmental standards.

    - Both standards and direct controls often are used together resulting in an

    environmental policy that suffers from the problems of both approaches.

    Land use control

    - Land use control is important part of overall pollution control program.

    - Location of the sources of residual pollutants, as control can minimize the

    extent of environmental externalities.

    - Cities use computer simulation analysis to determine the optimal location of

    new faculties.

    - One potential Flaw of this approach is that land use Management, controls

    zoning and involve very difficult equity problems. They impose pressure on

    both individual and firms.

    Pollution Taxes or Effluent charges

    - This approach is the favorite of many economists, as it attempt to place

    “price” for using environment.

    - Incentive to use pollution control up to where the marginal cost is equal to the


    - Firms would be “treated” differently in the sense of achieving low pollution


    - This approach is extremely difficult to implement as it is expensive and

    difficult to monitor industry discharges, and requires monitoring system which

    is not practical or feasible.

The Information Gap

Initial Empirical Findings

Limitation in Scientific Evidence

    - Any legislation of optimal level pollution required enormous amount of

    technical information.

- Conflicting of scientific evidence.

    - Limitation of scientific knowledge of the environment and its complexities.

Limitation in Economic Analysis

    - Environmental economics is limited by inadequacies of his own discipline as

    well as by the insufficient state of the art sciences.

- Environmental and economical tradeoff.

    - Economical analysis requires the estimation of both damage and coast of

    abetments functions.

    - Several approaches have been applied to estimate the demand function, but

    none have been really successful.

    - One prominent technique attempts to measure implicit "revealed preferences"

    of individual by examining for example, land or housing prices as related to


    - The problem rely on the fact that environmental quality is a public good and

    economists have been imperfect to develop a solid analytical techniques for

    estimating the demand for a public good in a community with a hetrogenious


Costs of uncertainty

    - Given the inadequate data and information currently available, plus the

    severely limited analytical tools to correctly approach environmental problems,

    policy maker should proceed in solving problems.

    - Policy makers often forget that the social costs of inappropriate policies could

    very well exceed the social cost of environmental degradation that they are

    attempting to eliminate.

- Flexible approach is needed, though still value and hazy.

    Private Risks versus Societal Risk

    - The social risk involved with uncertainties of environmental decisions is

    difficult to handle because such risk cannot be pooled along other public

    sector projects.

- The risk may involve irreversible global consequences.

    - The private sector also faces a significant amount of uncertainty with regard to

    environmental hazards and risks.

    - The public sector's responsibility to internalize the problem as a social issue

    and thus the public must bear the global consequences of poor decision.

    Uncertainty with regard public policy

    - Uncertainty can create anxiety between the public and private sectors.

    - Giving the current state of knowledge and analytical techniques the public

    sector became involve in environmental decisions where the decision making

    process itself is uncertain .

- The private sector now is faced with new constrains.

    - The costs of private sector activity may become extremely high, due to

    enormous transaction cost in involvement in meeting the approval of the

    public sector and regulatory requirements.

    - Too often the public sector ignore the costs it imposes on the private market

    system because of its own inefficient decision making process.

    - The risks involved in making mistaken decisions are potentially large, yet the

    potential danger of not acting could be more costly.

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