Res Econ 2
Terms
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- negative externality
-
External cost
A negative externality exists when the activity of some agent causes a loss to another without consent and without compensation.
External cost is the loss from a negative externality. - cost-effectiveness
-
means achieving a goal at lowest cost. -
Efficiency
- strikes a balance between the value of what is produced and the cost of producing it.
- Impact Analyses
-
estimate the various impacts of an actual or proposed
policy
types:
Environmental
Economic
Regulatory - Cost Effectiveness Analysis
-
estimate the costs of various alternatives
for reaching an environmental quality goal.
- Damage Assessment
-
Estimate the damage to a resource caused by an event so that this value can be recovered from those held liable by a court.
Note that this is done after the
damage has occurred. -
Damage assessment
oil spill -
Lost resource value
Restoration costs
o assumes resource can be replaced and that damages are not irreversible - Benefit/cost analysis and efficiency
-
1. Just because a policy passes a benefit-cost analysis (benefits
outweigh the costs) doesn’t mean that it is efficient. It just means
that it is an improvement.
2. A high benefit/cost ratio is not necessarily what we want.
3. The policy cannot be efficient if the method of reducing emissions
is not cost-effective. - Discounting
-
In general, the present value (PV) of a future cost or benefit (FV) received t
years from now with a discount rate of r% is
PV = FV
(1+r %)t
Note that the present value of a benefit is lower when you have to wait longer to receive it. - Distribution of benefits and costs
-
The distribution of the benefits and costs for Program 1 are said to be NEUTRAL
because proportional net benefits are equal across incomes.
REGRESSIVE because proportional net benefits are higher for higher income
people.
PROGRESSIVE because proportional net benefits higher for lower income people - Risk analysis
-
a. Risk valuation
b. Risk attitudes
c. The value of a statistical life -
The main ways to estimate benefits from improvements in environmental
quality are: -
Calculate reduction in direct damages from environmental improvements
Estimate willingness to pay to obtain an environmental benefit.
Stated preference methods
⬢ Ask people directly what they are willing to pay for improved
environmental quality or to avoid environmental degradation. - Human Health Damages
-
Estimate human exposure to ambient levels of pollution
Measure all health impacts of exposure
Estimate the costs of these impacts - Problems with human health damage assessments
-
1. most of us would be WTP a lot to avoid getting sick
2. our relatives would pay too
3. Direct calculations of health damages do not usually account for the resources
people expend to avoid illness (averting behavior).
It seems likely that pollution damage assessments will understate the benefits (willingness to pay) of avoiding human health impacts by increasing
environmental controls. - controversy about the accuracy of contingent valuation
-
Experience: People have a lot of experience with buying and selling
normal market goods. CV studies ask people to place values on things
that do not carry a price
Hypothetical nature: Since CV studies place people in hypothetical
situations in which money does not change hands, people do not actually
bear the costs of their decisions. People may be motivated to overstate
their WTP because they do not bear the cost of their statements - Criteria for evaluating environmental policies
-
1. Cost-effectiveness
2. Efficiency
3. Incentives for innovation
4. Enforceability
5. Information requirements
6. Fairness
7. Morality