Presentation on theme: "Valuation of non-marketed goods. Non-marketed goods Externalities and public goods complicate the estimation of impacts Ignoring these will result in."— Presentation transcript:
Non-marketed goods Externalities and public goods complicate the estimation of impacts Ignoring these will result in – Excluding (referent groups that are pertinent) – Under (overstating) benefits and costs The challenge is to measure changes utility Method 1 – experiments and measures of net impact Method 2 – revealed preference Method 4 – state preference
Walkerton In May 2000, bacteria seeped into Walkerton's town well. The deadly E. coli then slipped quietly through a maze of pipes and into the homes of Walkerton, Ont. Unsuspecting residents thirstily drank the polluted water and bathed in their bacteria-ridden tubs. But soon after, they began experiencing common symptoms of infection; bloody diarrhea and throbbing cramps. Seven people would eventually die and another 1286 would fall ill. The investigation which followed exposed an alarmingly unstable waterworks system made fragile by government cuts. http://www.cbc.ca/archives/categories/environment/pollution/dea th-on-tap-the-poisoning-of-walkerton/town-epidemic.html http://www.cbc.ca/archives/categories/environment/pollution/dea th-on-tap-the-poisoning-of-walkerton/town-epidemic.html
Economic valuation of non-marketed goods Consider the economic evaluation of regulations to adjust the way farmers manage manure and A program to offer technical advice to famers to change practice and financial assistance (grants) to invest in manure handling equipment. External effects comprise – Smell and pollution to all land users – Pollution for non-agricultural water users – Reduction in economic welfare of farmers that may be offset by exurban development that bids up the value of land How should we value this? who should pay? What does a benefit cost analysis say about regulation and proscribes how manure is managed
Coase theorem The Coase theorem states that it is not necessary to assign liability or regulate pollution Provided that – transactions costs (the costs of negotiation) are not too high, socially efficient equilibrium can be achieved regardless how the property rights are assigned. It does not matter whether the chemical factory has the right to pollute or the salmon fishery has the right to water that is not polluted. The Coase theorem fails to work because one party believes they should not need to negotiate and when the transactions costs exceed the benefit either parties could obtain by negotiation. Coase makes the point that which ever way the law interprets the property rights, as long as these rights are well defined and the transactions costs of enforcing and transferring them are not too great, society's resources will be used most efficiently by just letting private agents work out these problems to their own mutual benefit. http://faculty.wcas.northwestern.edu/~mwitte/pf/handouts/coase.html
Coase Theorem Example Consider a railroad that passes through wheat fields. The passing trains let off sparks which can burn the wheat. If the legal rights are on the side of the farmers, then they could require the trains to buy and install spark catchers to eliminate these fires. However, if that is expensive (i.e. more than the value of the burned wheat), the train owners may just pay the farmers for the damage done to the crops. If the legal rights are with the trains, the farmers may just put up with burned crops or (if that is expensive) they could pay the trains to put on spark catchers. Either way, the socially efficient outcome (install spark catchers or burn crops) is what happens and the legal rights just determine who has to pay.
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Rehabilitating the Green Tax 1.Some studies show that redistributing the surplus as an eco-bonus creates a progressive tax. 2.Green taxes at the retail level are regressive, but imposed at the upstream are less so it affects all incomes – salaries, rents, profits, dividends, which tend to fall more of richer households. 3.Green taxes should form part of a broader tax reform. For example a general shift to wealth taxes and a move to value added taxes (GST) and away from income taxes. Caution: Progressivity in taxation is not the only goal. Other goals must be sustainability (resource allocation is not disturbed to erode the tax base), ease of administration, and enforcement.
The basic math rests on geometry and the area defined by the rectangle that shows the marginal abatement cost/tax and emission level Total costs minimized (area a + b) Area b Area a MAC = marginal abatement cost Allowing emissions costs nothing E 0 = 50 Govt imposes a tax Total Abatement costs = Area under the MAC = ½ (200 x 50) = $1500
Cost of tax + abatement creates an incentive to invest in new technology With a tax of $100/tonne Industry 1: total cost = a+b+c+d+e Industry 3: total cost = b+d+e If the difference is technology, the gain is area a+ c Technology lowers the MAC
A tax imposed on industry will cost differentially depending on abatement costs of each firm (H and L) Total abatement is 80 + 20 Kg/mo An emission tax may have a lower social compliance cost than a uniform standard When abatements costs vary, a tax may be more cost-effective ($/kg controlled)
Total cost of damages foregone = e + f (total cost of abatement + avoided losses to the pollutee) The net benefit is f Total tax paid by the polluter is a+b+c+d, plus the abatement cost (e). Taxes are more costly to the firm than standard Cost of a standard (set at E*) is just e. Why tax? What dangers exist in using a tax MD = marginal social cost of damages Optimal Green Tax: MAC = MD