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The Economic Approach to Environmental and Natural Resources, 3e By James R. Kahn © 2005 South-Western, part of the Thomson Corporation.

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Presentation on theme: "The Economic Approach to Environmental and Natural Resources, 3e By James R. Kahn © 2005 South-Western, part of the Thomson Corporation."— Presentation transcript:

1 The Economic Approach to Environmental and Natural Resources, 3e By James R. Kahn © 2005 South-Western, part of the Thomson Corporation

2 Further Topics Part IV

3 Toxins in the Ecosystem Chapter 16 © 2004 Thomson Learning/South-Western

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5 5 Introduction In 1962, Rachel Carson alerted the world to the problems associated with western society's increasing chemical dependence. Carson's book Silent Spring, focused primarily on the dangers associated with the increasing use of pesticides. Events in the 1960s and 1970s made people more aware of the potential danger from toxic substances.  One was Love Canal, the "textbook" example of illegal and unethical disposal of toxic substances by a chemical producing firm.  Another was Times Beach, Missouri, a small rural town where dioxin laden waste oil was spread on dirt roads to keep down dust. The government stepped in, bought the town, and forced residents to move.  Ketone contamination of the James River was due to waste products from the manufacture of pesticides in the nearby town of Richmond being dumped in river. The result was nervous system health problems and contaminated fish.

6 6 Introduction One way to categorize the toxic problem is to distinguish between types of exposure. One type of exposure is a result of toxic substances being present in economic processes. This would include on-the-job exposure to toxic substances, pesticide residue on fruits and vegetables, and radon exposure on people's homes. Another type of exposure is a result of wastes that result from economic processes. This would include environmental exposure to humans and ecosystems, such as toxic contamination of lakes and rivers. Toxic waste can be further dichotomized relative to the type of policy implemented. One type is a policy developed to deal with past releases of toxic substances. A second is a policy developed to control new sources of exposure to toxic substances.

7 7 Introduction Toxic waste is a poison produced by the metabolic processes of organisms. The adjective toxic describes wastes or substances that are poisonous or are of inorganic origin. A more specific definition is that toxic wastes are those wastes that have following properties.  Exposure to small amounts of the waste generate adverse health effects in living organisms. These effects include: interference with a variety of life processes, including reproduction and often include carcinogenic and tetragenic (creating mutations such as birth defects) properties.  The wastes are generally of synthetic origin.  A variety of mechanisms exist for the waste to move through both the physical environment and the ecosystem.

8 8 Introduction Exposure to toxic waste can kill an organism or stress the organism to the extent that it succumbs to other stresses. Because synthetic materials do not exist in nature, nature has no mechanisms for breaking these toxic products down into simpler compounds. The variety of mechanisms available for the waste to move through the physical environment and the ecosystem implies greater potential for exposure. As toxic substances move through the food web, the concentration of toxic substances increases. This increase in concentration has extreme importance for humans, who are at a terminus on the food web.

9 9 Market Failures in Exposure to Toxic Substances in Consumption and Production A variety of goods contain toxic substances and may expose either workers, consumers, or both. This includes solvents, paints, plastics, pesticides, and fungicides. Some argue that since people choose their level of exposure this is not market failure. However, market failure may arise when there is imperfect information. In order for choices of individuals to promote social welfare, the individual must be aware of the risks that are facing, which is often not the case when it comes to toxic substances. The government can provide information on hazards through labeling. An example of this is the cigarette warning label.

10 10 Market Failures in Exposure to Toxic Substances in Consumption and Production A second approach to addressing imperfect information is to use direct controls. For example, certain pesticides can only be applied by licensed applicators and are not available for home use. One matter complicating the issue of imperfect information is that the general public does not adequately understand risk and more specifically, fully understand the concept of probability. Policymakers also have to deal with the problem that many of the risks are of future consequences. Finally, consumers view an externally imposed risk as having much greater consequences than a voluntarily accepted risk, even though the two may have equivalent implications for risk of illness, injury or death.

11 11 Market Failures in Exposure to Toxic Substances in Consumption and Production The primary piece of legislation that addresses these market failure is the Toxic Substances Control Act of 1976 (TSCA). This legislation gives the Environmental Protection Agency the authority to test existing chemicals, conduct pre-market screening of new chemicals, control unreasonable risks of chemicals, and collect and distribute information about chemical production and risks. The TSCA does not apply to pesticides, drugs, or nuclear material.

12 12 Market Failures in Exposure to Toxic Substances in Consumption and Production The EPA has implemented several policies to accomplish this authority, including requiring manufacturers to test the chemicals they produce, limiting or prohibiting the manufacture of certain chemicals, requiring record keeping and labeling, requiring notification of hazards and consumer calls, and controlling disposal methods.

13 13 Market Failures in Exposure to Toxic Substances in Consumption and Production The second source of market failure applies to on- the-job exposures. Full information about the hazards associated with the work should result in higher wages for those jobs with higher risk. Again, the problem is that there is not full information and therefore wage rates do not reflect the higher risk. There is also the problem with mobility. Many workers may feel that an alternative "safer" employment does not exist.

14 14 Market Failures in Exposure to Toxic Substances in Consumption and Production "Right to know" laws require employers to inform their workers of actual or potential exposure to toxic substances. In addition, both the Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency regulate exposure through prohibiting the use of certain chemicals and by requiring safety procedures such as protective clothing, respirators, and adequate ventilation.

15 15 Market Failures in Exposure to Toxic Substances in Consumption and Production Should all toxic substances be banned? The marginal social benefits of the toxic substances must be compared with the marginal social costs to determine the socially optimal level of production and consumption of the toxic substance. Often there will be a trade-off. For example, smoke detectors contain a radioactive material. Even though artificial sweeteners reduce obesity and associated health risks but may increase other health risks.

16 16 The Delaney Clause The Delaney Clause is a controversial piece of legislation that does not recognize the trade-off between costs and benefits. The Delaney Clause is contained in amendments to the Food, Drug and Cosmetics Act enacted in 1958. This clause bans the use of additives in processed food that are shown to cause cancer in animals. While this clause regulates the use of additives in processed foods, it does not apply to fresh foods. It also has no ability to recognize improvements in risk. A new fungicide called fosetyl A1 was developed that had an additional risk of cancer of 1 in 100 million. Since this fungicide was associated with some risk, it was banned even though the old fungicide in use had 1000 times greater risk of cancer.

17 17 Market Failures in the Generation of Toxic Waste Market failures related to the generation and illegal disposal of toxic waste are completely analogous to market failure associated with other types of pollution. Firms do not take social costs into account when deciding how much toxic substance to produce and use or which safety procedures to use. Because toxic substances are defined by strong health effects that can be generated by relatively small amounts of substance, the marginal damages from the first few units of emissions are high. One implication of this is that the optimal level of pollution is near zero, as illustrated in Figure 16.1 and it is probably more efficient to simply ban the release of the substance, than to try and achieve the small, efficient level of output. Regulatory costs are probably higher in maintaining the efficient level of output than the loss in welfare due to no emission.

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19 19 Market Failures in the Generation of Toxic Waste The problem is even more complex as long as the marginal damage function is positively related to emissions. The persistence of emissions from one time frame to the next results in current emissions having greater marginal damages because they are added on to past emissions. The present value of total damages and the present value of abatement costs must be summed and this total cost minimized. This requires choosing an optimal time path of emissions, rather than focusing on each period independently.

20 20 Market Failures in the Generation of Toxic Waste Since the optimal level of emissions of these toxic pollutants is zero or near zero, direct controls that prohibit the release of toxic substances and that mandate required disposal techniques have been implemented. Government has also developed a "cradle to grave" manifest system that creates a written record of the movement of the toxic substances from the time of manufacture until they are disposed of. Other substances have been banned such as DDT, asbestos, and PCB. Economic incentives that are appropriate for toxic substance regulation include deposit-refund systems and liability systems.

21 21 Deposit-Refund Systems A deposit-refund system would require that households to pay for improper disposal of toxic substances such as batteries and pesticides by requiring a deposit "up front." When the product is properly disposed of, then the deposit is refunded. A deposit system is more difficult to establish for large scale generators of toxic waste. There is a variable relationship between inputs and the economic or waste output, unlike the container of pesticide. In this case, a deposit-refund system may provide an incentive to generate more waste.

22 22 Deposit-Refund System A deposit-refund system based on mass balance would mean that if firms pay a per unit of input deposit of g and purchase X weight units of inputs, the firm's total deposit payment will be gx. If the per unit refund is also a direct function of X, then there is an incentive to produce more waste. However, if per unit refund is a function of a ratio between inputs and waste generated (X/W), then lower waste would lead to a higher refund. This type of refund system would require more information and monitoring than the types of command and control variables that are currently in place. A performance bond system, similar to that discussed in Chapter 13 could also be developed.

23 23 Liability Systems A liability system requires toxic waste generators, transporters, and disposal site operators to pay for the damages associated with any release of any waste for which they are responsible. The assignment of responsibility implies less probability of violation. This is the rational behind the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) which creates different types of liabilities for toxic waste generators and transporters. CERCLA establishes liability for wastes that are disposed of improperly and allows the government to force waste generators, transporters, or disposal site operators to clean up sites into which any of these parties were responsible for release of hazardous substance.

24 24 Liability Systems This act also states that firms are responsible for disposal of waste even if they contract disposal out and that firms may be sued for environmental damage created by spills. The combination of high fines and prison terms for accidental release, and extremely high fines ($250,000) and up to 15 years in jail for “knowing endangerment,” liability for damages, and liability for cleanup are strong incentives for firms to comply with laws. The CERCLA legislation also set up the “Superfund”, which was created with required payments of money from firms that were involved in the production and use of toxic substances. Existing toxic waste legacies for which a “responsible party” could not be identified would have their remediation paid out of the Superfund. Unfortunately, the money in Superfund has been almost entirely spent, it is not being replenished, and there remain many toxic waste sites remaining.

25 25 Liability and the Creation of Brownfields Although defining strict liability rules creates financial responsibility to clean-up old sites and to avoid new releases of toxic waste, it also creates an economic disincentive to undertake new economic activities on old and abandoned industrial sites. Abandoned old manufacturing sites became known as “brownfields”, a name chosen to reflect the desolation they created in the communities. Interest in brownfields increased as the Superfund diminished in magnitude and environmental justice implications of the impact of these sites began to be recognized. As a consequence, new laws were enacted to give developers economic incentives to convert brownfields to productive resources. A Brownfield Initiative undertaken by EPA in 1995 had as its focus to assess brownfields for past contamination, and certify those that were found to be free of contamination. In 2002, the Small Business Liability and Brownfields Revitalization Act was signed into law eliminated CERCLA liability for those attempting to resurrect brownfields.

26 26 The Government and Improper Waste Disposal The federal government particularly through defense related activities, is responsible for many of the most severely contaminated toxic sites. One of the legacies of the cold war is toxic waste in the form of heavy metal contamination, radioactive waste, carcinogenic solvents and other substances. Tables 16.1 and 16.2 show examples of the magnitude of the militarily generated toxic waste. People in charge of various programs have objectives that include other factors in addition to social welfare. In an effort to meet other objectives, these managers compare program costs and program benefits, which do not include full social costs and the result is excessive levels of toxic waste. It is interesting to note that this disparity between private cost and social cost is associated with government activities.

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29 29 How Much Should We Pay For Cleanup? How much to pay for cleanup of existing sites is extremely important because there are 50,000 contaminated sites in the United States, and when potentially leaking underground storage tanks are factored into the question, the number of potential sites may be greater than 2.5 million. There are two primary questions that must be addressed in developing a cleanup or remediation policy. Which sites should be cleaned and in what order should they be cleaned? To what extent should each site be cleaned? A third question might be who should pay for the cleanup, a question more of equity than efficiency.

30 30 How Much Should We Pay For Cleanup? Russell, Colglazier, and Tonn (1992) discuss five major programs that deal with past contamination. These programs include the Superfund Program of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), the Resource Compensation and Recovery Act (RCRA), the federal facility program, a program established under RCRA to deal with underground storage tanks, and state and private programs. The Superfund Program charges the Environmental Protection Agency with identifying, evaluating, and remediating hazardous waste sites in the United States. These sites include landfills, manufacturing facilities, mining areas and illegal hazardous waste dumps. According to Russell, Colglazier and Tonn, more than 1,200 sites have been placed on the national priority list of hazardous waste sites that are eligible for CERCLA funding but this number may be as high as 2,000-10,000.

31 31 How Much Should We Pay For Cleanup? Subtitle C of RCRA regulates facilities that treat store, and dispose of hazardous wastes. These facilities are required to obtain a permit from EPA and according to the aforementioned authors, there are approximately 4500 nonfederal facilities of this sort in the United States. An additional program established under RCRA deals with underground storage tanks. There are an estimated 1.7 to 2.7 million underground storage tanks in the United States. These tanks include those at gasoline stations, vehicle fleets, and chemical manufacturing companies. Many of these have been in place for more than 30 years and have begun to develop leaks.

32 32 How Much Should We Pay For Cleanup? The fourth program described by Russell, Colglazier, and Tonn's is the federal facility program directed at toxic waste cleanup at federal sites. The final program examined by the authors is a catchall for state and private programs that do not fall under the other four categories. It is estimated that there are 40,000 sites in the United States that fall in this category. As the number of sites and complexity of cleanup would indicate, the cleanup of contaminated sites in the United States will be a tremendously expensive task. Estimates of these costs are contained in Table 16.3.

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34 34 How Much Should We Pay For Cleanup? The big policy question is whether we should spend all this money to clean up every toxic site. This larger policy question can be broken into smaller policy questions:  What sites should be cleaned up first?  Should they be restored to pristine levels, or should we merely contain the wastes in place to limit their potential for damage?

35 35 Summary The toxic waste problem is very different from many of the other environmental problems that we face. Toxic substances may persist for long periods, and can pervade the ecosystem as they are transported by physical means and through the food web. Exposure to risk comes not just from release of wastes, but from the presence of toxic substances in economic processes and goods. Familiar command and control policies, as well as deposit- refund and liability systems can be used to deal with intentional or accidental release of toxic substances. It is much more difficult to deal with our waste legacy. To what extent should we clean up existing toxic waste? Should we clean them all up or seek to isolate and contain the waste?


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