Tag: externalities

India to apply Dr. Interis’ teachings

Posted on

From CNN Money: India Slaps New Taxes on Cars to Curb Pollution

The tax hikes were unveiled as part of India’s annual budget on Monday by Finance Minister Arun Jaitley, who described pollution and traffic in Indian cities as “a matter of concern.”

Buyers of small cars will now pay a tax of 1%, while diesel cars will be taxed at 2.5%. SUVs and vehicles with bigger engines will be hit by a 4% tax.

Thirteen of the 20 most polluted cities are in India, according to air quality data released by the World Health Organization in 2014. India’s capital New Delhi, which is home to more than 20 million people, topped the list.

As I teach in class, pollution from vehicles is an example of a negative externality. When people drive around in vehicles, the emissions affect not only the buyer and seller of the vehicle, but others as well. Because it affects these “others” who are external to the market transaction, it’s called an externality. And because people think pollution is bad all else equal (exception: Elmer Fudd as Siegfried in What’s Opera Doc?*), it’s a “negative” externality.

I also teach that a possible way to increase economic efficiency in the presence of a negative externality is to impose a tax which discourages the action that creates the externality. In this case, India is imposing a bigger tax on vehicles which pollute more, all else equal, to discourage purchases of higher-polluting vehicles. Although, as my colleague and former adviser Tim Haab says here, there’s a much more straightforward approach to address the problem.

* Smooooog! See 5:39 here.

HT: Dr. Freeman

Can I pay you not to harvest that timber?

Posted on

From BBC News, Norway is going to pay Liberia to cease all harvesting of trees from its rainforest by 2020:

Liberia is to become the first nation in Africa to completely stop cutting down its trees in return for development aid.

Norway will pay the impoverished West African country $150m (£91.4m) to stop deforestation by 2020.

Why would Norway want to do that? Apparently…

Liberia’s forests are not as big as other countries but the country is home to a significant part of West Africa’s remaining rainforest, with about 43% of the Upper Guinean forest.

It is also a global diversity hotspot, home to the last remaining viable populations of species including western chimpanzees, forest elephants and leopards.

…

“We hope Liberia will be able to cut emissions and reduce poverty at the same time,” said Jens Frolich Holte, a political adviser to the Norwegian government, speaking to the BBC on the sidelines of the UN climate summit in New York.

So apparently (assuming “Norway” is acting on behalf of its citizens) Norwegians value the forest because it provides habitat for endangered species and because it acts as a carbon sink. Well, that’s not really that surprising – plenty of studies have shown that residents of one nation value ecosystem services provided by forests and other kinds of habitat in other nations.

But what is surprising is that the two nations were able to strike a deal. Here’s why: typically, the benefit to the nation owning the forest (here, Liberia, whose harvesters can sell the timber) of harvesting from it is greater than the cost of harvesting, which includes not only costs of equipment and labor, but also costs of giving up carbon storage and the costs of harming wildlife habitat. Let’s call the benefits of harvesting to Liberia Bl, and the Costs of harvesting to Liberia Cl. However, forests provide services like carbon storage and wildlife habitat that benefit not only the nation which controls the forest, but residents of other nations as well. So let’s say we have some nations whose names start with a, b, and c. The typical problem is that, even though Bl > Cl, Bl is yet less than Cl + Ca + Cb + Cc. So, from the perspective of the entire world, it’s economically inefficient to harvest from the forest, but from the perspective of the owning nation, it’s economically efficient to harvest from the forest.

This problem comes up repeatedly with the Amazon rainforest which is primarily controlled by Brazil. As far as I know, Brazil has never entered any similar deal with another nation or group of nations to receive payments to not harvest from its rainforest.

In the case of Liberia and Norway though, a deal was struck because the benefits to Norway of not harvesting the forest are greater than the $150m payment it gives to Liberia, and the $150m that Liberia receives is greater than its costs of not harvesting from the forest (i.e. forgone profits from selling timber). And, again, this assumes that each nation has made a decision that is actually best for its own nation.

As the article mentions, success of the deal will depend on being able to enforce the ban on logging, and Norway is prepared to help with that.

By the way, this is also the same exact problem that makes coordinating a global effort to curb greenhouse gas (ghg) emissions difficult (e.g. the Kyoto protocol). For each individual nation, the costs of cutting down on ghg are greater than the benefits of doing so. But from a global perspective, the costs are less than the benefits of doing so because curbing ghg emissions in one nation benefits all other nations.

You don’t see this kind of deal that Liberia and Norway struck very often, if ever. And one of the nice things about it is that residents of other nations besides Norway benefit as well, for example, the U.S. Many U.S. citizens would be happier protecting the habitat of the chimps, elephants, and leopards than allowing the habitat to be cut down. That increase in happiness? Economists would consider that to be a benefit that should be accounted for in any economic analysis of the decision – but most non-economists aren’t used to thinking about these kinds of benefits.

That’s why I describe economics in my principles class as the study of how to make the best decisions by comparing all the costs and all the benefits of an action.

What does your dog doo in the cemetery?

Posted on

The Dispatch reports that the city of Starkville is struggling with how to handle dog waste in the city’s cemeteries.

Starkville aldermen will let the city’s informal cemetery board decide recommendations on how to curb a growing trend of irresponsible pet owners not cleaning up their animals’ waste after the board took no action on the matter Tuesday.

Several residents spoke out against an increasing amount of students that take their dogs to University Drive’s Oddfellows and Brush Arbor cemeteries and allow them to relieve themselves without properly disposing of the waste. A full list of cemetery board members was not available from city staff as the group is comprised of lot owners and is independent of Starkville’s bureaucracy, but aldermen Tuesday said the committee is split between banning pets from those areas or installing new waste receptacles and signage outlining park rules.

This is a great local example of how to handle a negative externality – when one person’s actions have an unintended negative effect on others. Other examples of actions that create negative externalities might be smoking in public, ringing cowbells at a football game, or a factory polluting the air or water. Here, dog waste is both unpleasant in and of itself for cemetery visitors, but many also believe it is disrespectful in the first place to relieve one’s dog in a cemetery.

In environmental economics, we often teach that a good way to deal with externalities is to make the externality-creating action more expensive. This discourages people from engaging in the action. For example, you could increase the tax on cigarettes, or impose a fine on polluting factories if you wanted to discourage smoking or pollution.

In this case, you could charge dog-owners who don’t pick up after their pet. But it would actually be very difficult to enforce such a policy because it would cost a lot to consistently monitor the cemeteries to see if people don’t pick up their pet’s waste. (Is that how we’d want police officers spending their time, for example?) This pet waste problem is actually a very similar problem to littering – you see signs on the highway about fines imposed for littering, right? But let me ask you: how many of you have ever been fined – or have known someone who has been fined – for littering? I’m going to guess not many of you.

In fact, the littering laws are more enforced by social norms than the threat of fines. That is, parents tell their children not to litter, or friends give their friends who litter scornful looks, or you see an anti-littering television ad or billboard, etc. Changing social norms can be a more efficient way of enforcing policies in which it is difficult or very costly to impose more traditional enforcement mechanisms such as fines or taxes.

So if our goal is to discourage people from not picking up their pet’s waste in the cemeteries, changing social norms might be the way to go. By putting up signs in the cemeteries, people become aware that not picking up pet waste is an undesirable behavior. Also, if pet owners see other pet owners properly disposing of pet waste, they get a signal about what is socially (un)acceptable. So I like the idea of putting up signs. There might also be a fine imposed for violators as well – but, like the littering example, this fine will be of more value as a signal about undesirable behavior than as an actual punishment imposed. But I also like the idea of putting in more trash receptacles in the area – this makes it cheaper to engage in the desired behavior (properly disposing of waste).

Economists teach that people respond to incentives and we usually focus on financial incentives. But social incentives have been shown to be effective in many situations as well. So the next time you see someone who doesn’t properly dispose of pet waste, you might try politely pointing them in the direction of the nearest trash can.

Renewable energy, birds, and Apple, inc.

Posted on

I knew wind turbines kill birds, but it appears solar energy can as well. From NBC News:

Workers at a state-of-the-art solar plant in the Mojave Desert have a name for birds that fly through the plant’s concentrated sun rays — “streamers,” for the smoke plume from birds that ignite in midair. Federal wildlife investigators who visited the BrightSource Energy plant last year reported an average of one “streamer” every two minutes.They’re urging California officials to halt the operator’s application to build a still-bigger version until the extent of the deaths is assessed. Annual estimates range from a low of about a thousand by BrightSource to 28,000 by an expert for the Center for Biological Diversity environmental group.

Sheesh. You try to avoid one negative externality and another pops right up to take its place. 

The link to the article also contains a video about how Apple, Inc. is using 100% renewable energy. Now why do you think they’d try to do that???

Air quality scares Pascagoula residents

Posted on

From the Sun Herald:

A neighborhood along Bayou Casotte, in the heart of the state’s most industrialized county, has been co-existing with industry for decades.

…

But in the last two years, things have changed.

A sticky dust blows in and there’s a strong acrid smell that lingers day and night. Residents with heart or immune problems are reporting breathing issues.

Neighbors say when they mow their lawns, the dust that’s kicked up burns eyes, noses and skin. There is silica, cadmium, aluminum and other metals in soil samples. Smells persist.

Unfortunately the article doesn’t suggest any ideas about why the problem has suddenly appeared, or become worse, in the past two years. This is a classic externality problem, where production by industry creates a negative effect (air pollution) on a third party (the nearby residents).

Apparently the nearby industries have met with neighborhood representatives and have undertaken some actions, but one woman says that no one is taking responsibility:

She said Mississippi Phosphates came to her house with an air monitor to tell her the problem wasn’t theirs.

VT Halter shipbuilding has met with her several times. It responded to a call on May 14 and determined a smell she reported was not coming from Halter.

All the industry say they’re meeting air-permit requirements.

 

So one problem is that the source of the pollution can’t be identified, at least not by residents, without additional help. This makes it harder for different parties (the residents) to unite their voices against the polluter because the specific polluter is unknown.
A second problem is that the industries are meeting their air-permit requirements so they have little incentive to cut emissions further because it is costly to do so.
The Coase Theorem states that, under certain conditions, parties (here, the residents and the industries) can get together and solve an externality problem without any government or policy intervention. But one of those conditions is that the people negatively affected by the externality can get together and bargain with the polluter. Because the polluter can’t be identified, and because there are many people negatively affected by the pollution (which makes coordination challenging), this condition is hard to meet in this case. Policy intervention may therefore indeed be the best course of action…although I’m not saying there is or isn’t a need for it in this case specifically.

 

Externality watch: Air pollution leads to 7 million deaths

Posted on

From BBC news, air pollution caused 7 million deaths in 2012:

Seven million people died as a result of air pollution in 2012, the World Health Organization estimates.

Its findings suggest a link between air pollution and heart disease, respiratory problems and cancer.

One in eight global deaths were linked with air pollution, making it “the world’s largest single environmental health risk”, the WHO said.

Nearly six million of the deaths had been in South East Asia and the WHO’s Western Pacific region, it found.

Largest single environmental health risk? I hadn’t hear that before but it makes sense because air pollution is a pretty much global phenomenon.

In general, environmental economists tend to think that pollution is not “internalized” meaning that the level of pollution is above the level which is economically efficient. Under economic efficiency there would definitely still be some air pollution because, although the pollution is costly, it would be even more costly to eliminate the pollution entirely.

Here’s how air pollution affects health:

Reducing air pollution could save millions of lives, said the WHO.

WHO family, woman and children’s health assistant director-general Dr Flavia Bustreo said: “Cleaning up the air we breathe prevents non-communicable diseases as well as reduces disease risks among women and vulnerable groups, including children and the elderly.

The WHO assessment found the majority of air pollution deaths were linked with cardiovascular diseases.

For deaths related to outdoor pollution, it found:

  • 40% – heart disease
  • 40% – stroke
  • 11% – chronic obstructive pulmonary disease (COPD)
  • 6% – lung cancer
  • 3% – acute lower respiratory infections in children

For deaths related to indoor pollution, it found:

  • 34% – stroke
  • 26% – heart disease
  • 22% – COPD
  • 12% – acute lower respiratory infections in children
  • 6% – lung cancer

New sulfur regulations to increase gas and automobile prices

Posted on

From the New York Times, the EPA will soon force oil refiners to remove all sulfur from gasoline.

 The Environmental Protection Agency plans to unveil a major new regulation on Monday that forces oil refiners to strip out sulfur, a smog-forming pollutant linked to respiratory disease, from American gasoline blends, according to people familiar with the agency’s plans.

When burned in gasoline, sulfur blocks pollution-control equipment in vehicle engines, which increases tailpipe emissions linked to lung disease, asthma, emphysema, chronic bronchitis, aggravated heart disease and premature births and deaths.

The respiratory diseases and other health effects of pollution from automobile tailpipes are known as negative externalities in economics – bad (hence ‘negative’) effects on people who neither produced nor purchased the gasoline that’s being consumed (hence ‘externalities’ because the effects are on people external to the market transaction). The purpose of the regulation is obviously to try to decrease the negative externalities so that there are fewer negative effects on human health. The story continues…

The E.P.A. estimates that the new rule will drastically reduce soot and smog in the United States, and thus rates of diseases associated with those pollutants, while slightly raising the price of both gasoline and cars.

…

E.P.A. officials estimate that the new regulation will raise the cost of gasoline by about two-thirds of one cent per gallon and add about $75 to the sticker price of cars. But oil refiners say that it will cost their industry $10 billion and raise gasoline costs by up to 9 cents per gallon.

The E.P.A.’s studies conclude that by 2030, the cleaner-burning gasoline will yield between $6.7 billion and $19 billion annually in economic benefits by saving lives and preventing missed work and school days due to illness.

…

The new rule will have a significant impact on the health of low-income Americans who live near major highways…

But oil refiners say that the new rule will hurt their industry.

There are tradeoffs associated with this policy. It should reduce costs on human health, but will decrease consumer and producer surplus in the automobile and gasoline industries. This policy is said to pass the

One last tidbit from the article:

Mr. Drevna said it was easier to comply with the earlier regulations because removing the first 90 percent of sulfur molecules from gasoline can be done without difficulty. Wringing the last 10 percent of those molecules is harder.

“They’re tough little buggers that don’t want to come out,” Mr. Drevna said. “It’s like getting the last little bit of red wine stain out of a white blouse.”

In environmental economic theory, we learn that marginal cost of reducing pollution increases. That is, it’s relatively cheap to cut back on the first units of pollution but, as you cut back more and more, each additional unit becomes more costly to eliminate. Mr. Drevna’s statement here is consistent with the theory we propagate to our students!

 

Ronald Coase, of Coase Theorem fame, Dies.

Posted on

From the New York Times: (Ronald H. Coase, ‘Accidental’ Economist Who Won a Nobel Prize, Dies at 102)

Ronald H. Coase, whose insights about why companies work and when government regulation is unnecessary earned him a Nobel Memorial Prize in Economic Science in 1991, died on Monday in Chicago. He was 102.

…

He introduced the concept of transaction costs — the costs each party incurs in the course of buying or selling things — and showed that companies made economic sense when they were able to reduce or eliminate those costs by performing some functions in-house rather than dealing in the marketplace.

…

In the second of his groundbreaking papers, “The Problem of Social Cost,” published in 1960, Professor Coase challenged the idea that the only way to restrain people and companies from behaving in ways that harmed others was through government intervention. He argued that if there were no transaction costs, the affected parties could negotiate and settle conflicts privately to their mutual benefit, and that fostering such settlements might make more economic sense than pre-empting them with regulations.

The paper made the idea of property rights fundamental to understanding the role of regulation in the economy.

The Coase Theorem is a central theorem in environmental economics.  It states that, in the presence of an externality (e.g. I’m yelling loudly in the Junction and you’re annoyed), if there is (1) low transactions costs (we can speak to each other easily), (2) perfect information (we both know the benefits and costs to each other of my yelling), (3) and clear property rights (either I have the right to yell or you have the right to not hear my yelling), the two parties can bargain and an economically efficient outcome will result.  An economically efficient outcome is one in which the benefits to society (in this silly example, that’s just you and me) minus the costs to society are greatest.

If the conditions for the Coase Theorem hold, it means that, theoretically, there’s no need for government regulation or intervention to resolve the issue (assuming all we care about is economic efficiency, that is).  The question is always whether or not the conditions hold.