environmental economics book

8/6/2019 Environmental Economics BOOK

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Environmental Economics

Vijaya Raj Sharma, Ph.D.

LECTURE NOTES ON PART I: BASIC CONCEPTS AND THEORY

These notes are not edited. They also do not necessarily cover everything that wouldbe discussed in the class. Students are responsible for any additional materialsdiscussed in the class.

These notes frequently refer to exhibits and tables in the textbook - EnvironmentalEconomics, An Introduction by Barry C. Field, Second Edition, Irwin/McGraw Hill,1997.

I. INTRODUCTION

(Chapters 1 and 2)

Environmental Economics

y Application of principles of economics to study use of environmentalresources

y Distinguish between environmental resources and natural resourcesy Environmental resources

o indivisible.o Examples: ozone layer, ecosystem, air quality.o not consumed directly, only their services are consumedo focus on optimal quality of a resourceo this course is about these resources

y Natural resourceso divisible into smaller units.o Examples: barrels of oil, tonnes of fish, cubic feet of woodo consumed directlyo need labor, capital, and/or energy inputs to utilize themo focus on optimal quantity of extraction of a resourceo such resources are a subject matter of Natural Resource Economics


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Scarcity of Resources

y All fields of economics, including environmental economics, deal with issuesarising out of scarcity of resources

y Households, firms, societies, countries, and the entire World face scarcity ofresources

y Societies face scarcity of environmental resources alsoo Example: air resources

need clean air to breathe, remain healthy, and survive need air to discharge emissions of numerous vehicles and

factories conflicting uses of air resources force societies to determine

how clean thry want their air to be

Social Choice between Market Goods and Environmental Quality

y Tradeoff between market goods and environmental qualityy Production possibility frontier of two goods: market goods and environmental

qualityy The more the production of market goods, the lower the environmental quality,

given a state of technical knowhowy Values placed by a society on environmental quality and on market goods

determine the choice of the society where to locate in the PPFy Value of environmental quality vis-a-vis market goods may differ among

societies according to educational level, income, and information.y A short-run choice can affect long-run choices between environmental quality

and market goodso Excessive emphasis to market goods in the short run may damage the

assimilative capacity of the environment and thus future productivecapability of an economy (this shifts the PPF inwards).

Economics Approach

y Two principal characteristics of "economics approach"o Rationalityo Anthropocentricity

y Rationalityo Assumes that when a decision maker faces choice among alternatives,

he or she compares benefits and costs of each alternative and chooses

the alternative that yields the largest net benefits (benefits net of costs)o Example 1: Should you fly or rent and drive a car to Chicago?

Flying costs more than renting and driving, but air travel iscomfortable and saves travel time.

If the value of time saving and comfort exceeds the additionalcost of flying, you will fly. Else, you will rent a car and drive.

o Example 2: How many hours a week to allocate to study ofenvironmental economics?


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For each additional hour devoted to economics, you comparethe possible gain in grade in economics with the possible loss

in grade in other courses (because fewer hours available forother courses).

You will choose the allocation that maximizes total grade(GPA).

y Anthropocentricityo Economics approach is completely human-centered.o Evaluate environmental issues based on value of resources to people.o Example 1: should we preserve an animal species?

A species is worth saving only if benefits of saving the speciesto human beings at least exceed the costs of saving the species.

Contrast this with the Principle of Minimum Interferenceexpounded by ecologists

A species should be preserved regardless of the cost andimportance of the species to the people.

o Example 2: should we allow mineral extraction in the YellowstoneNational Park?

Mining activities can destroy natural features of this Park Any mineral has no value apart from the purposes to which

people intend to put it. The same is true of the services of anational park that mining would destroy.

The issue is to compare benefits of mining with its costs,including the loss of benefits of the services of the Park.

y Do you agree with the following statement?o In economics, someone who privately owns a forest but will not allow

any trees to be cut for lumber despite offers would not be considered to

be using the resource efficiently.o Invite discussion

The statement is wrong because economics compares benefitsof letting trees stand with its costs (forgoing the revenue fromsales of lumber). If benefits exceed costs, it is very wellefficient to let trees stand.

However, the problem is that many services of standing trees(e.g. ecological benefits) cannot be marketed, and hence theforest owner does not earn revenue from nonmarketbenefits ofstanding trees. On the other hand, the forest owner can easilysell lumber by cutting trees. Therefore, it is very well possiblethat the owner finds cutting trees more advantageous thanletting them stand.

If nonmarket benefits are indeed greater than the potentialrevenue from sales of lumber, economics would consider thisan example of market failure to allocate resources efficiently. Itis therefore important that nonmarket benefits of standing trees

be estimated.y Do you agree with the following statement?

o Value of life is a hard to determine controversial estimate. Whateconomists do is placing a monetary value on a life lost as a result of

emissions, pollution, etc. How could you put a value on the loss of a

child as a result of lead contaminated drinking water?


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o Invite discussion A couple of issues here Mostly we seek to value a statistical life, i.e., value of a life

saved (the saved life could be yours or others - a random

happening). For example, how much are you willing to pay forreducing highway speed limit from 75 mph to 55 mph, if it

reduces probability of highway deaths from 7 to 6 in 100,000?Obviously, the value you put on a statistical life is likely to befar different from the amount you may be willing to pay to saveyour life from a criminal who is pointing a gun on your head.

There are people who prefer 75 mph to 55 mph speed limit, andobviously they are valuing risk to their life less than the

perceived benefits of the higher speed limit. In many occasions,people consciously and subconsciously are putting values onrisk to life (e.g. mountain climbers, labors choosing to work inrisky jobs for higher wages). Economists simply try to estimate

what is the value placed by these people on risk to life.

Private and Social Opportunity Costs

y There are two types of costs - private costs and social costs - depending onwho is evaluating costs, a private individual or the society.

y If an individual or a firm or an institution pays money for something (e.g.,labor, materials, taxes, etc.), the transaction enters into its book of accounts asa cost. However, a social planner may or may not consider the transaction as acost or may consider it a cost after some modification. Consider costs of

baking breads from the perspective of a baker and from the perspective of asocial planner (who is determining the optimal quantity of bread for thesociety).

o The cost of flour ($0.30 a pound) purchased from a competitive flourmarket is considered a cost by both the baker and the social planner.

o A sales tax of $0.05 on each pound of bread sold is a cost to the baker,but not a cost for the social planner. For every $0.30 paid, the bakergets a pound of flour in exchange. But for a tax of $0.05, the baker getsno good or service in exchange. Tax is simply a payment obligated bylaw and, therefore, a transfer from the baker to the taxpayers.

o Payment of the Federally mandated minimum wage of $5.15 an hour tolabor is a cost to the baker. Suppose the baker could hire a labor at acompetitive wage rate of $4.50 an hour if this minimum wage was notmandatory. Then the social planner would consider $4.50 as the true

labor cost, instead of the Federally mandated wage rate. Wages andprices in a competitive market reflect the true values of goods andservices. Government interventions generally distort the competitivevalues of goods and services.

o The part time voluntary (unpaid) help of the spouse of the baker wouldnot appear as a cost in the book of accounts of the bakery. But the

social planner would include her services as a cost (probably at a rateof $4.50 an hour).


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o The baker uses a diesel-fired oven to bake breads, which causes airpollution and is likely to create some health damages to neighbors. In

the absence of regulations against pollution, health costs of neighborsdo not appear in the book of accounts of the bakery. But, the social

planner includes it as a cost.y The above examples illustrate possible divergences between private costs and

social costs. Private costs are also called monetary costs or accounting costs,and social costs are also called economic costs. Economic costs represent thereal and full value of resources used.

y Let us consider costs of driving a car. Private costs consist of fuel, oil,maintenance, and depreciation expenses on the car and time expenses of thedriver. Social costs include, besides the above private costs, costs ofcongestion and pollution created by the car.

y In environmental economics, we always evaluate environmental projects orissues from the perspective of the society. Therefore, we consider social

benefits and social costs, instead of private benefits and private costs.

Marginal Cost versus Average Cost

y Marginal cost is the cost of one additional unit, whereas average cost is thetotal cost averaged over the number of units produced. Let us clarify this withan example.

y Example 1: DIAMOND SELLER IN A COMPETITIVE MARKET

Quantity Price, $ MC, $ Net Marginal Total Profit, $

Sold, carat Profit, $

1 5 1 4 4

2 5 2 3 7

3 5 3 2 9

4 5 4 1 10

5 5 5 0 10

6 5 6 -1 9

7 5 7 -2 7

8 5 8 -3 4

9 5 9 -4 0

y What is the average cost of producing 5 carats? ($1+$2+$3+$4+$5)/5 = $3 percarat. Marginal cost of the 5th carat is $5 per carat.


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y The average cost of producing 7 carats is ($1+$2+$3+$4+$5+$6+7)/7 = $4 percarat. Marginal cost of the 7th carat is $7 per carat.

Efficiency and Cost Effectiveness

y According to the rationality assumption, a decision maker comparesalternatives for benefits and costs and chooses the alternative that is associatedwith the largest net benefit.

y In environmental economics, the emphasis is on maximization of collectivenet benefits to the society. Maximization of collective net benefits to thesociety is called economic efficiency. Let us now establish a rule of achievingefficiency (MB=MC rule), using two examples. Note that an individualdecision maker also attempts to maximize total net benefits to the individual,

by equalizing private MB to private MC. On the other hand, a social plannerattempts to maximize total net benefits to the society, by equalizing social MBto social MC. The outcomes of the individual's evaluation and the social

planner's evaluation may be the same, or they may differ. Whether the

outcomes differ depends on whether there is divergence between social MBand private MB and also between social MC and private MC differ.

y Example 1: Costs and Benefits of Diamond ProductionQuantity Price, or MC, $ Net Marginal Total Net

Sold, carat MB, $ Benefit, $ Benefit, $

1 5 1 4 4

2 5 2 3 7

3 5 3 2 9

4 5 4 1 10

5 5 5 0 10

6 5 6 -1 9

7 5 7 -2 7

8 5 8 -3 4

9 5 9 -4 0

How many carats should be extracted? Either 4 or 5 carats. Up to 4 carats, MB>MC ,so the seller should extract more. Above 5 carats, MB < MC, so the seller shouldextract less. Ideally, the seller should extract 5 carats where MB = MC to maximizetotal net benefit.

y Example 2: A CRAZYMONEY EXCHANGER


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Exchange Get MB MC Net Total

Benefit Net Benefit

First $1 $1.60 $1.60 $1 $0.60 $0.60

Second $1 $1.50 $1.50 $1 $0.50 $1.10

Third $1 $1.40 $1.40 $1 $0.40 $1.50

Fourth $1 $1.30 $1.30 $1 $0.30 $1.80

Exchange $4, Get $5.80

Average for $1, Get $1.45

Fifth $1 $1.20 $1.20 $1 $0.20 $2.00

Sixth $1 $1.10 $1.10 $1 $0.10 $2.10

Seventh $1 $1.00 $1.00 $1 $0.00 $2.10

Eighth $1 $0.75 $0.75 $1 -$0.25 $1.85



Ninth $1 $0.65 $0.65 $1 -$0.35 $1.50

Tenth $1 $0.50 $0.50 $1 -$0.50 $1.00



How many dollars would you exchange? $10? Why not, for every $1, you receiveaverage $1.10? You mean average benefit or average cost is not important for the

decision? In total you gain $1 by exchanging $10?

How many dollars would you exchange? The answer should be: either $6 or $7.Because up to $6, for every $1, your MB > MC. For more than $7, MB < MC, you donot like this. Ideally, you want to exchange where MB=MC, i.e., $7. That maximizestotal net benefits.


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y Cost effectivenesso Distinguish cost effectiveness from efficiencyo Cost effectiveness - achieving a given target at the minimum possible

cost

o Suppose a city decides to reduce air pollution by 50%. A number ofalternatives exist to achieve this target, like reducing auto emissions,

reducing factory emissions, or a combination of the two.o Benefit of each alternative is the same, no matter which alternative is

chosen (because each alternative cleans air by 50%). This allows us tofocus on cost of reducing pollution only.

o The objective then would be to choose the alternative that achieves thegiven target at the minimum cost possible.

y The Equimarginal Principle of Cost Effectivenesso To minimize the total cost of abating pollution by a given level,

allocate abatement among multiple sources such that marginal costs of

abatement are equalized.

o Discuss an example to show the equimarginal principle: MCa=MCb=...across all plants.

o Depending on the time available, discuss the textbook example (Figure3.8, Page 58) of the minimum cost allocation of a given level of total

output (say 100 units) among multiple plants to show the minimumcost allocation is achieved by equalizing marginal costs across plants.

Economic Incentives Work

y Since people compare benefits and costs of undertaking an action, publicpolicies that change either benefits or costs or both are likely to influence thedecision of individuals to undertake that action.

y Exhibit 1-1 of the textbook.o Exhibit 1-1 talks about reducing household wastes. It compares a

monthly flat fee system with a pay-per-bag system of household wastedisposal. Under the monthly flat fee system, every household pays thesame fee, irrespective of the amount of waste generated by thehousehold. The pay-per-bag system encourages recycling andcomposting and saves waste disposal cost. The system is more

beneficial to poor households because they generate less wastes. Theintroduction of this system (an incentive to recycle) worked in ChesterTownship, NJ. The possible demerit of this system is illegal dumpingof wastes.

y Exhibit 1-2 of the textbooko

Exhibit 1-2 talks about reduction of auto emissions and trafficcongestion. The suggested policy is "roadway pricing," i.e., chargingdrivers the full cost of use of roads. Costs drivers impose on the societyare smog, congestion, and increased probability of accidents. Full

pricing will offer incentives to drive less, and it will generate fund fordeveloping mass transit. The possible demerits of this policy are social

engineering, more taxes, and greater regulation.y Exhibit 1-3 of the textbook


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o Exhibit 1-3 talks about the failure of the Mexican Clean-AirLaw. TheLaw prohibited driving of cars on certain days according to their

license numbers. The even-numbered cars were allowed on some daysevery week and the odd-numbered cars only on other days of the week.

The objective was to reduce the number of cars driven on any day andthus to reduce auto emission in the Mexico City. The Law failed to

achieve the objective because the regulation provided perverseincentives to households to purchase of more than one car, whichincreased the total number of cars and thus auto emissions.

Linkage Between Economy and Environment

y Draw a box diagram to show linkages between Nature and economy.y Nature provides raw materials and energy to the economy. Economy uses the

resources to produce goods which are then consumed. During both productionand consumption processes, residuals are emitted to Nature.

y Environmental economics is the study of the flow of residuals (see the boxdiagram) and its impact in the natural world.

y According to the First Law of Thermodynamics (also known as the Law ofconservation of matters), matters only change in shape, size, or phases, thetotal weight is conserved. What goes in must come out. Thus, the total weight

of raw material and energy inputs to economy must be balanced by the totalamount of residuals flowing to the environment.

Materials Balance Concept

y The "materials balance" concept tells us that there are only three ways ofreducing residuals in the environment.

o Reduce output Reduction of output reduces amount of inputs; therefore, some

people advocate "zero population growth."o Improve productivity of inputs

Improvement of technology or productivity leads torequirement of less inputs for the same amount of output. Itmay as well change the composition of outputs to reduce inputs


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(for example: a change from manufacturing sector toinformation or service sector).

o Increase recycling of residuals (refer to the box diagram) Increased recycling of residuals also reduces the amount of

virgin inputs.y Land, water, and air are the three different environmental medium that receive

residuals. Materials balance concept also tells us that emissions in one mediumare reduced by increasing emissions in another media.

Few Terminologies

y Distinguish between ambientquality and environmentalquality.o Ambient quality is the quality of surrounding air and water, whereas

environmental quality includes visual and aesthetic quality of theenvironment.

o Effect of emissions on ambient quality depends upon physical,chemical, biological, and meteorological processes of the natural

system, which may change from day to day.o Besides depending on the different processes of the natural system,

damages resulting from degradation of environmental quality alsodepend on human choices of where and how to live and onsusceptibility of living and nonliving systems.

y Source would mean the location where emissions occur, such as a factory, anautomobile, or a leaking landfill.

o Some sources can easily be identified; for example, power plants assources of SO2 emissions. Such sources are calledpoint sources.

o Sources that are difficult to identify are called nonpoint sources;examples are agriculture runoff polluting streams and rivers, urbanstorm water runoff, etc.

o When emissions from two sources mix up and cannot be separated,design and implementation of environmental policy may be

problematic. Assigning reduction in emissions among sources wouldbe difficult.

y Depending on whether a pollutant accumulates over time, it is categorized as acumulative ornon-cumulative pollutant.

o For example, noise is a non-cumulative pollution.o Nondegradable wastes, such as radioactive wastes and plastics, are

cumulative pollutants; they may bring inter-temporal problems.y Noise is a localpollution, but acid rain is a regionalpollution, whereas

greenhouse effect is aglobalpollution.y

Emissions from power plants are continuous, but oil spills and Chernobylnuclear disaster are episodic emissions. Certain environmental damages arenot related to emissions, e.g. logging or strip mining, the conversion of land tohousing or commercial purposes.


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II. REVIEW OF MICROECONOMIC CONCEPTS

(Chapters 3 and 4)

Demand, or Marginal Willingness to Pay, Curve

y The higher the price, the lower the quantity demanded. Draw a downward-sloping demand curve to show this negative relationship.

y Demand curve is also a representation of marginal willingness to pay. It is alsoa marginal benefit curve.

y Implicit in the demand curve is the law of decreasing marginal returns. Themore apples you eat, the less tastier is the next apple.

y Marginal benefit from a good decrease with increasing consumption of thegood. Therefore, people are willing to pay larger quantities only at lower

prices.y The value you place on a good depends on how much you have already

consumed.y Height of the d-curve measures the marginal willingness to pay.y Area under the d-curve measures the total willingness to pay for a given

quantity. Area also measures the benefits (of, say, improvement inenvironmental quality).

y Different persons may have different demand curves, reflecting differentvalues placed by them on the same good, either because of different

preferences or income levels.y A person's demand may change over time with changes in knowledge

(experience or information) about the good or with changes in income. Thesame individual can place more value on the same good when incomeincreases.

y Demand for normal goods increases with income, and environmental assetsare generally considered normal goods.

y Higher income people are likely to have higher d-curve for environmentalquality.

o An implication is that the same improvement in environmental qualityis tagged a lower value if implemented in an area inhabited by poor,compared to the value when implemented in an area inhabited by rich.

o This difference in value arises from the lower ability to pay of poorpeople.

y Market demand (demand of all individuals in a market aggregated together) isthe horizontalsummation of individual demands. For each price add quantitydemanded of all consumers to obtain the market demand. Show the additiongraphically.

Supply, or Marginal Cost, Curve

y The higher the price, the greater the quantity supplied. Draw an upward-sloping supply curve.


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y The supply curve is also a representation of marginal cost of production.y For a producer to supply a given quantity, the producer must be offered a price

at least equal to the marginal cost at that level of quantity.o Note that marginal cost includes a normal return on equity capital (a

return that could have been earned if invested elsewhere; this return isconsidered a part of profit by accountants).

y Implicit in the supply curve is the law of increasing marginal costs, i.e.,marginal cost increases as more and more of a good is produced.

o Increase in MC with increase in production is a general case, but thereare cases of decreasing MC (for at least up to a certain level of

production, primarily due to economy of scale). In some cases, MCmay remain constant with production.

o Consider supply of clean water as an example. The marginal cost ofsupplying water depends on degree of cleanliness sought. The cleanerthe water supplied, the greater the marginal cost of supply. Cleaningcosts increase progressively. Water can be easily cleaned of solid

residues and suspended particles by filtering it through a filter or strain(a physical process). If further cleanliness is desired to get rid of

dissolved substances in water, water may have to be boiled or distilled(a relatively more expensive procedure). If still more cleanliness is

sought to get rid of chemicals in the water, it may need still moreexpensive chemical processes.

y Height of the supply curve is a measure of marginal cost (the opportunity costof production). Improvement in technology lowers marginal cost, or shifts the

s-curve to the right.y Area of the supply curve is the total cost of supply.y Firms may differ in their marginal costs (s-curves) because of different

technologies they use. Example: new and old firms. Accordingly, the total costof providing the same improvement in environmental quality may be differentfor different firms. The cost of a firm may also go down with improvement intechnology of the firm.

y Market supply curve is the horizontalsummation of firms' supply curves (justas in case of market demand).

Competitive Market Generally Achieves Economic Efficiency

y Competitive market generally achieves economic efficiency.y When demand curve measures both the private MB and the social MB and

when supply curve measures both the private MC and social MC, marketequilibrium coincides with the efficient allocation.y Discuss graphically.

Issue of Equity

y Economic efficiency guarantees maximum possible net benefits to the society.


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y But, economic efficiency does not guarantee equitable distribution of netbenefits among members of the society.

y In a market system, one who has the ability to pay gets most of the goods andservices and, therefore, gets most of net benefits available to the society. In

other words, market allocation is generally efficient, but not necessarilyequitable.

y This is the reason, many times governments interfere in a market placethrough price floors and price ceilings to affect distribution of market outputs.But in the process, the government intervention makes the market outcomeinefficient. That is the society is now left with a lower amount of net benefits(because net benefit is not maximized).

y Efficiency guarantees the largest possible pie, but poor are likely to get asmaller share of the pie. On the other hand, government intervention in marketfor the purpose of increasing the share of poor reduces the size of the pie.

y Equity is a normative issue.

Performance of Market in the Presence of Negative Environmental Externalities

y A competitive market fails to achieve economic efficiency in certain cases.There are two such cases of interest in environmental economics.

o Production of goods associated with environmental externalitieso Production of public goods (many environmental services are public

goods)

y Firms in their production decision consider only private costs and ignoreexternal costs (those costs that are not borne by the firm but are true costs tothe society).

y Market S-curve only represents private MC, whereas the social MC would behigher because it includes external costs.

y Draw a figure to show this.y To the society, costs are higher and therefore fewer amount of such goods

should be produced.y Market output exceeds the efficient level of output.y This presents a rational for the government to intervene to correct the market

failure to produce efficient quantity.o We will discuss many types of government interventions related to

pollution (a negative externality) control.o One such intervention can be a pollution tax.

y Let us consider an example of open-access externalities presented in thetextbook.

o Four similar firms are situated on a lake (an open-access resource).o

Each firm uses water of the lake as an input to production anddischarges emissions back into the lake.o Treatment costs of each firm depend on the ambient quality of water in

the lake.o Let the treatment costs be $40,000 per year for each firm.o A new firm is contemplating to begin operations on the lake.o With the new firm, treatment costs of each firm would go up to

$60,000 per year.

o What is the cost of operating a new firm on the lake?


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The new firm adds $60,000 of treatment costs to its other coststo determine its operating cost. It will ignore the fact that each

of the other four firms will now have to spend $60,000 a yearon treatment, instead of the current expenditure of $40,000 a

year. But a social planner includes the increase in treatment costs of

existing firms, which amounts to $80,000 a year. $80,000 is theexternal cost imposed by a new firm on existing firms.

y Since market outcome would not be efficient, the government may intervenein this case. A possible method may be to impose a tax of $80,000 a year onthe new firm. This tax internalizes the external cost.

Public Goods

y A public good, if made available to one person, automatically becomesavailable to other persons. For example, national defense, radio signal, cleanair, clean rivers, ecological benefits of forests, etc.

y You can be excluded from consuming a hamburger if you are not willing topay for hamburger. But, a nonpayer cannot be excluded from consuming apublic good.

y Since no one can be excluded from consuming a public good, there is anincentive to free ride (consume without making full payment, or making

payment below the level of benefits). Very few people pay the full price of apublic good.

y The amount of payments (contributions) received to supply a public good in amarket place - therefore a demand curve estimated from such contributions -understates the true benefits of the public good, because of free riding.

y The true social MB is higher than what such a market-revealed demand curveshows. Market is therefore likely to supply less than efficient quantity of

public goods. Show graphically.y Market demand of a public good is the verticalsummation of individual

demands (unlike private goods we discussed earlier). For each quantity ofpublic good, add prices or marginal willingness to pay of all individuals toobtain the market demand, or true marginal willingness to pay of the society.

y It is very likely that a private entrepreneur is unwilling to supply public goodsbecause the entrepreneur cannot exclude nonpayers from consuming the goods.Therefore, public goods are provided by either the government or activistsnonprofit organizations.

y Whenever an activist organization supply environmental goods of publicnature (e.g. protecting forests), their effectiveness is dependent on

contributions they can raise for the cause.Y

ou can expect that the amount ofcontributions would be lower than the true value of such environmental goods,because of free riding.

Possibility of Government Failure


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y Implicit in a request to government to formulate, implement, and monitorenvironmental policies is the assumption that public officials pursue public

interest. One may, however, question this assumption.y The assumption that public officials pursue public interest while making

public policies contravenes our more general assumption that economic agentsare self-centered.

o Public officials while making a decision in a market place weighpersonal benefits and personal costs associated with an activity.

o How do we then expect that the same individual, in his or her capacityas a public official, essentially ignores personal benefits and personalcosts and focuses only on public interest while formulating orimplementing public policies?

o It is possible that personal interests of a public official conflict withpublic interest while formulating a public policy. Public interestrequires appropriate control of pollution, but polluting firms want leastcontrol and are willing to contribute a large amount of money for the

forthcoming election campaign of the politicians involved in the issueof pollution control policies. Is campaign contribution likely to affect

pollution control policy? Perhaps, yes.o Lobbyists, politicians, bureaucrats, and voters are engaged in the

process of public policy formulation and each of these may beinfluenced by their private interests in this process. There are some

systematic tendencies and incentives within legislatures andenforcement agencies that work against the attainment of efficient and

equitable public policy.o Rational Voter Ignorance

Voters vote for electing politicians and also vote at times onissues put to referendum. Mostly voters are uninformed;consequently, they either do not vote or make uninformedchoices during voting.

A voter finds that the cost of being informed is substantialwhereas the benefit of being informed for voting is generallyvery small.

Consider from the perspective of a voter, what is theprobability that the person or the issue preferred by the voterwins in an election or referendum just because of his or hervote? This probability is almost negligible. In other words, the

benefit of being informed and voting is very small. On the otherhand, the voter needs to spend substantial amount of time and

perhaps some money too to become informed. Since cost of informed voting far exceeds benefit, voters

generally make a rational choice to remain ignorant. Thisphenomenon is called "rational voter ignorance." This can leadto many economically sensible issues losing in referendum.

o Short-sightedness Effect A politician is generally concerned with his or her electability

in the next election. To improve electability, the politician iseager to show before the next election at least some policyachievements that are positive or beneficial to his or herconstituents. The pursuit of personal interest of improving


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electability for the next election makes politicians often shortsighted. In their legislative agenda, they tend to favor projects

that generate immediate benefits even at the expense of largefuture costs.

o Special Interest Issue Certain issues are of interest to special interest groups. A

limited number of people will benefit from such issues. On theother hand, costs associated with these issues are often sharedamong a large number of people.

An example is the proposed financing of Broncos' stadiumfrom sales tax collected in six counties of Colorado.

The Broncos franchise and people associated withfootball (owners, players, coaches, sportscasters, etc.)make up the special interest group who will benefitfrom sales tax financing of the proposed stadium.

Costs, however, are shared by taxpayers of the sixcounties. To each individual taxpayer the cost would beminuscule.

Taxpayers (who are also voters) tend to ignore the costbecause it is minuscule. Most probably they also choose

to remain uninformed on economic desirability of thefinancial proposal (rational voter ignorance effect). So,

taxpayers or voters care less on this issue. For thisreason, politicians too do not see a threat of voters'

backlash if they support the tax financing proposal - aspecial interest issue.

On the other hand, the group which is likely to benefitwould lobby and contribute to campaign funds of

politicians. Therefore, politicians tend to give precedence to special

interest issues in the legislative process, although it maybe a bad economics.

o Regulators often become captive of the regulated. Public officials depend on those regulated (polluters) for

information on cost of abating pollution. Polluters may have incentive to mislead or confuse officials to

avoid stiffer regulations. Polluters may attempt to convince public officials (and even

coerce or threaten them, depending upon how strong they arepolitically) that high pollution taxes or stiff regulation wouldforce the polluting sources to close operations, rendering many

workers jobless. Public officials often do not dare political risks and they

succumb to polluters' political pressure while setting emission

standards and while sanctioning violators of existingregulations.

o The above problems should, at least, convince you that governmentintervention is not necessarily the best answer always

The government can as well fail in achieving efficiency.


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Before proposing government intervention, you should pauseand think about alternative market-oriented approaches to solve

environmental problems.

III. A SIMPLE MODEL OF POLLUTION CONTROL (Chapter 5)

Marginal Damage Function

y Pollution causes many types of damages. The benefit of pollution control isreduced damages.

y Let us define marginal damage. Marginal damage is the additional damagecaused by an additional unit of emission.

o Example: If total damages increase from $30,000 to $35,000 when

emissions increase from 10 tons per week to 12 tons per week,marginal damage is $2,500 per ton. [($35,000-$30,000)/(12tons-10 tons)]=$2,500 per ton.

y Marginal damage function is a relationship between quantity of emissions andthe damage caused by it. Draw an upward-sloping marginal damage curve.

y The curve assumes that marginal damage increases with increasing emissions.y There is a thresholdbelow which marginal damage is zero.y The area below the function measures total damage.y Marginal damage is a time-specific function; it may shift with time because of

changes in natural environment.y Let us focus marginal damage from a non-cumulative pollutant (a pollutant

which does not accumulate over time).y The function is a population-specific function; it may shift with an increase in

the number of people exposed to the pollutant.

Marginal Abatement Cost Function

y This function denotes the additional cost of achieving a one more unitdecrease in emission level.

y It is sloping upward to the left. Draw a marginal abatement cost curve.y The higher the emission reduction, the greater the marginal abatement cost.y At its right end, the curve starts from the maximum level of emissions with no

abatement efforts, i.e., from the uncontrolled levelof emissions.y This function reflects the minimum costs of achieving different levels of

emission reduction. In other words, pollution abatement is being carried out ina cost-effective manner.

y Note that there is always an upper limit on abatement costs, which is the costof stopping the operations of the polluting plant (zero emission).

y Area below the curve measures total abatement costs of achieving a reductionin emissions.


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y Different sources may have different MAC functions because of differenttechnology of operation.

y For the same source, the function may shift with time periods because ofimprovement in technology of pollution control.

y Aggregate marginal abatement function of the industry is the horizontalsummation of the MACs of individual firms.

Efficient Level of Emission

y Let us assume that MD and MAC have been evaluated from the perspective ofsociety.

y MD can be interpreted as the marginal benefit of reducing emissions (damagessaved), and MAC is the marginal cost of reducing emissions.

o That is, they are social marginal benefits and social marginal costs ofreducing pollution.

o The efficient level of emissions (the level that maximizes social netbenefits) would then be where MD and MAC are equal (MAC=MD),

the point of intersection of MAC and MD. Explain graphically.y Alternatively, we can interpret both MD and MAC as costs.

o No matter which level of emissions a society chooses, it has to incurcosts on bringing down emissions to that level, and at that level, thereare some damages remaining. At any level of emissions, therefore, thesociety incurs abatement costs plus costs of damages.

o The society would be efficient if it chooses that level of emissionswhich is associated with minimum possible total of abatement costsand damages.

o The area below the MAC is total abatement costs and the area belowthe MD is total damages. Show in the graph that only at theintersection of the two curves (MAC and MD), the sum of the twocosts is minimum.

y Here, we ignored costs of enforcing emission standards.o Sources (polluters) may not follow the chosen emission standards

voluntarily, and the society may have to incur costs on enforcement. Ifso, enforcement costs should be included while deciding the efficientlevel.

o The more emissions polluters are asked to cut back, the moreexpensive it gets to them to cut back each additional unit of emissions.(This is because of the increasing MAC).

o Therefore, polluters are more likely to cheat on cutbacks when theefficient level involves larger emission reductions.

oConsequently, the cost of enforcing cutbacks is also likely to increasewith requiring additional reductions of emissions. That is, marginalenforcement cost would be increasing with increasing abatement.

o Thus, there are two types of cost: cost of abating and cost of enforcingthe abatement target. In other words, the total marginal cost (TMC) ofemission reduction is the sum of MAC and marginal enforcement cost

(MEC). TMC=MAC+MEC. Show in a graph.o Note that the gap between the TMC and MAC increases progressively

with additional reductions (the gap is increasing as move to the left


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along the MAC), reflecting increase in MEC with increase in emissionreductions.

o Efficient emission level is then given by the intersection of the TMCand the MD curve.

o This efficient level would be lower than the previous efficient levelwith no enforcement costs.

o This tells us that the society should be willing to accept lower emissionreductions for the sake of enforceability of emission standards.

Cost-Effective Allocation of Emission Reduction Target

y Once we have decided the target level of emission reduction, we can use theequimarginal principle to allocate emission reduction among different sources.We have already discussed this principle.

y We will equalize marginal abatement costs across sources for the given levelof emission reduction.

Long-run sustainability

y Efficiency is maximization of net benefits, and cost effectiveness is theminimization of costs.

y Evaluation of efficiency, however, measures costs and benefits from theperspective of the present generation.

y This raises a concern whether benefits and costs to future generations areappropriately considered. Is the efficient level sustainable over generations?

y If all environmental resources were renewable and if all pollutants arenoncumulative, sustainability would not be an issue. What is efficient todaywould always be efficient, assuming that preferences remain the same overgenerations.

y If pollutants are cumulative, damages are likely to increase over time. Timedimension of damages and abatement costs (i.e., long-run and short-runimpacts) should be incorporated in MD and MAC.

o But, how would you compare present effects with future effects? It is ahuman nature to value less or discount future effects. If it is the sameamount of benefit, you prefer to receive the benefit sooner than later. Ifit is the same amount of cost, you prefer to pay the cost later thansooner. In other words, the damages that happen in future and the

benefits that accrue to future generations are likely to carry relativelylower weight to present generation.

o There may be a problem of lack of information on long run effects of aproposal. This would then hamper inclusion of such effects in MAC orMD. There may be a probability of serious or irreversible futureconsequences, like extinction of a species. It may be necessary to usecaution if there is a possibility of irreversible long run effects.


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Criteria for Evaluation of Policies (Chapter 9)

y There are five criteria generally used to evaluate environmental policies.o Efficiency/cost effectivenesso Equityo Incentives for long run improvementso Enforceabilityo Moral considerations

Efficiency/cost effectiveness

y We know these two terms. If there are alternative methods of abating pollution,cost effectiveness is to choose the method associated with the lowest MACcurve. Explain this graphically.

y Efficiency is to balance marginal abatement cost and marginal damages, i.e. todetermine the point of intersection of the MAC curve and the MD curve. Show

this in a graph.o This maximizes net benefits from emission reduction.o The MAC curve that is considered for efficiency should be the lowest

possible curve, if there exist alternative methods of abating pollution.y In other words, efficiency also implies cost effectiveness, but cost

effectiveness does not necessarily imply efficiency.

Equity

y Equity evaluates the distribution of net benefits of environmental policiesacross different sections of the society, mostly the distribution between poorand rich, and many times also the distribution across ethnic groups.

y Relative weights of efficiency and equity in the evaluation of policies is anormative issue and often controversial.

y Some take the view that resources are scarce but environmental problemspervasive, so we should emphasize efficiency to achieve the greatest possiblenet benefits from the use of scarce resources.

y On the other extreme, some argue for even avoiding efficient policies if theyare regressive in equity. Let us discuss the following table.

Program TotalCost,$

TotalBenefits, $

NetBenefits,$

Net Benefits toPoor, $

Net Benefits toRich, $

A 50 100 50 25 25

B 50 100 50 30 20

C 50 140 90 20 70

D 50 140 90 40 50


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o There would be differences of opinion in the class on which program isbetter.

o Program B is better than Program A because it is equally efficient butrelatively more progressive. However, some may consider A fairer

because both income groups get the same amount of net benefits.o The choice between B and C is likely to be very controversial because

C is more efficient but regressive.o Controversy between B and D should be milder because D is more

efficient and also provides more net benefits to poor; however, netbenefits to rich increase proportionately more than those to rich.

o Obviously, the choice among programs can differ from person toperson according to their individual notion of fairness.

y Some studies have raised doubts that toxic wastes in the U.S. have beengenerally dumped at sites mostly inhabited by poor and minorities. But, someother studies have refuted this.

o A study commissioned by the Environmental Protection Agency (EPA)found no relationship between hazardous waste sites and income levelof the community.

y The EPA has now suggested adding "population distribution analysis" tobenefit-cost analysis of environmental projects.

Incentives forLong-Run Improvements

y Besides efficiency or cost effectiveness, it is preferable to have a policy thatalso provides incentives to the private sector to find new and innovative waysof reducing emission.

y This would help shift the MAC curve downward, reducing over time the costof controlling emissions.

y Incentives become more effective, when policies are perceived stable andwhen the envirotech industry (the industry that develops and manufactures

pollution control technologies) is competitive.

Enforceability

y Policies have to be enforced to become effective, and enforcement requiresenergy and resources.

y Polluters may try to outwit or confound the pollution monitoring process.y The general enforcement practice in the U.S. is:

o self reporting of emissions by firms to the central pollution controlauthority

o periodic audit of firms' records by the authorityo periodic, but generally very infrequent, testing of emissions by the

pollution control inspectorso sanctioning violators through penalties and even litigation, if necessary.

y Like any other government agency, the pollution control authority often facesbudget constraint.

o According to a study done by the Resources for Future, enforcement isexpensive. See the table below.


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Air Pollution

Control

Water Pollution Control

Number of Agencies monitored by

an agency

Range: 40 to

8,140.

Average 4,550

Range: 220 to 3,900. Average

1,770

Average costs per visit, with noemission test

$155 $301

Average costs per visit, withemission test

$1,725 $955

y According to a General Accounting Office study in 1993, about one-third ofmajor water waste dischargers were not in compliance of regulations.

o This highlights the need of enforcement.o Rather than having a dazzling but nonenforceable emission standard, it

is better to have a modest standard that is enforceable.o While determining the efficient level of emissions, the marginal

abatement cost should also include the marginal enforcement cost.Show this in a graph.

o When enforcement is also considered, the efficient level would belower, compared to the level with no enforcement.

Moral Considerations

y Proposed policies are not likely to gain support if they are not consideredmorally right.

y This may explain the general lack of emission subsidy programs that subsidizesources for reducing emissions. Instead, emission taxes may be preferred tocontrol pollution. People perceive subsidy to polluters morally incorrect, areward to culprits.

y Moral considerations are also important in international environmentalproblems.

o There is no agreement on developed and developing countries' sharesof costs of reducing greenhouse effect.


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Chapter 26. Dirty Industries: A Challenge toSustainability in Africa

Document(s) 25 of 29Femi Olokesusi and Osita M. Ogbu

IntroductionDeveloped countries have been acclaimed for achieving a high levelof socioeconomic growth and development, largely as a result ofindustrialization. This is precisely because industrialization hascertain positive effects: it creates employment, wealth, and sourcesof foreign exchange; it develops infrastructure and endogenoustechnology; and it builds human capacity. In the same vein, it hascertain negative effects (negative externalities): it pollutes; itcauses ill health and disabilities; it degrades the environment; andit induces natural disasters.

The so-called dirty industries have become an object of concern,largely because they are perceived as critical in the infrastructureand industrial base for possible takeoff of development (Rostow1960). However, the promotion of dirty industries by African nationsand bilateral and multilateral agencies is questioned on a number ofgrounds. Dirty industries pose serious challenges to sustainability inAfrica because the physical environment has very limited carryingcapacity, as well as the debilitating effects of dirty industries on thebiosphere and people. Equity and other moral issues are beingraised by some; others argue that we should take the development

path followed in the West and, lately, in Japan and South Korea,before we tackle the problem of industrial pollution.

The research problemLiterature on the subject can best be described as diverse andcontradictory, although we observe some neutrality among someresearchers. It is being argued that the higher environmental-protection standards and costs of pollution abatement are pushingdirty industries and their entrepreneurs from the developedcountries into the developing ones. To further buttress thisargument, some environmentalists argue that free trade (part of

the current liberalization policies) undermines environmentallegislation, agreements, and protection in the developing countries.

Closely related to this is the notion that developing nations havehigh assimilative capacity (that is, the natural capacity to absorbwastes and render them harmless). This school holds thatdeveloping countries should be content to have low or zeroenvironmental protection standards because (1) the assimilative


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Table 1. Environmental effects of minerals extraction.

Activity Potential effects

Excavation andore removal

Destruction of plant and animal habitat, humansettlement, and other surface features (surface

mining)Land subsidence (underground mining)Increased erosion; silting of lakes and streamsWaste generation (overburden)Acid drainage (if ore or overburden containssulfur compounds) and metal contamination oflakes, rivers, streams, and groundwater

Oreconcentration

Waste generation (tailings)Organic chemical contamination (tailings oftencontain residues of chemicals used in

concentrators)Acid drainage (if ore contains sulfur compounds)and metal contamination of lakes, rivers,streams, and groundwater

Smelting andrefining

Air pollution (sulfur dioxide, arsenic, lead,cadmium, and other toxic substances)Waste generation (slag)

Source: After Young (1992).

The environmental damage resulting from the excavation of anymineral is a function of the ecological character of the mining site,the quantity of material moved, the depth of the deposit, thechemical composition of the ore and of the surrounding rocks andsoils, and the nature of the processes used to extract the mineralsfrom the ore. Moreover, the scale and type of damage varydramatically with the type of mineral being mined (Young 1992).

The energy consumed by industries and the volume and types ofpollutants emitted are determined by the production technology andpollution-control technology in place. The choice of productiontechnology is determined by the local availability of raw materials;energy sources; patterns of trade in semifinished products; raw-materials input (e.g., recycled aluminum waste instead of bauxite inaluminum production); host-country environmental legislation,enforcement, and related policies; entrepreneurial awareness; etc.Dirty industries are dirty partly as a result of the uncleantechnologies used in extraction, processing, and production. Suchunclean technologies are inimical to sustainable development, asindicated by Figure 1.


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To ascertain the truth of these viewpoints, various researcherscarried out studies in Latin America, Asia, and the United States(see Walter 1975; Pearson 1976; Portier 1979; Leonard 1984;Agarwal et al. 1985; Lucas et al. 1992). Often, the contention isthat dirty industries have deliberately relocated from Westerncountries, but others claim otherwise, stating that the cost ofpollution control is 13% of industrial costs; hence, other factorsshould be held accountable for any relocation observed.

Objectives of the studyThe general objective of the study was to ascertain the reality andextent of international migration of dirty industries to Africa and itsimplications for sustainable development in the continent. Thespecific objectives were the following:

y definition of the concepts of dirty industries and sustainabledevelopment;

y examination of the linkages between sustainable industry andindustrial development;

y examination of the rationale and evidence for dirty industries'migration to Africa;

y identification of issues and trade-offs (if any) associated withthe dirty industries' migration;

y identification of the policy and sustainable developmentimplications of dirty industries' migration and the trade-offsassociated with it; and

y identification of a pertinent research agenda for more rigorousempirical studies.

MethodologyThe data for this study were collected from secondary sources, thatis, a review of current literature on the theme. The scope of analysiswas dictated by the nature of the available data in general and ofAfrica, in particular.

General discussionA number of empirical studies have been carried out on therelocation of dirty industries to developing countries. The studiesdiffer in methodologies and data: some use regression analysis of

investment data by location and industry; others use inferentialanalysis of environmental-control costs; a few rely on surveys offirms, surveys of business literature, case studies of firms andcountries, or anecdotal evidence.

Pearson (1976) used the costs of environmental control in 18 USindustrial sectors to estimate the possible increase in exports thatdeveloping countries might expect to result from differences in


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environmental-control costs. He reported that the range of likelyincreases in developing countries' exports was 129257 millionUnited States dollars (USD) annually from 1973 to 1977. For 197882, the annual increase was from 116 million USD to then-existinglevels of developing countries' exports of manufactured products.These increases appear modest because of an 8% annual increasein the growth of manufacturers' exports occurring in the developingcountries in 197382.

In a study of the effect of environmental regulations and thelocation of US industries, Duerkseen and Leonard (1984) found that

y US foreign investment in pollution-intensive industries grewno more rapidly than in all other manufacturing;

y host countries that received the most overseas investment inpollution-prone chemicals, paper, metals, and petroleumrefining were other industrial countries, not developing ones;

andy the share of US foreign direct investment in pollution-

intensive industries that went to developing countries did notincrease significantly, compared with that going to otherindustrial countries (see also Bartik 1988; Leonard 1988).

By the same token, Walter (1975) asserted that there was a trendto locate new capacities of the Japanese aluminum industry abroadbecause of environmental considerations, together withconsiderations of availability of raw materials and cheaper electricpower in the host developing countries. In 1977, for example,

Kawasaki Steel opened a sintering plant in Mindanao (thePhilippines) to refine imported iron ore for its blast furnaces inChiba, Japan. However, the Japanese Stop the Pollution ExportCommittee wanted the sintering plant closed. The plant has notclosed, but the Mindanao people are still bitter about the acutesocioeconomic and environmental impacts of the plant, according toRocamora (1983). Portier (1979) observed that in the United Statesthere was a trend to relocate industries producing asbestos,mercury, pesticides, and other environmentally hazardoussubstances to Mexico and Brazil.

Leonard (1984) found evidence of some migration of hazardousindustries (for example, asbestos, textiles, and building supplies) toMexico from the United States. The author rationalized themigration and expansion on the basis of low wage rates, proximityto the US market, and Mexican government incentives for domesticprocessing of materials. UNEP (1981), on the other hand, has givenexamples illustrating that relocation is essentially due toenvironmental factors.


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Castleman (1979, 1985), in an effort to determine the effect of theUS Occupational Safety and Health Administration on industrialrelocation to the developing countries, came to rather ambiguousconclusions. In the earlier study, Castleman found evidence ofimminent relocation of industries with environmentally hazardouswork places (e.g., with asbestos, arsenic, and mercury). In the laterstudy, Castleman reported double standards in worker- andcommunity-health protection provided by transnational corporations(TNCs) in developed and developing countries but claimed that thisdid not encourage relocation by US companies. However, work-place abuses are more prevalent in Asia, Africa, and Latin Americathan in the United States. Following the disaster at Bhopal, India, anumber of lawsuits were filed against Union Carbide in US courts in1984 and 1985. Union Carbide, which owns 51% of the Bhopal plant,was accused of knowingly and wilfully disregarding public safety inthe design and operation of the plant. According to Agarwal et al.(1985), Union Carbide's facility in the United States has more

safeguards than the Indian plant.

The problem of hazardous-waste management cannot be divorcedfrom the dilemma about dirty industries that faces developingcountries. For instance, the Mexican government, together with USauthorities, developed the Maquiladora Programme in 1965 as acomponent of Mexico's border-industrialization program, which hadthe goals of generating employment and acting as a catalyst toindustry. The Maquiladora Programme decree stipulated that anyhazardous waste generated in processing activities must be shippedback to the country from which the raw materials came, although

some recyclable wastes could remain. However, large quantities ofuntreated hazardous wastes were dumped in many locationsinhabited by poor and vulnerable groups in Mexico. There is now alucrative international trade in hazardous wastes, to the detrimentof developing countries (Merk 1990; Shimmin 1990; Asante-Duahet al. 1992).

A closely related issue is the rapid rate at which hazardous-wasterecycling plants are now being established in developing countries,particularly lead recycling plants in Brazil, Taiwan, Mexico, India,China, South Korea, and South Africa. Debt-for-equity swaps enable

US companies to buy very cheaply into Chilean operations and openup new, large-scale mines (Metal Bulletin, 1990). The use ofincentives is also continuing to ensure developed countries' access(see Young 1992).

Knodgen (1979) examined the influence of environmentalregulations and pollution-control costs on industrial location andforeign investment from the former West Germany. The author


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indicated that there is no explicit evidence that firms in the formerWest Germany relocated production to "pollution havens" in thedeveloping countries. She argued that the cost advantage isnarrowing because firms must now build to meet high standardsexpected in developing countries in the future. One of the majorfindings is that 90% of the firms surveyed claimed to use similarenvironmental-protection techniques in and outside the former WestGermany to be internationally competitive.

Lucas et al. (1992) examined how the structure of manufacturingvaries across countries and time as a function of the toxic emissionsof the component industries. The underlying assumption of thestudy was that industrial-pollution intensity is the effect of product(or industry) mix. The authors found, however, that industrial-pollution intensity is also influenced by the processes used for eachof the goods and the treatment of the waste that results from theseprocesses. To this end, the author addressed three main lines of

analysis:

1.Development and sectoral composition to compare patternsof pollution intensity in manufacturing with the level ofeconomic development as measured by per capita income(the assumption is that pollution exhibits an inverse U-shapedrelationship with capital income; that is, pollution is believedto, at first, rise faster than output at low levels of income andthen rise more slowly than output above a critical incomethreshold);

2.Organization of Economic Co-operation andDevelopment(OECD) environmental regulation and displacement toexamine broad differences in trends across differing periods todetermine whether production relocation of dirtier industrieshas been more rapid during occasions of enhanced OECDenvironmental regulation; and

3. Economic policies of developing countries and pollutionintensity to ascertain whether periods of trade liberalizationhave led to more rapid growth in the pollution-intensiveindustries in the developing countries.

Lucas et al. (1992) concluded that across countries, there does

exist an inverse U-shaped relationship between gross domesticproduct (GDP) per capita and the total estimated toxic releasesfrom manufacturing relative to GDP. That is, toxic releases per unitof production tend to fall in higher income countries, althoughthroughout the 1960s intensity remained constant, beingindependent of income. This decline was claimed to be aconsequence of the declining share of GDP accounted for byindustrial output, rather than a consequence of any shift toward a


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less toxic mix of manufacturing industries. Growth in toxic intensityhas been more rapid in the developing countries. The study gaveevidence of relocation of dirty industries from the OECD membercountries to developing nations. The authors concluded that fast-growing, closed economies were very rapidly adopting toxic -intensive industries in the 1970s and 1980s. On the other hand,fast-growing, open economies had an essentially toxic -neutralstructural change in the 1970s and a strong shift toward a less-toxicstructure in the 1980s. It is worth noting that, quantitatively, theseeffects were more important during the 1980s than the 1970s.Again, the strength of the openness effect in the 1980s was morethan twice that in the 1970s.

In another recent study, Low and Yeats (1992) used actual tradeflows and a modification of Balassa's (1965, 1979) revealedcomparative advantage (RCA) model to determine whether therewas a locational pull of dirty industries toward developing countries

and, if so, to assess its magnitude. The study measured a country'sRCA in a specific industry by the share of that industry in thecountry's total exports relative to the industry's share in total worldexports of manufactures. The authors examined how thecomposition of countries with RCA in dirty industries changed overthe period 196588. The findings are interesting:

1. In 1988, the environmentally dirty products accounted forabout 16% of world trade.

2. In the same year, industrial countries accounted forapproximately 285 billion USD, or 75% of all shipments of

these products, with almost 40% of world exports comingfrom the European Economic Community (EEC). The Africancountries exported about 12.8 billion USD of these goods,representing about 3% of world trade. Petroleum andnonferrous metals accounted for about 12.16 billion USD, or95% of the African exports.

3. The environmentally dirty products' share of industrialcountries' exports is falling, but the share observed foreastern Europe, Latin America, and west Asia is increasing.

4. Of the 25 largest exporters of environmentally dirty productsin 1988, the only African country is South Africa (Table 2). For

this country, the metals product group account for 80.50% ofthe dirty goods. This is an indication of the prevalence oflarge-scale metalliferous mining and processing in SouthAfrica.

5. Low and Yeats (1992) noted a disproportionately largeincrease in the average number of developing countries withRCAs of >1 in dirty industries and that this expansionoccurred in almost all of the polluting sectors. The increase in


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the number of developing countries with RCAs of >1 wasabout three times that of the developed countries.

6. Natural resource endowments seem to have a significantinfluence on RCAs, particularly in the nonferrous-metalssector: 33% of the dirty industries appeared to have alocational pull toward natural resources. In contrast, labourintensity was not found to be an important factor: only 15%of the sample goods (e.g., metal products) weremanufactured by labour-intensive processes, and nonecounted as 10% more labour intensive than the US averagefor all manufacturing activity.

The generally low cost of compliance with environmental regulations(13% of total costs or turnover) has not caused large-scalemigration of dirty industries to developing countries.Nonenvironmental factors, such as competitive strengths andweaknesses in labour, capital, technology, and natural-resource

endowments, and other factors contribute to location decisions.

Table 2. The twenty-five largest exporters of

environmentally dirty goods in 1988.

Exporting country

Share in total exports ofenvironmentally dirty goods (%)

1988 exports ofenvironmentallydirty goods

Ferrousmetals

Nonferrousmetals

Refinedpetroleum

Metalmfg.

Papermfg.

Share in

countryexports(%)

World

tradeshare(%)

Valu

e(106USD)

Germany, Fed.Rep.UnitedStatesCanadaFranceBelgium-LuxembourgNetherlandsJapan

25.87.37.3

32.736.713.850.523.425.020.310.58.0

44.7

13.814.823.213.316.114.98.8

17.18.36.16.9

26.216.4

3.111.16.16.7

10.131.21.2

14.410.55.74.2

52.711.4

20.4

15.1

6.412.

79.89.620.

513.

8

10.2

9.427.

79.56.68.95.47.77.234.

1

15.810.523.814.623.520.28.1

14.113.833.052.329.024.3

11.9

7.46.65.75.45.34.94.54.24.02.62.2

45.628.525.222.020.820.318.917.316.015.310.08.37.9


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UnitedKingdomItalySwedenFinland

SovietUnionBrazilAustriaSpainKorea,Rep. ofTaiwan,ChinaNorwayAustralia

SwitzerlandChina,PeoplesRep.Rep. ofSouthAfricaSingaporeVenezuelaSaudiArabia

27.628.748.012.91.7

7.412.917.931.63.25.50.4

12.59.55.87.4

42.8

48.321.017.348.93.7

17.10.6

0.818.56.52.37.8

5.61.0

14.41.2

73.772.695.1

25.1

10.4

2.6

0.53.216.

814.

524.

449.

34.4

4.427.7

21.8

1.46.40.90.7

56.1

1.97.522.

45.63.92.715.

21.48.92.63.71.8

0.50.0

24.618.411.810.027.3

19.811.29.6

41.019.249.714.9

2.11.81.81.71.6

1.61.51.51.41.31.31.11.1

6.96.86.66.26.0

5.75.65.25.04.84.34.1

Source: Low et al. (1992).

Discussion of the African situationIn view of the significance of the mining industry in Africa, it is bestto start our discussion of the African situation from there. Moreover,the share of mining in the GDP at constant-factor cost is high 60 317 and 57 865 USD in 1980 and 1990 but manufacturing

accounted for 25 497 and 34 410 USD in the same years,respectively (ECA 1991).

Many developed nations have been making strenuous efforts toensure continued access to cheap mineral supplies throughinternational trade and aid policies. To this end, most of theEuropean governements and the Japanese government subsidizeforeign mineral projects through loans with preferential interestrates, loan guarantees, and direct foreign investment.


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The Bureau de recherches gologiques et minires, a Frenchgovernment agency, helps French companies with funding forexploration and development of overseas projects. Germany offersinvestment guarantees, minimum rate-of-return guarantees, andfavourable loans for its companies' offshore mineral investments.These governments, along with the government of Japan, oftenalign with the US government in supporting efforts by the WorldBank, the International Monetary Fund, and InternationalDevelopment Agency to fund mineral development projects indeveloping nations, sometimes even with the explicit goal of havingaccess to future mineral resources. Developing countries that havebenefited from this strategy in Africa include Zambia, South Africa,Nigeria, Zaire, and Central African Republic.

Despite the nationalization policies of the 1970s, most African minesare owned and operated in collaborations with foreign companies.The management is nearly always in the hands of the foreign

company.

The TNCs dominate the international marketing of Africa's mineralsbecause of the need to integrate the production process withmarketing operations. This raises the issues of equity, economicdomination, loss of national decision-making power, and, especially,the extent of the refining done in the country and, thus, the valueadded. These issues, along with those of greater exploration andproduction in the face of declining demand for and prices of mostAfrican minerals in the world market, the environmental problems,local job losses, and weakened industrial linkages, hamper

sustainable development in Africa.

Table 3 shows the employment characteristics of industries intropical Africa. Essentially, the table shows that African dirtyindustries are labour intensive. The manufacturing value added perworker was highest for the glass industry in 1980, followed bynonferrous metals. In 1990, pottery and china topped the list,followed by rubber products. Although there was not much variationover the decade, there were diverse and irregular shifts amongindividual industries, with a significant increase in employment.

Table 3. Tropical Africa: manufacturing employment (1970,1980, 1990).

Employment MVA/workera

1970 1980 1990 1980 1990

Food 176 285 355 91.3 90.8


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BeveragesTobaccoTextilesApparelLeather

FootwearWood and corkFurniturePaperPrintingIndustrial chemicalsOther chemicalsPetroleum refiningPetroleum and coal productsRubberPlastics

Pottery, chinaGlassNonmetallic mineralsIron and steelNonferrous metalsMetal productsNonelectrical machineryElectrical machineryTransport equipmentProfessional and scientificgoodsOther

3824

153426

157022102813235

0.2186

1431113

528

13290.3

9

7439

2646713

2511045255126569

0.72642

2652227

97193365

1.415

9433

28512618

3167353551307114

1.12029

2855366

93163159

2.420

89.783.488.584.7127

98.1124

114.391

101.383

118.868.234.797.481.1

135.3150.387.1

142.557.5

101.7100.296.4

263.477.989.6

93.9110.576.584.6

117.7

106.3162.9103.469.385.391.5

100.256.126.5

172.695.3

219.798.6115.4101.296.4

110.8138.1118.5155.4130.476.2

Total 812 1476 1625 99.7 99.7

Source: UNIDO (1991).a manufacturing value added/worker index; 1970 = 100.

Critical issues and trade-offs

IssuesAfrica's transition to sustainable development is imperative.Sustainable development can only be achieved by the decisions andactions of each member nation, on the basis of its own interests,needs, and priorities, including its responsibilities to the r egionaland wider international communities.

A major challenge is to develop an acceptable and successfulstrategy for sustainable development. The transfer anddevelopment of technology are crucial aspects. The use ofenvironmentally sound technologies, whether exogenously or


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endogenously developed, can contribute significantly to productivityand the sustainability of resources through renewable-energygeneration, pollution control, and waste reduction.

The relationship between inputs and outputs and the holistic impactof economic activity on the environment is not static but dynamic.Consequently, the question is whether the positive forces ofsubstitution, technological innovation, and structural change cancompensate for any deleterious effects of the overall growth in scale.

The process of industrialization should always take into account thetrue monetary value of the environment and its protection.Formulating an environmental policy on the basis of the costs tosociety of environmental damage rests on the assumption thatenvironmental conditions will worsen without pollution control. It iscrucial to the determine the monetary costs of damage andprotection. What factors influence the value individuals in different

countries place on environmental protection?

As shown by the memo written by the World Bank chief (Summers1992), the perception of the assimilative capacity of the developingcountries' environment raises some pertinent questions. How candeveloping countries be convinced beyond reasonable doubt thatthe World Bank, its affiliates, and similar agencies have not beensecretly encouraging the transfer of unclean technologies fromdeveloped countries through loans? If so, it would mean that thesebanks have been earning interest on loans and credits given for thetransfer of environmentally unfriendly industrial technology.

Available evidence suggests there is rapid environmentaldegradation in Africa, coupled with poverty and the unmet basicneeds of the people.

How will this development pattern create jobs and what type of jobs?Will these generally be blue- or white-collar jobs? Is there evidenceto show that dirty industries generate more employment per unitcost of investment than "clean" industries?

African governments are generally ambivalent about environmental-protection issues, and this is closely related to the ease with which

unclean technologies are imported into African countries. Whatfactors are responsible for this ambivalence? Why areenvironmental policy instruments weak or poorly enforced? Arethere enough local capabilities to establish environmental -protectionstandards based on locally determined norms, values, and

acceptable pollution levels?

Most African countries are undergoing structural adjustment andtrade liberalization in various forms. To what extent will the drive


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for export diversification put pressure on governments to neglectenvironmental protection issues and industrialize at all costs?Export-oriented industrialization in the absence of endogenoustechnology has made Africa dependent on foreign markets, capital,and technology. Would this process not merely be a closed loop?Would it not lead the region to incur more debts, deeperenvironmental degradation, greater poverty, and a more pervasiveerosion of its sovereignty, democratic institutions, and policies? WillAfrican industrial entrepreneurs, governments, donor agencies, andforeign technical partners respond by importing clean technologiesand adapting existing technologies? The answers to these qu estionswill help to decide whether the structural adjustment programs andtrade liberalization have been helpful to sustainable development inthe continent.

The occupational-health and industrial-safety standards in TNCfirms in host countries are generally lower than in TNC plants in

their home countries, which is of particular importance in a poorregion, where emergency and health-care facilities are poor andwater and sanitation facilities can be at best described asrudimentary. Why do we encounter this divergence, and what canbe done to ensuring better housekeeping and safety?

The empirical work on the issue of dirty-industry relocation to Africaneeds to be strengthened. Stricter environmental-protectioninstruments, including high-cost disposal, are creating a push effectin developed countries. On the other side, the desire of cash -poorAfrican nations to import waste acts as the pull factor. This trade is

an unwholesome one and raises the issues of double standards,equity (present and intergenerational), and weak (or nonexistent)monitoring and enforcement of international environmental laws.

The national environmental-protection agencies are either unable orunwilling to enforce established instruments. The appropriateness ofthese instruments and the capabilities and staffing of the nationalenvironmental institutions are critical to sustainable development.Strategies that promote more environmentally sound technologiesand discourage environmentally damaging ones must involve theappropriate combination of market instruments and public

intervention at each stage in technology acquisition and adaptationand the industrialization process.

The environmentally sound technologies (ESTs) are not discreteentities but a system that encompasses procedures, processes,products, and services, as well as equipment. This implies that to besustainable, transfer of technologies to Africa must address humanresource development and local capacity-building aspects of thetechnology options. The process of technology transfer and


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development should be equitable for nations, gender, and socialstatus, bearing in mind the linkages and interdependency of all inthe context of sustainable development.

How can African countries achieve a long-term partnership withsuppliers and users of technology? This would be crucial for training,

institutional linkages, and technology adaptation.

The rate at which new technologies spread is largely determined bythe pace of new investment. For example, retrofitting of existingfacilities, the replacement of poorly performing equipment andmachinery, and the addition of new equipment to the stock requireinitial investments in ESTs, which are often greater than those inexisting polluting technologies. How can poor African countriessecure the resources to acquire environmentally sound technologiesor develop their own endogenous capacities? How can poor Africancountries best use technology and environmental -impact

assessments (EIAs) in industrialization?

The transition to sustainable development requires effective accessto technological information, including technology assessments.Especially crucial is information on environmentally soundtechnologies and on environmental risks from technologies on theinternational market. Africa needs to build up a critical mass ofresearch and development (R&D) based on adequate and

appropriate information.

R&D facilitates an anticipatory approach. Research activities and

strategies to promote ESTs require a multidisciplinary approach andclose collaboration across countries, firms, governments, researchinstitutions, and nongovernmental organizations. How can Africaimprove its policies and strategies for both R&D and technologyassessments? How can external funding, R&D, ESTs, EIAs,technology transfer, technology choice, technology assessments,and environmental-protection instruments complement, supplement,and support host-country initiatives, actions, and priorities? To whatextent can indigenous knowledge of the environment, industrialdevelopment, and pollution control be tapped by R&D andappropriately used?

Trade-offs

The relocation of dirty industries to Africa may contribute to anincrease in some African countries' GNP, but the negative effects ofthe pollution and degradation on other sectors of the economy andon human productivity need to be examined carefully. There couldbe a labour and income advantage for some heavily pollutingindustries, but these advantages would be tenable only in the shortterm. In the long term, the effects of this comparative advantage


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rests largely on the opportunity costs of investing the resources inother sectors of the economy. Would greater employment havebeen created by alternative investments? The type of benefitsaccruing to society determines the trade-off between environmentand income. Examples of such benefits are health and quality of life,esthetically pleasing landscapes, monetized benefits, and theconversion of monetized benefits to other income-generatingactivities. Under proper management, the income optimization andtime horizon of benefits should be compatible with manyenvironmental, conservation, and improvement projects, plans, andprograms.

The income-elastic nature of the willingness to pay to avoidenvironmental damage and ensure protection and the correlation ofrising income with environmental quality explain why the poor andrich perceive some environmental problems and their solutionsdifferently. This again has to do with the type of technology

involved. Although rural Africans might be willing to tackle erosionproblems, they may not be too interested in industrial pollutionunless it directly affected their livelihoods.

Some pollution-control and resource-conserving technologies will beprofitable to society and firms and others won't. Lack of profitabilitycould be a result of distortions in the market prices of inputs.Corrective policies would reverse such trends, particularly in Africa,which largely depends on natural resources. Resource-conservingtechnologies should have greater priority.

Furthermore, Africa has a lower level of capital, hence higheropportunity costs. High priority may not be given to projects with along-term horizon of benefit because priority is already given tosatisfying basic needs. As a trade-off, there is likely to be greaterinterest in projects and technologies with monetized benefits.

The African environment is a resource, as well as being a constrainton development; as a constraint, the level of poverty deepens.Hence, ceteris paribus, an attack on poverty should lead toenvironmental improvements and resource conservation. Creatingemployment is a priority in the quest to alleviate poverty. Creating

employment with environment-enhancing projects and alliedtechnologies should be a desirable trade-off. This concernsparticularly labour-intensive technologies, although they may beless attractive investments than capital -intensive alternatives.

Because human capital has to be improved to achieve sustainability,alleviation of poverty should be perceived as a social investment inthe short-term consumption needs of the poor. It is equally ameans of improving their own contribution to the accumulation of


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capital in the future. With respect to income generation in the future,a trade-off is implicit. This is because the degree of povertyalleviation has to be significant enough to generate productivity,consumption, income, and welfare; otherwise, the opportunity costswill be negative.

Finally, trade-offs among types of risk are often involved in dealingwith waste. Deciding whether to incinerate waste or to bury it canmake a difference in the degree and type of risk to whichcommunities are exposed. Further work on the "best practicable"waste management system would be desirable.

ConclusionsDirty industries are increasing in Africa and declining in somedeveloped countries. Agencies from developed countriesaggressively promote mining, a very dirty industry. We have beenable to establish that dirty industries do generate a reasonable levelof employment. However, we have not been able to establish thattheir expansion in Africa is due to nonexistent or weakenviro

environmental economics book

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