ESP 162: Environmental Policy

Mike Springborn

Department of Environmental

Science & Policy

[image: USGCRP, 2010]

Overview• Introductions

• Syllabus/website

• Today’s discussion:– What is this course? What is public policy analysis?

What is economics? Environmental economics? The place of economics in policy?

– The discipline of economics and subfields of environmental and resource economics

– Focal economic ideas relevant for policy

• Prepare for lab experiment tomorrow

http://www.des.ucdavis.edu/faculty/Springborn/courses/esp162/index.html

[Google: “esp 162”]

Class Website

Course readings• K&O: Course textbook, Keohane and Olmstead• Additional articles are hyper-linked (you’ll need UC Davis network access to to retrieve some articles.)

Schedule in gray tentative, may change ,

links not live

For lab on Wednesday

• Classroom experiment:  – “Supply and demand” (Experiment 1) – Reading material posted on class website

• Theodore C. Bergstrom and John H. Miller, Experiments with Economic Principles: Microeconomics, 2nd edition, Irwin McGraw-Hill, 2000.

– Read pages 3-6 [the first three pages of the PDF] before lab.

– *****Print and complete the Warm-up Exercises—hand in at beginning of lab.

Conceptual overview map on the website

Key concepts

Value systems: efficiency, distribution, ethics and morality

• How do we decide what decision should be preferred by society? – Based on outcomes or intrinsic morality?

• If we’re concerned with outcomes, then what outcomes? – Equity?– Economic efficiency?

Public policy analysis: reality Czech

Benefits and Costs

• Costs to the state budget: $403M/year (15.6B CZK)– premature death (forgone income taxes and social security

contributions)

– sickness (medical costs and sick leave)

– lost property from fire

• Benefits to the state budget: $553M/year (20.3B CZK)

– cigarette taxes receipts

– savings on retirement pensions and other government provided services for the elderly because smokers die prematurely

• Conclusion: smoking is beneficial for the Czech Republic because it saves the state budget every year about $150M (5.8B CZK)

Ross (2003)

Philip Morris statement:

"All of us at Philip Morris are extremely sorry.

No one benefits from the very real, serious, and significant diseases caused by smoking" (English, 7/27/01)

Philip Morris CEO:

the study showed “a complete and unacceptable disregard of basic human values.” (Sandel, 2009, p. 42)

Public policy analysis

the process of assessing, and deciding among alternatives in public choices based on their usefulness in satisfying one or more social goals or values

Adapted from:MUNGER, Analyzing Policy (New York, NY: WW Norton, 2000), p. 6WEINER AND VINING, Policy Analysis (Upper Saddle River, NJ: Prentice Hall, 1998), p. 27

What is economics?• “Allocation science”; the study of how society [allocates]

[should allocate] scarce resources– Tools for solving problems (e.g. cost-benefit analysis to compare

alternatives) – Insights for making broad philosophical arguments. – "A refuge for scoundrels“?

• Descriptive/Positive and Prescriptive/Normative– Descriptive /Positive [“what was, what is, what will be”]

• Concerned with causality: understanding how the world works • Prediction: forecasts about what will happen under different conditions

– Prescriptive /Normative [“what should be”]• Concerned with optimal outcomes (efficiency) and sometimes equity.

• The application of economic principles to the study of how scarce environmental resources are (descriptive) and should be (prescriptive) managed.

• Major concerns: • (1) failures of the market system associated with

environmental (public) goods, and

• (2) evaluate alternative policies designed to correct such failures

– Failures typically occur when human activity leads to costs and/or benefits to others which are not included in prices paid,

i.e. when there exist “externalities” (demo: public good provision)

Environmental economics

Why study environmental/resource economics?

• Many causes and consequences of environmental degradation and poor natural resource management are economic.

• "Market-based" approaches to resource management and environmental regulation are increasingly common at all levels of government.

• Economics plays a central role in environmental policy debates. – Concerns about the cost burden of environmental policy

a central hurdle to more stringent policy

– Knowing the basic principles enables you to formulate or refute

economic arguments.

Keohane & Olmstead, 2007

• Economic incentives: – forces in the economic world that attract or repel people, causing

them to change their behavior (e.g. in production or consumption) in some way.

– Without incentives that cause decision makers to “feel” the true costs of their actions, few will voluntarily account for all the effects of their choices.

Key ideas in economic thinking

image: 2greenenergy.com

• Scarcity–Something is said to be scarce if the following is true: If it were

offered to people at no cost, more would be wanted than is available.

• Trade-off –The situation when something must be given up to

obtain something valued. (“No free lunch.”) • E.g. More goods more pollution. • Devoting resources (money, labor, time, etc) to issue A means

we can’t focus those resources on issues B, C, D, etc.

Key ideas in economic thinking: Cost/benefit and policy analysis

Delhi Sands Flower-Loving Fly, San Bernadino County* $6M to move hospital 250 ft

marginal (incremental) benefits

marginal (incremental) costs

(quazoo.com)(L.A. Times, 1998)

ESP 162

• Rational choice: – Economic agents (people, firms, etc) are

optimizers who make choices to maximize their own payoffs. (Hackett, 2006, pg. 8)

– Behavioral economics acknowledges important departures from rational choice.

Key ideas in economic thinking

marginal (incremental) benefits

marginal (incremental) costs

(quazoo.com) ESP 162

• Valuation for public policy –Values and tradeoffs used in public policy should be informed by observations of the same in society.–Willingness to pay (e.g. for environmental quality), willingness to accept (e.g. for environmental degradation), discount rate.

Key ideas in economic thinking: Cost/benefit and policy analysis

"In this approach [of assigning dollar values to human life, human health, and nature itself] formal cost-benefit analysis often hurts more than it helps: it muddies rather than clarifies fundamental clashes about values. … [E]conomic theory gives us opaque and technical reasons to do the obviously wrong thing.“

-Ackerman and Heinzerling (2004)

Can we/should we put numbers on things?

Can we/should we put numbers on things?

• Over the past several decades rigorous and reliable methods have been developed for estimating how individuals value a broad range of environmental threats and damages.

• These methods have been validated and even required by government (Stavins, 2011): – Executive Orders (Reagan, Bush, Clinton, Bush, and Obama)– Federal statutes (Clean Air Act, Clean Water Act, CERCLA)– Best practices (Guidelines of U.S. Office of Management and

Budget, U.S. Environmental Protection Agency, and others)

Only as objective as the practitioner….

• A 2009 e-mail, written by the U.S. Chamber of Commerce’s senior health policy manager proposes:– spending $50,000 to hire a "respected economist" to study the impact

of health-care legislation

• "The economist will then circulate a sign-on letter to hundreds of other economists saying that the bill will kill jobs and hurt the economy. …

• We will then be able to use this open letter to produce advertisements, and as a powerful lobbying and grass-roots document.“

• Source: “Health bill foes solicit funds for economic study” Michael D. Shear, Washington Post, Monday, November 16, 2009

…

We must take a messy world, select and analyze the essential components and provide policy guidance

messy social, political, economic, environmental system

select and formalize (model) the essential components; analyzeusing methodological tools (jargon)

provide policy guidance and intuition for environmental management

simplifications, assumptions

select findings and translate insights into plain language

Course Outline, Part I• Analytical Tools: What is a market and how does it

function? What economic and environmental outcomes are desired? When is there a role for policy (government intervention), i.e. when does an unregulated market fail to generate the desired outcome?

– Benefits and Costs, Demand and Supply– Market Equilibrium and Economic Efficiency. – Introduction to market failure: externalities, public goods and the

“tragedy of the commons”.

• Benefit Cost Analysis – Overview & dynamic issues – Measuring Benefits – Measuring Costs – Application: Climate Change– Application: Arsenic

• Policy for Market Failure – Introduction and criteria for evaluation – Decentralized Policies – Command and Control Strategies – Market Based Strategies

• Price instruments (e.g. taxes)• Quantity instruments (e.g. cap and trade)

• Applications– Climate change– Invasive species– Ecosystem service valuation – Arsenic in drinking water

Course Outline, Part II

Additional definitions to study on your own

Public Policy; Analysis

(Webster’s dictionary)

Policy:

1. A definite course or method of action selected from among alternatives and in the light of given conditions to guide and usually determine present and future decisions.

2. A projected program consisting of desired objectives and the means to achieve them.

Analysis:

1. Separation or breaking up of a whole into its fundamental elements or components or component parts.

2. A detailed examination of anything complex made in order to understand its nature or to determine its nature or to determine its essential features, through a study.

Public policy analysisMUNGER, Analyzing Policy (New York, NY: WW Norton, 2000), p. 6

• Policy Analysis is the process of assessing, and deciding among alternatives based on their usefulness in satisfying one or more goals or values.

WEINER AND VINING, Policy Analysis (Upper Saddle River, NJ: Prentice Hall, 1998), p. 27

• Policy Analysis is client-oriented advice relevant to public decisions and informed by social values.

MAJONE, Evidence, Argument, & Persuasion in the Policy Process, (New Haven CT: Yale University Press, 1989) p. 7

• The job of analysts consists in large part of producing evidence and arguments to be used in the course of public debate. 

Source: Perreira (2009) http://www.unc.edu/~perreira/guide1.html

• Microeconomics (core-general theory): the behavior of consumers (individuals) & producers (firms) interacting in markets.

• Public economics: how government policies (do and should) effect the economy and individuals (welfare economics, public goods, externalities, taxation).

• Macroeconomics (core-general theory): the economy as a whole with an emphasis on understanding growth (expansion/depression), interest rates and employment

• Industrial organization: the behavior of firms under imperfect competition

• Political economy: behavior of actors in government

• Agricultural economics: behavior of the agricultural sector

• International trade: international exchange (patterns of imports and exports) and the movement of production between countries.

• Development economics: issues of poverty and industrialization in developing countries.

• Game theory: the behavior of individuals/firms in the economy who act strategically (make choices accounting for the expected actions of others).

• Econometrics: statistical methods employed/developed to answer economic questions.

Environmental economics is a composite field that draws from several subfields in economics:

• Resource economics: the study of how society allocates scarce natural resources, usually changes to a stock.

– either harvest/extraction or emission of resource stock or stock pollutant.

– Major concern: problems following from open access