Environmental Economics: Some Applications to Watershed Resources

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Environmental Economics Some Applications to
Watershed Resources
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Environmental Economics Overview

• Basic Environmental Economic problem --
  divergence between private and social costs
• One party uses an input without paying for it.
• Another party pays external cost of the action.
• Valuing Environmental Resources/Damage
• Want to find the Socially Optimal Level of
  Environmental Damages
• Policies to Correct Environmental Damages

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Exchange and the Environment
Environmental, Natural Resources (and other)
Inputs
Recycled or Treated
Residuals (sewage, emissions, litter, plastics,
...)
Producers combine inputs in production

• Environmental Damage
• to 3rd Party
• Diminishes environmental resource
• Neglected in market process

Consumers use goods/services
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Illustrating the Environmental Economic Problem
The Basic Story

• Nursery grows sells plants to earn profits.
• Weighs benefits (price) and costs (inputs) in
  choosing how many plants to grow.
• Produces/sell plants as long as expected benefits
  exceed (or equal) costs.

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Illustrating the Environmental Economic Problem
The Basic Story (cont.)

• Nurserys Private Benefits and Social Benefits
• Price (marginal revenue) is nurserys private
  benefit.
• Price also reflects consumer willingness to
  pay, or Social Benefit (Value)

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Illustrating the Environmental Economic Problem
The Basic Story (cont.)

• Nurserys Private Costs and Social Costs
• Owners time, wages, land, water, fertilizers,...
• Private costs reflect the value of other things
  that could have been produced with the resources.
• These input payments reflect Social Costs

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Markets Private Social Benefits/Costs
Nursery produces plants

• Private Benefits
• Also reflect Social Benefits (Value)

• Private Costs
• Also reflect Social Costs

• Well-functioning Markets equate
• Price (willingness to pay) to Social Cost
• Social Benefits to Social Costs
• Economic well-being maximized

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Illustrating the Environmental Economic Problem
The Basic Story (cont.)

• Suppose the nurserys pesticides seep into a
  local aquifer or watershed, contaminating a
  ranchers water supply.
• Ranchers dairy cows drink the water, become ill,
  produce less milk for market.

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Illustrating the Problem (con.t)

• Problem Nursery lacks incentive to incur
  external costs imposed on rancher, doing so
  reduces its profits.
• External cost is a social cost that nursery fails
  to pay (or internalize).

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Market Fails Unequal Private Social Costs
Nursery produces plants

• Private Benefits
• Reflect Social Benefit (Value)

• Private Costs
• Reflect Social Costs paid by nursery

• External Costs
• Environmental Damages
• Social Costs neglected by nursery

• Market Failure
• Nursery costs do not capture Social Costs
• Social Cost exceed Price (Social Benefit)
• Economic well-being is not maximized

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Socially Optimal Level of Environmental Damage

• Environmental problems center on divergence
  between private and social costs
• One party uses an input without paying for it.
• Another party pays external cost of the action.

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Socially Optimal Level of Environmental Damage
(con.t)

• Maximizing social welfare means finding optimal
  number of plants to produce (and corresponding
  level of pollution)
• Tradeoff between things society values--plants,
  dairy products, and the watershed.

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Correcting Environmental Damages

• Environmental resource uses should be valued so
  that damages can be estimated.
• Costs (damages) should be internalized on
  responsible parties.

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Correcting Environmental Damages (cont.)

• More complicated than the simple story
• Many polluters, some from non-point sources
• Urban runoff, sewage spills, many point sources,
  ...
• Many uses (values) of watershed resources
• Households, manufacturing, recreation, ecological
  services, aesthetic benefits,...
• Difficult to value non-market nature of some
  environmental resources.

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Valuing Environmental Resources Applications to
Watershed Resources

• Estimating Loss Values
• Commercial Losses
• Aesthetic value of damaged environment quality
• e.g., scenic preservation, beach quality, open
  space, ...
• Recreational values

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Correcting Environmental Damages Possible
Watershed Examples

• Some policy criteria
• Internalize costs on responsible parties
  (upstream)
• Provide incentives to change problem behavior
• Efficient and cost-effective pollution reductions
• Incentives for polluters to find better ways to
  reduce impacts
• Ability to enforce and monitor
• Fairness