Economics. Environment

Transcription

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2 Horst Siebert Economics of the Environment Theory and Policy Second, Revised and Enlarged Edition Springer-Verlag Berlin Heidelberg GmbH

3 Prof. Dr. Horst Siebert Universitat Konstanz Lehrstuhl for internationale Wirtschaftsbeziehungen UniversitatsstraBe Konstanz 1, Federal Republic of Germany The first edition was published in 1981 by Lexington Books, D. C. Heath and Company, Lexington. ISBN Library of Congress Cataloging-in-Publication Data. Siebert, Horst, Economics of the environment. Bibliography: p. Includes index. 1. Environmental policy-economic aspects. 1. Title. HC79.E5S ISBN ISBN (ebook) DOI / This work is subject to copyright. AII rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, re-use of iiiustrations, recitation, broadcasting, reproduction on microfilms or in other ways, and storage in data banks. Ouplication of this publication or parts thereof is only permitted under the provisions of the German Copyright Law of September 9, 1965, in its version of June 24, 1985, and a copyright fee must always be paid. Violations fali under the prosecution act of the German Copyright Law. Springer-Verlag Berlin Heidelberg 1987 Originally published by Springer-Verlag Berlin Heidelberg New York in 1987 Softcover reprint of the hardcover 2nd edition /

4 Contents List of Figures and Tables Preface XI XIII Part I Introduction 1 Chapter 1 The Problem 3 Chapter 2 Using the Environment-An Allocation Problem 7 Externalities 7 Relationship between the Environment and the Economic System 7 Material Flows between the Environment and the Economic System 11 Competing Uses 12 Zero Price of Environmental Use 16 Environmental Effects of Government Decisions 18 How Much Environmental Quality? 18 A Taxonomy of the Environmental Problem 19 Appendix 2A: Input-Output Analysis and the Environment 21 Part II Static Allocation Aspect 25 Chapter 3 Production Theory and Transformation Space 27 Production Theory 27 Transformation Space with Environmental Quality 30 Variables Affecting the Transformation Space 33 An Alternative Approach of Production Theory 36 Appendix 3A: Properties of the Transformation Space 38 Appendix 3B: Transformation Space with Negative-Productivity Effect 42 Chapter 4 Optimal Environmental Use 43 Criteria for Optimality 43 Optimization Problem 44 A Shadow Price for Pollutants 46 Implications for the Shadow-Price System of the Economy 49

5 VI Economics of the Environment Optimum and Competitive Equilibrium 50 Requirements for an Emission-Tax Solution 54 Appendix 4A: Nonlinear Optimization 56 Appendix 4B: Implications of the Allocation Problem 58 Appendix 4C: Implications of the Profit Maximum 60 Chapter 5 Environmental Quality as a Public Good 61 Characteristics of a Public Good 61 Allocation of Public Goods 64 Social-Welfare Function 66 Benefit/Cost Analysis 67 Costs of Environmental Quality 68 Evaluation of Environmental Quality 70 Individual Preferences and the Pareto-Optimal Provision of Environmental Quality 74 Thesis of Market Failure 77 Lindahl Solution 77 Mechanisms of Social Choice 84 Chapter 6 Property-Rights Approach to the Environmental Problem 91 Property-Rights Approach 91 Property-Rights and Environmental Allocation 92 Coase Theorem 93 Coase Theorem and Transaction Costs 95 Can Property Rights Be Specified? 96 Part III Environmental-Policy Instruments 99 Chapter 7 Incidence of an Emission Tax 101 Standard-Price Approach 101 Reaction of Producers 103 Emission Taxes in Monopoly 105 General Equilibrium Approach 106 Allocation in a General Equilibrium Model 107 Pollution Intensities, Factor Intensities, and Allocation Effects 111 Overshooting of the Emission Tax 114 Appendix 7 A: Reaction of the Individual Firm 116 Appendix 7B: General Equilibrium Model 117

6 Chapter 8 Policy Instruments 119 Transforming Quality Targets into Individual Behavior 119 Available Policy Instruments 120 Criteria for Evaluating Instruments 120 Moral Suasion 122 Government Financing and Subsidies 122 Regulatory Approach 123 Emission Taxes 126 Pollution licenses 130 The Bubble Concept 133 Institutional Arrangements for Cost Sharing 136 Combining Standards and an Emission Tax 137 Taxonomy of the Environmental Problem and Policy Instruments 138 Chapter 9 The Political Economy of Environmental Scarcity 141 The Opportunity Cost Principle 141 The Polluter Pays Principle 142 The Principle of Long-Run Perspective 144 The Principle of Interdependence 145 Major Environmental Legislation 146 Part IV Environmental Allocation in Space 149 Chapter 10 International Dimension 151 Environmental Systems in Space 151 Global and Transfrontier Pollution 152 National Environmental Policy and International Repercussions 154 Environmental Policy and Comparative Advantage 155 Environmental Policy and Trade Flows 158 Location Advantage 159 International Specialization and Environmental Quality 159 The Equalization of Prices for Emissions 161 Environmental Policy and Gains from Trade 162 Environmental Regulation and Protection Against Trade 163 Chapter 11 Regional Aspects of Environmental Allocation 165 The Problem 165 Spatial-Allocation Model 168

7 Regional Implications of a National Environmental Policy 169 Regional Differentiation of the Emission Tax 170 Location Advantage 171 Diagrammatic Explanations 172 Resource Mobility and Adjustment of Emission Taxes 176 Differences in Environmental Quality 177 Siting Issues and the National Interest 177 Regional versus National Authorities 178 Some Restraints on Regional Authorities 179 Cooperative and Non-cooperative Solutions of Bargaining 180 Regional Autonomy and Environmental Media 181 Environmental Equity and Specialization of Space 182 Environmental Policy and Regional Planning 183 Appendix l1a: A Regional Allocation Model 185 Part V Environmental Allocation in Time and Under Uncertainty 187 Chapter 12 Long-Tenn Aspects of Environmental Quality 189 The Problem 189 Dynamic Model 191 Implications 191 Three Strategies for Dynamic Environmental Use 193 Social Discount Rate and Environmental Allocation 197 Further Determining Factors of the Shadow Price of Emissions 198 Appendix 12A: Control Theory 201 Appendix 12 B: A Dynamic Allocation Model 204 Chapter 13 Economic Growth and Environmental Quality 207 Zero Economic Growth 207 Interdependencies among Environmental Quality, Growth, and Resources 210 Growth and Environmental Degradation 211 The Survival Issue 217 Environmental Quality as a Normative Restriction for Growth 217 Optimal Growth 219 Growth with Finite Resources 219

8 Contents IX Chapter 14 Risk and Environmental Allocation 221 Environmental Risks 221 Risk and Environmental Quality 223 The Steady State 225 Increased Risk in the Damage Function 226 Increased Risk in Assimilative Capacity 228 Preventive Environmental Policy 229 Irreversibilities 230 Allocating Environmental Risks? 231 Risk Reduction 231 Allocating the Costs of Risk Reduction 232 The Response of the Polluter Under Uncertainty 233 Appendix 14A: An Intertemporal Allocation Model with Risk 237 Bibliography 239 About the Author 267 Index 269

9 Figures List of Figures and Tables 2-1 Interaction between the Environment and the Economy Input-Output System of the Economy and the Environment Emission and Production Functions Damage Function Transformation Space with Environmental Quality Specific Cases of the Transformation Space Transformation Space with Negative Externalities Production Function with Emissions as Input Determination of the Emission Tax Aggregation of Willingness to Pay Optimal Environmental Quality Abatement Costs Pareto Optimum of Environmental Allocation Household Optimum Lindahl Equilibrium Majority Voting and Environmental Quality Coase Solution with Transaction Costs Standard-Price Approach Structure of General Equilibrium Model Main Effects of an Emission Tax Allocation Effects in a Two-Factor Model Effect of an Instruction to Reduce Emissions Reactions to an Emission Tax Tax Bases of an Emission Tax Combining Standards and an Emission Tax Trade Effects of Environmental Policy Comparative Advantage and Environmental Policy Delineation of Regions Emission Taxes with Differences in Evaluation 172

10 XII Economics of the Environment 11-3 Regional Allocation with Differences in Assimilative Capacity Regional Allocation and Interregional Diffusion The -IJ. = 0 Curve and the S = 0 Curve Optimal Stock of Pollutants and Time Path of the Emission Tax Effects of an Increase in the Discount Rate and in Assimilative Capacity Goal Conflict between Environmental Quality and Output Capital Accumulation The S = 0 Curve and the K = 0 Curve Steady State with Accumulation of Pollutants and Environmental Constraints Steady State with Negative-Productivity Effect Survival and Environmental Policy Expected Utility and Disutility Risk in the Damage Function and Steady State Risk and Steady State Increase in Risk and Probability Distribution 235 Tables 4-1 Pareto Optimum and Competitive Equilibrium Classification of Goods U.S. National Ambient Air Quality Standards 89 12A-l Optimality Conditions 202

11 Preface "The labor of nature is paid, not because she does little. In proportion as she becomes niggardly in her gifts, she exacts a greater price for her work. Where she is munificently beneficient, she always works gratis." David Ricardo * This book interprets nature and the environment as a scarce resource. Whereas in the past people lived in a paradise of environmental superabundance, at present environmental goods and services are no longer in ample supply. The environment fulfills many functions for the economy: it serves as a public-consumption good, as a provider of natural resources, and as receptacle of wastes. These different functions compete with each other. Releasing more pollutants into the environment reduces environmental quality, and a better environmental quality implies that the environment's use as a receptacle of wastes has to be restrained. Consequently, environmental disruption and environmental use are by nature allocation problems. This is the basic message of this book. If a resources is scarce and if a zero price is charged for its use, then misallocation will result. The environment as a receptacle of wastes is heavily overused, and consequently environmental quality declines. Scarcity requires a price. This book analyzes how this price should be set, whether a correct price can be established through the market mechanism, and what role the government should play. The book offers a theoretical study of the allocation problem and describes different policy approaches to the environmental problem. The entire spectrum of the allocation issue is studied: the use of the environment in a static context, international and trade aspects of environmental allocation, regional dimensions, environmental use over time and under uncertainty. The book incorporates a variety of economic approaches, including neoclassical analysis, the public-goods approach, benefit-cost analysis, property-rights ideas, economic policy and public-finance reasoning, international trade theory, regional science, optimization theory, and risk analysis. This book grew out of may research at the Universities of Konstanz and Mannheim, Germany, and visiting positions at the University of Aberdeen, Scotland, the Australian National University in Canberra, the Energy Laboratory of the Massachusetts Institute of Technology as well as the Sloan School of Management, the University of California at Riverside, the University of New Mexico at Albuquerque, New York University, and Resources for the Future. I would like to thank Ralph d'arge, Ron Cummings, Allen V. Kneese, John V. Krutilla, Ngo Van Long, Toby Page, David Pearce, Cliff Russell, Walter Spofford, and Ingo Walter for stimulating discussions. I am also grateful to Rudiger Pethig (University of Oldenburg) and to Hans Werner Sinn (University of Munich), to Ferdi DudenhOfer, Helga Gebauer, Ralf Gronych, Helmut Meder, Sabine Tous-

12 saint and Wolfgang Vogt (all Mannheim) and Ernst Mohr (Konstanz) with whom 1 worked on the environmental issue and on intertemporal allocation. Further, 1 appreciatively acknowledge financial support by the Deutsche Forschungsgemeinschaft. This book only considers environmental issues and does not discuss natural resource scarcity for nonrenewable and renewable resources such as oil and fish. Of course, there are interrelations between the environmental and resource scarcity problem, for instance the common property rights issue and the intertemporal aspect of environmental use and resource allocation. 1 have studied the intertemporal allocation problem of natural resource scarcity in my German Book "Okonornische Theorie narurlicher Ressorucen" (J. C. B. Mohr, Tiibingen, 1983). With the environmental problem having already a sufficiently broad spectrum of facets, it is a topic in its own right. Both of my books, however, should be viewed as an ensemble attempting an answer as to how to incorporate the environment and natural resource scarcity into the doctrine of economics. This book was originally published byd. C. Heath in 1981.ln this thoroughly and extendedly revised edition, chapter 9 on the political economy of environmental scarcity as well as chapter 14 on environmental risks and their impact on allocation have been added whereas chapter 12 on depletable resources of the first edition has been omitted. Besides these major changes, the whole text has been completely revised. The regulatory approach to environmental policy, the bubble concept, and some practical aspects of regional environmental policy have been added or extended. The role of transaction costs in the Coase theorem and the distinction between public goods and common properties has been clarified. New data have been introduced, the bibliography has been updated and extended and the new literature has been incorporated into the text. Moreover, teaching a text over several years brings to light some shortcomings. Ernst Mohr scrutinized the complete manuscript for improvements, and he has pointed out quite a few. Finally, Gudrun Kugler has typed the bulk of the revisions. It should be mentioned that some parts of the book were originally published in German under the title "Okonornische Theorie der Umwelt" in However, chapters 4, 6, 7,8,9, 14 and parts of 5 as well as 11 were not included in the original publication. Of course, the profession does not read, and simplifications are called for. But it is not justified to classify this book as an English version of the original German Text. 1 hope that the analysis presented in this book contributes some insights to the emotional debate on environmental disruption, and 1 wish that it incorporates nature and the environment as a scarce good into the body of economic thought and that it provides an answer of economics as a discipline to a problem of great importance to our societies. H. S. Note * D. Ricardo, Principles of Political Economy and Taxation, 1817, quoted accordingly to Everyman's Library, London 1911, Dent, p. 39.