Tuesday, February 03, 2009

Environmental Externalities and Some Possible Solutions

For this part of the assignment, I want to look at a variety of issues that may arise with a water supply in a rural region. I will do this by bringing up a variety of sources of pollution and some suggestions that may help solve the environmental externalities. Let me first mention that this hypothetical water supply comes from a river that runs through a variety of landscapes and thus land uses including woodland areas near the tributaries then through a variety of farmlands and rural and suburban built up areas.

The first source to discuss is a sluice mining operation that emits low levels of mercury into the river as part of their discharges. I assume that no other negative externality and those mercury emissions affect nearly all sectors of society and as such analyzing all possible externalities may be too difficult and costly to analyze. In this case using contingent valuation [good link to the theory] may be the most efficient way of finding what levels of mercury emissions are acceptable for the majority of citizens affected. The questionnaire would consist of levels of mercury and what the costs to the society would be. For example if people choose zero levels of emissions then some of the costs would be reduced government revenue from the tax base reduction and some compensation to the owners of the mill as well as the laid off workers. In essence after the people spoke then government would devise a regulatory regime that enforces and monitors levels of mercury emissions below that expected by the citizens. Along with this process, government officials may wish to implement “safe minimum standards” to mitigate against events that are highly uncertain with irreversibility. Accumulation of mercury in an environment may have long and persistent consequences that are not easily identified at first. (SG, 6.6.7) Ultimately we are trying to limit this heavy metal to tolerable levels for everyone with direct control measures (Kula, Section 6.3.7). Good point

The second source to discuss is excessive nitrogen runoff from a few large farming landowners into the river affecting a fish cooperative. Here Ronald Coase’s theories may help us get to an optimal level of nitrogen runoff given the property rights of both parties being well defined as well as the rights of who gets to pollute and to what degree. Choosing situations that had fewer numbers of parties to deal with allows transaction costs [excellent point] to be mitigated and to prevent holdouts as well as free-riders from blocking negotiations. Government still has a role to play by being available as arbiter/mediator as well as being able to provide relevant information about costs and benefits for both sets of parties through HPA possibly. Government must also be willing to let the parties negotiate and discourage rent seeking behaviors. If this fails to reach a compromise then government could always step in and use common law to internalize the environmental externalities and make a judgment based on facts discovered through the negotiation process. (Kula, Sections 6.3.1, 6.3.2)

A third source of environmental externalities is from used motor oil dumped into storm drains. Since the source is widespread and happens at random occurrences most methods of enforcement fines or taxes is of little prevention for events that can damage 250,000 gallons of drinking water or 1 million gallons of fresh water from one quart of used motor oil (Ref. 12). Perhaps this is rather too much detail for the assignment – put in a foot-note? Although the desired response tends to wane over time, a propaganda campaign can inform and instruct individuals as to what the consequences of their actions are and appeal to their community consciousness. This does negate having fines and penalties but those do little good when the chances of getting caught are very low but the damage can be so severe. Depending on how a CV is conducted it could provide opportunities for the interviewees to be informed about the problems. Boadu noted a problem with the field work was that village chiefs announced the purpose of the interviews but did provide opportunities for citizens to evaluate the opportunities. (Boadu, P. 465) (Kula, Section 6.3.8)

The fourth source to affect our water source is acid rain caused by industrial plants emitting SO2 into the atmosphere. I assume that the present levels of SO2 gas does not create problems but could if industry expands or emits more SO2 in the future. A good idea to maintain a capped level of emissions while leaving industry as a whole with opportunities to change and grow is through marketable permits. This scheme allows a great deal of flexibility by both the regulators and those companies regulated. Regulators can also get in and buy or sell permits as needed. Since the market is open then other interests could become involved in the transactions also. Any environmental group could purchase rights also and thus reduce pollution discharges. Polluters also have flexibility to either increase levels of emissions by purchasing from more efficient firms or reduce and sell those permits. (Kula, Section 6.3.9)

The fifth source of pollution spilling into our water source is raw sewage from a variety of types of septic tanks or gravity flow drainage systems. When heavy rains or flooding occurs, this raw sewage (along with all the bacteria) is carried downstream. The easiest way to solve this problem is to take over waste removal especially in areas that may leak into the water system. In effect this is expanding public ownership of existing services and incorporating more area in the water treatment district. (Kula, Section 6.3.10) Relate this more to the economic analysis rather than the description of the source material. See may comment on Pigou and Kaldor-Hicks below.

Sedimentation from logging is the sixth factor affecting our river water source. During the permitting process of public lands, the amount of sentiment can be given a weight based on techniques used, areas covered, time of year, and other factors that can be determined before logging begins. If plans are ignored or standards are not maintained then additional taxes could be reassessed. Sedimentation is bound to occur and will affect all the users of the water supply to various degrees so number of claimants could be quite large but taxing the logging for extent of damages done by each timber contract allows a fund to be built up for claims that may arise because of sedimentation. One of the easiest ways to calculate the costs would be to charge what it would be to clean up and put back to the original levels of sedimentation. Belli provides another technique of valuating the costs associated with the various timber projects with “Shadow Project”. It would calculate the costs of the externalities based on what it would cost to reproduce that good. In this case it would be clean water without sedimentation. (Belli, Page 70) Although these techniques would be on the high end of costs, it would try to internalize every aspect of this pollution onto the timber harvest. This example does not abide by Pareto Optimum solution but we at least get to the Kaldor-Hicks criterion since we have collected the Pigou tax to the socially optimal levels. The question becomes how we can distribute the tax receipts so that all people affected can be compensated to the correct amount? (Kula, Section 6.3.3) This is excellent – you need more on the economic principles involved and less on the minute detail of source sof pollution

The seventh and last contributing factor I wish to discuss is the fact that migratory Canadian Geese (or any bird congregation caused by human interaction) can also cause nitrogen runoff. As fascinating as this may be, is this related to the question i.e. developing country? In the process of development, settled areas can be very attractive to a variety of birds. I included this in the analysis because it did not fall into any of the techniques I know about internalizing environmental externalities as easily. I say this because the cause of the externality is not a direct cause of humans polluting but of the secondary effects of creating an environment conducive to certain species. To be more specific, the creation of a golf course will attract Canadian Geese since the well watered grass is constantly fresh and usually near bodies of water including hazard ponds that most likely will overflow to the water source we are concerned about. Since no person is directly responsible then who can be taxed or forced to behave in a certain manner? Even if the government decides to make it a public ownership will not solve the problem only shift which party is hosting the problem. And no amount of propaganda will change the behavior of the geese. While a variety of techniques can be done to reduce the attractiveness of the golf course habitat (Ref. 8, 9), there is still the question of who will pay for such remediation and whether they are acceptable to the public. The easy answer is to make the golf course owners pay for any remediation but then that is punishing those that did not directly create the problems especially if migratory patterns had changed. Ultimately, maybe government should pay for the remediation but that is political question. Does this issue nevertheless have an economics dimension of Cost-Benefit Analysis?

In conclusion, I used a variety of techniques to either internalize the environmental externalities on a river water source or to at least account for how society can deal with those problems. I started out with direct control of a heavy metal; and then used Coase theories to settle the externalities between parties and if that failed to use a common law solution; then how propaganda can influence individual decision makers to raise the level of concern for environmental issues; then created marketable permits to maintain a constant level of SO2 output that prevents acid rain from causing major problems; then take over of certain social services into new areas by expanding public ownership; then the use of pollution taxes on timber harvests to internalize the sediment externality for specific contracts with the government; and then the last one I concluded that based on fairness that the government may end up paying for whatever remediation is needed to overcome the geese problems. [A clear set of conclusions]

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