Confronting A Negative Externality Environmental Policy

1
Confronting A Negative Externality -
Environmental Policy
Session 20
MT292 Introduction to Technology
Policy Vanderbilt University School of
Engineering
2
Externalities(from Session 1)

• Ideal
• Price paid by buyer covers all product costs
• Producer reaps all social rewards of product
• Deviations
• Positive externalities
• Negative externalities

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Positive Externalities

• Rewards that the producer doesnt fully reap
• Examples
• Any productive activity that is taxed
• Scientific research (often)
• Artistic creations whose dissemination cant be
  controlled
• Public goods paid by public, enjoyed by
  private parties (public education, roads, airport
  security)
• Causes
• High transaction costs
• Low enforceability of property rights
• Results
• Underproduction

4
Negative Externalities

• Costs that are created but not paid by parties
  pursuing their private interests
• Examples
• Smoking
• Productive activities that create undesired side
  effects (e.g., pollution)
• Cause (why cant/wont private parties pay the
  costs they create)
• High transaction costs
• (e.g., policing compliance, collecting fines)
• Other?
• Results
• Overproduction/Overconsumption
• Underpricing
• A net social cost

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Key Source of Negative Externalities The Scarce
(Finite) Public Resource

• Right-of-Way - Delivery of Services
• water, gas, electric, phone, cable
• Right-of-Way - Transportation
• railroad, highways, air space
• Communication
• Radio frequency spectrum (radio, TV, cellular,
  mobile radio)
• Microwave spectrum
• Satellite communication (transponder space)
• Natural Resources
• Land (industry, residence, agriculture, mining,
  recreation, wildlife)
• Air/Ocean/Rivers/Lakes (e.g., fishing rights)

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Tragedy of the Commons

• The over-exploitation of a scarce public resource
  that results when each individual pursues his own
  economic self-interest.
• Examples
• Depletion
• Over-fishing over-grazing
• Unacceptable service levels
• Spectrum congestion
• Overlapping distribution networks
• Danger to human life
• Unregulated air space

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Policy Remedies(from Session 3)

• Market-based solutions
• Reduce market inefficiencies
• Incentives/disincentives
• Direct and indirect subsidies
• Regulation
• Direct Investment

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A Public/Private Approach to Environmental Policy

• Premises
• Any external shock that disequilibrates an
  industry stimulates innovation, potentially
  raising productivity
• New environmental standards can trigger
  innovations that lower total cost of product or
  improve its value.
• By regarding pollution as a form of economic
  waste (scrap)
• incomplete or ineffective use of resources
• By forcing businesses to reexamine the industrial
  processes that produce this scrap
• By focusing innovative effort on enhancing the
  productivity of processes and resource inputs
  (raw materials, energy, labor)
• Competitiveness vs. environmental leadership is
  not a tradeoff
• Mirrors the quality/cost false dichotomy of the
  80s (p. 120)

Source Porter, M. E. and C. van der Linde,
Green and Competitive Ending the
Stalemate, Harvard Business Review, Sept.-Oct.,
1995.
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Motivation for being Green and Competitive

• Increased resource productivity
• First-mover advantages
• Stimulant to innovation
• e.g., how can we reduce the number of parts to
  simplify disassembly -gt 16-30 reduction in parts
  simplified assembly as well as disassembly (p.
  127)

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If Green and Competitive is so compelling, why do
we need environmental regulations?

• Initial push (counter organizational inertia)
• Level the playing field among competitors
• Education function (stimulate innovation)
• Early warning system
• Somebody needs to be focused on the environment
• Policy level best place to set responsibility

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If we must have regulation,what makes a good one?

• Creates options (vs. dictates solutions)
• Strict (stretch) targets more likely to stimulate
  innovation
• Long-term-oriented ( vs. next year)
• encourages innovation vs. BAT, legal resistance
• Best Available Technology
• Contains incentives
• Administrable/enforceable
• Focuses on the end of the value chain
• encourages systems thinking, more options

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Characteristics of a Green and Competitive
Company Strategy

• Set high (stretch) targets, go beyond compliance
• Capitalize on environmental accomplishments
• change the competitive playing field in your
  favor
• Make early, aggressive RD commitments
• may lead to solutions you can market to others
• Integrate into company strategy
• Measure, inventory (e.g., material flow)
• Trace back to processes
• Revise incentives

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Assignment Commercializing a New Energy Source

• Reading
• "New Technology Turns Useless Agricultural
  Byproducts Into Fuel for Autos, New York Times
  New York Oct 25, 1998
• Question
• Since market forces alone have not brought about
  the widespread adoption of this technology, what
  policies, if any, should be adopted to bring
  about its adoption?

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Suggested Organizing Framework for Your Analysis
What are the key players in the supply chain,
where are they vs. where do they need to be?