Pollution Prevention Economics

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Chapter 7

• Pollution Prevention Economics

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Introduction

• Economics
• is the study of how societies use scarce
  resources to produce valuable commodities and
  distribute them among different groups.
• It involves understanding the way businesses,
  households, and governments behave.

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Economics
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Market Mechanisms

• Market
• an arrangement by which buyers and sellers of a
  commodity interact to determine its price and
  quantity.
• Free Market
• Imperfect Competition

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Law of Demand

• Law of Demand consumers are willing to buy
  more of a commodity at lower prices than at
  higher prices, given constant demand pressures
• depends on consumer income, consumer tastes and
  preferences, relative price of other goods,
  number of consumers, and expectations for changes
  in future market conditions

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Law of Supply

• Law of Supply sellers are willing to provide
  more of a given good at higher prices than at
  lower prices, given constant supply parameters
• depends on number of producers, state of
  technology, size of capital stock, price of
  inputs, and expectations for changes in future
  market conditions

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Equilibrium Point

• the demand and supply schedules (quantity
  demanded or supplied v/s price) can be plotted
• the Equilibrium Point is the intersection of
  these two curves
• the point where the supply of goods and the
  demand for goods match
• there are no surpluses or shortages

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Supply and Demand
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Marginal Cost and Marginal Benefit

• Marginal cost the increase in total cost
  required to produce one extra unit of output or
  the reduction in cost to produce one less unit of
  output
• Marginal benefit the increase in benefits
  obtained from one extra unit of output or the
  reduction in benefit from one less unit of output

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Marginal Cost and Marginal Benefit
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Total and Marginal Cost of Production
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Externalities

• Externalities exist whenever the production or
  consumption inflicts involuntary costs or
  benefits on other i.e., costs or benefits are
  imposed on others but are not paid for by those
  who impose them or receive.

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Types of Externalities
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Control Measures

• Regulations
• implementation and enforcement
• Emissions Fees
• benefits
• Marketable Permits
• drawbacks benefits
• Emission Reduction Incentives

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Discount Rate

• Discount rate the interest rate that is used
  to relate the future value of money to its
  present value
• It is the best rate of interest or return that
  one can earn on the best alternative use of the
  money at the same level of risk.
• It is not the same as the inflation rate.

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Present Worth

• Present worth (or present value) the value,
  in present dollars, of an actual cost of benefit
  in the future
• depends on the discount rate selected and the
  number of years into the future that the cost or
  benefit will be realized

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Engineering Economics

• Present Value
• Future Value
• Discount Rates
• Inflation

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Comparing Investment Alternatives

• Payback Period
• length of time required for revenues to match the
  initial investment costs
• Drawbacks
• ignores the time value of money
• ignores cash flows that occur after the initial
  investment has been recouped
• ignores costs and savings past the point where
  the project has paid for itself

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Comparing Investment Alternatives
All costs and revenues are brought back to
present value
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Comparing Investment Alternatives

• Internal Rate of Return
• also known as return on investment
• allows for variable rate of return
• discount rate that makes the present value of the
  costs and benefits equal is the internal rate of
  return

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Comparing Investment Alternatives

• Net Present Value (NPV)
• best method of comparing alternatives
• same as IRR, but also includes the impact of
  scale (in dollar cost) of a project

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Estimating Long-term Cleanup Liabilities

• Let us take the case of a Hazardous Landfill
• Length of time to landfill failure
• many landfills are now lined
• all liner manufacturers are for-profit and what
  to increase their market share
• offer guarantees and warranties
• manufacturers want to maximize their profit and
  market share

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Estimating Long-term Cleanup Liabilities

• Expected time of failure
• EPA expects many landfill liners will fail in
  approximately 20 years.
• Most manufacturers offer warrantees for 20 years
• if liner could last longer, manufacturers would
  offer a longer warrantee as that would increase
  their market share and hence profits

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Estimating Long-term Cleanup Liabilities

• The cost of landfill failure
• experiences from Superfund Cleanups and Spill
  remediations
• generator is responsible for waste for as long as
  it exists
• cost of destruction can be used as a base line
  expense for cleanup

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Estimating Cost of Failure

• Prepare a normal failure distribution curve for
  the liner in the post 20 year period
• Decide on time period over which landfill is to
  fail after warrantee period
• Read off the annual probabilities of failure of
  the curve
• Liability ?Cost of destruction Probability of
  failure Present value factor

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Total Cost Assessment

• Life Cycle Costing
• Environmental Accounting
• includes conventional, indirect and external
  costs

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Life Cycle Cost Assessment Case Study