Economics of the Environment: Theory and Policy PDF
Preview Economics of the Environment: Theory and Policy
Horst Siebert Economics of the Environment Springer-Verlag Berlin Heidelberg GmbH Horst Siebert Economics of the Environment Theory and Policy Fifth, Revised Edition Springer Prof. Dr. Horst Siebert President Kiel Institute of World Economics Diisternbrooker Weg 120 D-24105 Kiel Germany ISBN 978-3-662-11596-1 Library of Congress Cataloging-in-Publication Data Siebert, Horst, 1938- Economics of the environment: theory and policy / Horst Siebert. - 5th. rev. and enl. ed. p. cm. Indudes bibliographical references and index. ISBN 978-3-662-11596-1 ISBN 978-3-662-11594-7 (eBook) DOI 10.1007/978-3-662-11594-7 1. Environmental economics. 2. Environmental policy - Economic aspects. 1. Title. HC79.E5S437 1998 363.7-DC21 98-14294 CIP This work is subject to copyright. Ali rights are reserved, whether the whole or part of the material is concerned, specificaIly the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microftlm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is per mitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer-Ve rlag Berlin Heidelberg GmbH. Violations are liable for prosecution under the German Copyright Law. © Springer-Verlag Berlin Heidelberg 1987, 1992, 1995, 1998 Originally published by Springer-Verlag Berlin Heidelberg New York in 1998 The use of general descriptive names, registered names, trademarks, etc. in this pub lication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Hardcover-Design: Erich Kirchner, Heidelberg SPIN 10655742 42/2202-5 4 3 2 1 O - Printed on acid-free paper Preface "The labor of nature is paid, not because she does much, but 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 benefi cent, 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 pre sent environmental goods and services are no longer in ample supply. The envi ronment fulfills many functions for the economy: it serves as a public-con sumption good, as a provider of natural resources, and as receptacle of waste. These different functions compete with each other. Releasing more pollutants into the environment reduces environmental quality, and a better environmen tal quality implies that the environment's use as a receptacle of waste 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 resource is scarce and if a zero price is charged for its use, then misallocation will result. The environment as a receptacle of waste has been heavily overused, and consequently environmental quality declined. 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 alloca tion 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 environmen tal allocation, regional dimensions, environmental use over time and under uncertainty. The book incorporates a variety of economic approaches, in cluding neoclassical analysis, the public-goods approach, benefit-cost analysis, property-rights ideas, economic policy and public-finance reasoning, interna tional trade theory, regional science, optimization theory, and risk analysis. This book grew out of my research at the Kiel Institute of World Econom ics, 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 • D. Ricardo, Principles of Political Economy and Taxation, 1817, quoted according to Everyman's Library, London 1911, Dent, p. 39. VI Economics of the Environment California at Riverside, the University of New Mexico at Albuquerque, New York University, and Resources for the Future. I appreciate critical comments to this and previous editions from Ralph d'Arge, Ferdi DudenhOffer, Helga Gebauer, Ralf Gronych, Gernot Klepper, Allen V. Kneese, John V. Krutilla, Ngo Van Long, Peter Michaelis, Toby Page, David Pearce, Rudiger Pethig, Michael Rauscher, Cliff Russell, Hans Werner Sinn, Walter Spofford, Frank Stahler, Sabine Toussaint, Wolfgang Vogt and Ingo Walter. Christian Scholz has gone through the last edition and suggested some corrections. This edition has been revised and enlarged. All data have been updated. A new section on the double dividend of environmental taxes has been add ed in chapter 7. In chapter 11 two new sections on the relationship between national environmental policy, trade and the WTO have been introduced. In chapter 13 the discussion of institutional arrangement for global environmen tal goods has been extended, and in chapter 16 some new aspects of sus tainability have been added. I hope that the analysis presented in this book contributes some insights to the emotional debate on environmental disruption, and I wish that it incor porates nature and the environment as a scarce good into the body of econom ic thought and that it provides an answer of economics as a discipline to a problem of great importance to our societies. H. S. Contents List of Figures and Tables Preface 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 .. . . . . . . . . . . . . . . . . . . . . . . 8 Material Flows between the Environment and the Economic System... . .. . . . . .. . . . . . ... . . .. 12 Competing Uses. ... .. . .. .. . . . . . . . . . . . .. . .. . . .... . . 13 Zero Price of Environmental Use. .. . . . .. . . . . . . .. .. . . 16 Environmental Effects of Government Decisions ...... 18 How Much Environmental Quality? ................. 19 A Taxonomy of the Environmental Problem .......... 19 Appendix 2A: Input-Output Analysis and the Environment ........................... . 20 Appendix 2B: Applied General Equilibrium Models ... 22 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 3 A: Properties of the Transformation Space. 37 Appendix 3 B: Transformation Space with Negative Productivity Effect ................. 41 Chapter 4 Optimal Environmental Use ........................ 43 Criteria for Optimality ............................. 43 Optimization Problem ............................. 45 VIII Economics of the Environment A Shadow Price for Pollutants .... ...... ............ 46 Implications for the Shadow-Price System of the Economy ........... .. ....... ............ 49 Optimum and Competitive Equilibrium .............. 50 Requirements for an Emission-Tax Solution ........... 53 Appendix 4A: Nonlinear Optimization. .. . . . . ... . . . . . 54 Appendix 4B: Implications of the Allocation Problem. 55 Appendix 4 C: Implications of the Profit Maximum ... 56 Chapter 5 Environmental Quality as a Public Good .. .... ....... 59 Characteristics of a Public Good ... .... ............ . 59 Allocation of Public Goods .......... .. ..... ....... 62 Social-Welfare Function ... ......................... 63 Benefit-Cost Analysis ......... ..................... 65 Costs of Environmental Quality ....... ... ........... 66 Evaluation of Environmental Quality .... ......... ... 70 Individual Preferences and the Pareto-Optimal Provision of Environmental Quality .............. ......... . 73 Thesis of Market Failure ...... .. ................... 76 Lindahl Solution .. .............................. .. 77 Mechanisms of Social Choice ..... ... ... ........ .. .. 83 An Example: Ambient Quality Standards ... ....... ... 90 Chapter 6 Property-Rights Approach to the Environmental Problem .. ... ................. ... .......... .. .... 95 Property-Rights Approach ... .. .. ....... ..... ....... 95 Property Rights and Environmental Allocation .... .... 96 Coase Theorem .. ....... ..... .. ................... 97 Coase Theorem and Transaction Costs ............ .. . 99 Can Property Rights Be Specified? ... ... ............ 100 Part III Environmental-Policy Instruments ... ........ ........ 103 Chapter 7 Incidence of an Emission Tax . . . . . . . . . . . . . . . . .. .. . . . 105 Standard-Price Approach. . . .. . . . . .. . . .. . . . . ....... . 105 Reaction of Producers ............... ............ .. 107 Emission Taxes in Monopoly . . . . . . . . . . . . . . . . . . . . . . . . 108 General Equilibrium Approach .. ... .. .. ...... ..... .. 109 Allocation in a General Equilibrium Model ........... 112 Pollution Intensities, Factor Intensities, and Allocation Effects .......... ....... ......... ....... ....... 116 Overshooting of the Emission Tax ........ ........... 118 Is there a Double Dividend of Emission Taxes? ... .... 118 Appendix 7 A: Reaction of the Individual Firm ....... 122 Appendix 7B: General Equilibrium Model . . .... . . . . . . 122 Contents IX Chapter 8 Policy Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Transforming Quality Targets into Individual Behavior. 125 The Principal-Agent Problem ....................... 126 Available Policy Instruments ........................ 127 Criteria for Evaluating Instruments .................. 128 Moral Suasion .................................... 129 Government Financing and Subsidies ................ 130 Regulatory Approach .............................. 130 Emission Taxes .................................... 134 Pollution Licenses ................................. 138 The Bubble Concept ............................... 142 Institutional Arrangements for Cost Sharing .. .. ...... 145 Combining Standards and an Emission Tax ........... 147 Liability ............. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 Chapter 9 Policy Instruments and the Casuistics of Pollution .... ; 151 Solid Waste. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 Optimal Waste Reduction .......................... 153 Establishing Scarcity Prices for Waste with Collection Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Waste Management and Spatial Structure ............ 155 The German System of Waste Management........... 156 Emissions from Mobile Sources ..................... 158 Accidental Emissions .............................. 158 Vintage Damages... . . . . . .. .. . . . . .. . . . .. . . . . . .... . . 159 Pollutants in Consumption Goods ................... 159 Pollutants in New Products ......................... 159 Externalities in Land Use. . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Chapter 10 The Political Economy of Environmental Scarcity ..... 161 The Opportunity Cost Principle ..................... 161 The Polluter-Pays Principle ......................... 162 The Principle of Long-Run Perspective. .. . . . .. . ... . .. 164 The Principle of Interdependence. . . . . . . . . . . . . . . . . . . . 165 Major Environmental Legislation .................... 166 Part IV Environmental Allocation in Space .................. 169 Chapter 11 Environmental Endowment, Competitiveness and Trade 171 Environmental Systems in Space .................... 171 Environmental Endowment ......................... 172 National Environmental Policy and Comparative Advantage ..................................... 173
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