Appendix B. Theoretical basis for measuring social costs
In order to analyze cases where a change in environmental quality (q) affects individual preference and demand, a basic individual utility maximization problem is considered i.e., maximizing a strictly concave utility function subject to the compact (closed and bounded) budget set (Freeman 2003):
Maximize┬(x_j )〖u(x,q)〗 subject to y = ∑_(j=1)^n▒p_j x_j (B-1)
where u is individual’s utility, x is a vector of private goods quantities x = (x_1, x_2, …, x_n), and q is the level of environmental quality, which is a scalar fixed exogenously. The variable y is income, and p is the price vector of private goods p = (p, p_2, …, p_n). This yields a set of ordinary demand functions, x_j = x_j (p, q, y) for j=1 to n. Inserting the ordinary demand functions into the utility function provides an indirect utility function, v (p, q, y) ≡ v [x_j (p, q, y), q].
Suppose changes in environmental quality (q^0 to 〖 q〗^1) and utility u^0≡v (p,q^0,y) to 〖 u〗^1≡ v (p,〖 q〗^1,y). If this change is an improvement in environmental quality, 〖 u〗^1> u^0. If this change is an decrease in environmental quality, 〖 u〗^1< u^0. The compensation surplus and equivalent surplus (CS and ES) measures of changes in environmental quality are defined by (Hanemann 1991):
v (p,〖 q〗^1,y-CS) = v (p, q^0, y) (B-2a)
v (p,〖 q〗^1,y) = v (p, q^0, y + ES) (B-2b)
In case of an improvement in environmental quality (CS > 0 and ES > 0), CS measures individual’s willingness to pay (WTP) to secure the gain by keeping the gainer...
... middle of paper ...
...landfill at each target site exceeds social costs. This implies that the City and County of Honolulu necessitates a new landfill despite efforts to enhance alternate methods such as source reduction, recycling, and waste to energy recovery. Thus, social costs minimization given restrictive or exclusionary criteria emphasizes economic efficiency. Equity can be incorporated in the process of landfill site selection. While benefits provided with a new landfill site are shared by all citizens, harms from a landfill (e.g., reduction in housing values) concentrate on a host community i.e., unequal distribution of wealth. In terms of the Kaldor-Hicks criterion, if winners (other communities except for a host community) from a policy that locates a new landfill can compensate losers (a host community), the policy will improve the status quo without finding a new landfill.
Clear price signal – ensuring that the carbon price signal reaches consumers such that consumption is reduced and investment choices are made that favour low-carbon alternatives.
... straight on to consumers. Consumers demand pollution free air, but they also need 'other goods' at marginal utility. Therefore, consumers fall indifferent. An indifference curve is a graph showing different types of goods between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one item over another (as is shown in the graph below).
There are many assumptions that can explain the inverse U-shape relationship between pollution and income. It has been stated that the EKC is the result of non-homothetic preferences of users of environmental goods within the economy (Lopez, 1994). When individuals have homothetic preferences it implies that when income increases, so does consumption, which by extension causes increased pollution. When individuals have non-homothetic preferences, when income increases they decide to consume less and thus, pollute less. This depends on the relative risk aversion to damaging the environment in order to consume more.
There are two different views on the connection that is found between consumption and environmental policy. The first major connection is the ignorance of buying something that at first seems like it will help out people in so many ways, but ends up hurting the environment in the long run after changes and a changing culture, cars for example (Book Review: The Shadow of Consumption, 1). The other connection that could be made is the connection between researching products and how they are produced and what the companies do with the byproduct after the product has been made. This connection can seem like a strong connection than the ignorant connect because there is a whole other level of research and understanding that goes into understanding the environment and the policies that are changed by the production process.
One way to compensate such flaw is to calculate the compensating variation, which is the amount of money that must be taken to the individual after the change, if the individual’s utility increased, and leave him in the same level of utility as before the change. If the person were made worse off after the change, the compensating variation would be a positive amount of money (enough to compensate him for the deterioration in utility...
“Marginal analysis involves changing the value(s) of the choice variable(s) by a small amount to see if the objective function can be further increased (in the case of maximization problems) or further decreased (in the case of minimization problems)” (Thomas & Maurice, 2012, pp. 91). Marginal analysis is known as “the central organizing principle of economic theory” for its importance and applicability to many aspects of our daily lives as well as our careers (Thomas & Maurice, 2012, pp. 94). The key concepts of marginal analysis include total benefit, total cost, marginal benefit, marginal cost and net benefit. These concepts all come together to play a significant role in the use of marginal analysis to reach the optimal desired outcome.
...k 2012). Unlike many other of our environmental crisis, this in one that can be solved on a consumer level and does not rely solely on the backs of big companies and distant governments.
The notion of sustainability sometimes seems vague when applies to real world decision making process. But one universal agreement with regard to how sustainability functions in the political and economic arena unfolds as decisions made today would have huge impact on both nowadays and the future. According to Goulder and Stavins, economists, in order to help decision makers implement policy evaluations, would commonly discount future impacts. Basically, discounting serves as a mechanism to convert the potential impact in the future into computable monetary unit for nowadays. Here comes the first challenge in determining whether the use of non-renewable resources is intertemporally efficient or not. There exists some skepticism and controversy because some people would argue that discounting gives insufficient weight to future benefits and wellbeing of future generations. However, except for the superficial misconceptions, the real challenges lie in the unpredictable future interest rates and the tastes and preferences of future generations. For example, discounting will be used in...
The case study of the Frigidaire Corporation illustrates that valuable data has been collected; therefore, if applied correctly, the company has the potential to position the new front-loading washing machine in the correct market segment(s). According to Exhibit 5 in the case study, the following populations have above concern for conservation of resources: Elite urban singles between the ages of 25 and 34 and couples between the ages of 35 and 54 both of value space savings; Sophisticated townhouse White and Asian couples who are 55 years old or older have above average ecological concerns; Upscale suburban Asian and White families between the ages of 35 and 54 have determinant attributes of performance ...
Reinhardt, F.L. 1998, "Environmental product differentiation: Implications for corporate strategy", California management review, vol. 40, no. 4, pp. 43-73.
Cost benefit analysis, abbreviated as CBA, is a tool derived from utilitarianism to help businesses compare the costs of carrying out and the benefits that result from a decision. It lays down a set of guidelines that help businesses compare the costs and benefits of each available option and figure out which is the best option to choose. (Velsaquez, 63) A simple scenario utilizing cost benefit analysis is judging the production value of item “x”. If the “benefits” or the revenue made from selling “x” is high enough to cover the monetary costs, the costs of the time spent on the product, and produce profit, then cost benefit analysis would state that “x” is worth making because the benefits cover the costs of the item. On the other hand,
In the language of economists, “willingness to pay” describes the amount of money a person would sacrifice in order to obtain an additional unit of utility. In environmental economics, specifically, WTP is used to reflect the maximum amount a person would give up in exchange for an increase in an environmental “good” (for example, a one-unit increase in the cleanliness of a lake) or the minimum amount a person would accept in exchange for an environmental “bad” (for example, a one-unit increase in air pollution). Certainly, WTP can be a useful tool when used during standard cost-benefit analysis. However, the specific use of WTP as a measure of environmental values is flawed in several respects: it is dependent on the public’s awareness and understanding of environmental issues; it entails severe practical difficulties in quantification; and, since WTP varies by income, it is fundamentally inequitable as a measurement standard.
An increase in price on the demand side to expose the external costs of products that produce greenhouse gas emission are needed cause a shift in the choices of consumers. A reduction in sales, in conjunction with a rise in the costs of greenhouse gas production methods will provide newer incentives for manufacturers to assimilate to new production methods. A change that could be greatly developed through government intervention, by offering financial backing (subsidies) to these alternative production
Marginal utility is low if the article is available in abundance; therefore, the utility of an item that is reduced in quantity is greater. The price of a product is limited by marginal utility. For example, vegetables or fruits during a good season are reasonably priced but if there are floods or droughts that damage crops, the products come at exorbitant prices.
Regulations provide the baseline environmental standards that industry is required to follow. Without environmental regulations, industry would not be able to meet the same standards by themselves. Environmental regulations may not always be in the best interest of the industry due to their costly and sometimes prohibitive nature. In response to these concerns, the establishment of incentive programs increases the likelihood of industry complying with and potentially exceeding the minimum environmental standard. Incentive programs motivate industry to meet and exceed environmental standards by allowing them to benefit financially by aiming for higher than regulation