Tuesday, June 07, 2005

Economics of the environment

Well, the hype at present is on the Environment and its onus on the citizens of a country. As responsibility is concerned, we all have a lot to do which unfortunately is not being done anywhere and so the need arises to impose policies. During the process of development in a nation i.e. growth of its industries and building of infrastructure, environment is totally forgotten about. There is not much being done, which regulates the amount of pollution. And people in developed countries now prefer a region which is environmentally very well off because after all their monetary needs are met, they look for a pleasant atmosphere without noise and other pollutants. It is the responsibility of the government to make sure that its citizens are environmentally safe.
I have mentioned only the ill effects of air pollution, not because it is the most important but because it is more prevalent.
Air pollution is mostly concentrated in urban areas, due to concentrations of people both as the sources and victims of pollution. It leads to health problems and also reduces human performance. It damages materials, increases maintenance costs which erode the infrastructure of an economy. It incurs great loss to the economy.
In rural and semi-urban areas it damages crops; moreover it harms the forest and aquatic ecosystems. It also leads to global warming.Chloroflurocarbons (CFC’s), one of the major nonfuel air pollutants lead to depletion of the stratospheric ozone layer. These substances are primarily used as refrigerants. One economic problem which has resulted is the growing black market in illicitly produced CFC’s.The United States has spent approximately 2% of GDP on pollution abatement and control.

Presently, a survey conducted said that Kerala is getting warmer due to high deforestation rates as compared to afforestation and increased global warming. The reasons mentioned also include climate change and increased vulnerability to natural disasters. The survey was conducted by the Kerala State Council for Science, Technology and Environment (KSCSTE) with assistance from the Ministry of Environment and Forests. It says that on an average, Kerala has become warmer by around 0.5 degree Celsius over the last 43 years. Air Pollution by the emission of greenhouse gases is mainly due to increased consumption of firewood and petroleum products. The pressure of the large number of tourists is felt on the coastal areas. Sand mining, over exploitation of mangroves and the growth of housing and industries are the other reasons mentioned. Dredging in coastal areas is also a major reason.

To conclude, I would say that if the government does not have money to protect each persons environment, the collection of an Environment Tax is justified, provided it makes progress. I don’t think the government will do that in India because, as it is the people feel that the money they pay as tax is not being utilized properly.
This calls for some intervention. It is up to the private players to take up this job. Where the Government has failed the Public can win provided they are willing to take risks. They can set up organizations to provide environmental safety to its customers by paying those companies an amount based on the work done. For example, if an individual’s pond in his premises is dirty or the air is polluted, he/she can approach the above mentioned organizations and ask them to clean the pond and also plant more trees in order to reduce the incidence of pollution after paying a specified amount. This will bring about an increase in employment, mainly for the rural people as they would only be truly willing to do such cleaning. The salaries ought to be high because environmental protection is very important and the fees charged should be accordingly high in urban areas and low in rural areas. This will also help to reduce the inequalities between a city and a village.
1.Environmental Problems and Policy Solutions, Chapter 2, Environmental Economics, Charles Kolstad, Oxford University Press
2.‘Kerala getting warmer by the day, says survey, T Nandakumar’, Pg 2, The Hindu, June 5, 2005


anish said...

You seem to think that government has the solution to the intricate problem of environmental pollution. If i am right, you seem to propose the creation of a tax to correct this externality. Now, I suppose that you are talking about a Pigouvian lump sum tax.

As you must be aware of, such a tax will create distortions. However, I do not consider this to be the major problem. Ths issue rather is how much to tax. How to we estimate the damage funciton? How do we value a human life? Relatively new methods such as Contingent valuation seem to have made some progress on these issue but these are not without critics. Also, how do we regulate? Should government send somebody up the chimney of every NOx polluting factory and measure the level of pollution?

I could not agree more about the role that private individuals have to play. One of the first lessons in ECON 101 is that individuals respond to incentives. Correcting these externalities are hard in practice. While regulation or taxation can coerce plants to emit less, this does not ex ante mean that we've reached an optimal level of pollution.

I just wish that economists(including me) realize that there are no textbook solution to these complex problems. One cannot have a serious discussion of reducing pollution or inequalities in a blog. We need to build models for these kind of discussion.

alex said...

Well Anish,
Thank you for enlightening me on the role a government has to play in regulating environmental pollution. In an economy, where the individuals refuse to take up responsibilities, who else but the government can intervene?
It is true that i cannot address the problem of environmental pollutuion in a blog, but the purpose of that was to make the readers think of solutions which can reduce pollution.
And i consider the government has to play a massive role at least when the public has no initiative to do anything except amass wealth. The level of competition in all spheres are reaching alarming rates.
Yes a model has to be proposed by economists to tackle this problem.
What is your academic background?

anish said...

People respond to incentives - this is the key. Given the right incentives, then polluting firms will reduce pollution levels. It is obvious that the million dollar question is what kinda incentives are required. While i readily acknolwedge that the pollution issue leads to market failure, market failure is a necessary but not a sufficient condition for government intervention(I think you tend to confuse the necessary and suffienct condition). I vaguely recall reading an Artile by IMF deputy managing director Anne Krueger on government failure.

Lemme give you an example of a market friendly way of reducing pollution. I am talking of marketable permits. In the late 80s and early 90s, under George Bush Sr, congress approved Title IV of the US Clean Air Act and created an emission trading mechanism for emission reduction credits(ERCs). I am not going to go into the details of this but ERCs essentially gave the plant a "right to pollute". Hahn(1989) 3(2):95-114, JEP provides a discussion of this. The program reduced NOx and SO2 emissions greatly in teh US - surpassing by far original expectations. My point is that this mechanism is a way where government ca n encourage market friendly mechanisms as opposed to the old fashioned regulatory framework of Pigouvian tax.

There's nothing wrong in individuals amassing wealth. This is one of the points i keep making: It's not a crime to be rich. The public as a whole may not have much incentives primarily because of the free rider problems(assuming that there does not exist any systematic deviations from rationality).

I am an Econ(Hons) Student at McGill University with a math minor. My key interests though is finance, particularly asset pricing and behavioral finance. I am going to grad school next year - I am excited to be one of John Hull's(for those of you who do not know the guy, he is one of the most emminent researchers on asset pricing) student next year. At McGill, i've also had the distinguished pleasure to study econometrics under Professor Davidson(there is arguably no better econometrics professor than Russell in the world - the guy is terrific). I intend to do a doctoral degree in finance(or financial economics) after masters.

Which uni are you at?


alex said...

Well i must agree to that. Yea i missed out on that. Well its necessary for incentives to be given. But i believe it is the government which has to give incentives and not the private players.
Yes, but it is definitely far better than a pigouvian tax.
People have to be rational and i believe that economics has got a lot to do with people, society--merely buliding up models is not all bout it. This is my view. welfare economics interests me because of its concept of pareto optimality. If we become planners and policy makers, the society's interests is what matters. If we become well off without harming anyone else, then its fine-a win win position.
I am doing my final year of undergrad in Loyola college, Chennai,India which is affliated to the Madras university.

anish said...

That's cool dude. It's always good to have discussions on economic theory - Gradaute seminars are after all known for the aggressive discussions that are held!

One footnote regarding rationality: lately a lot of innovative stuff has been done treating systematic deviations from rationality - the discipline is loosely known as behavioral economics(or behavioral finance, depending on the situation). For instance, departures from expected utility theory have been explored and this has led to new fields - (Nobel Laureate) Kahneman and Tversky's work come to mind.

alex said...

Well i need to get myself updated on behavioral economics. Thanks for the tip dude.
So what other reading do you do? Do you go through any economic journals?
I have a long way to go.
Which is your native place?

anish said...

hmm..i don't go browsing econ journals unless i have some prior interest in the question. As i alluded to, asset pricing is my main concentration of area. Econometrics is more like a powerful tool for me. I've done some work on behavior of OPEC cartel, Stock returns in Mauritius, Education economics, a little bit of trade and development, behavioral finance (obviously), growth theory, and environmental economics.

It's more like I pick something that sounds attractive, then i do some background reading on it, then i find a professor who's published on that(that's not hard to find here) and we discuss about it. I am currently an RA for my growth teacher - part of my job is writing code for OLG models.

St Louis Cardinals BUFF said...

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