Quantifying Environmental Externalities

A. Externalities, Residuals, Intangibles, and Incommensurables

1. Externality: Non-market exchange in which one or more parties to the exchange are not compensated and may have little choice in the exchange. Externality is a broader term which includes residuals, intangibles, and incommensurables. Externalities can be either negative or positive for the parties affected.
Example: Effects of locating an oil refinery adjacent to a residential neighborhood: air pollution and associated health effects, noise pollution, light pollution, increased traffic, risk of industrial accident (all negative externalities) and availability of high-paying jobs, increased tax base for schools and other infrastructure (positive effect).

2. Residuals: Waste products (i.e.. pollution) created during the extraction, transportation, refining, or manufacturing processes necessary to deliver goods and service to the consumer.
Example: Sulfur dioxide pollution created by coal-fired electrical generating plant.

3. Intangibles: A good, service, or effect of an action that cannot be assigned monetary values (text); cultural or personal values which cannot be measured in monetary terms (my definition).
In my view, our text uses this term too broadly and a bit sloppily. The working assumption of applying economic models to environmental problems is that most externalities can be incorporated into the economic system. For example, even human life has been assigned monetary value by our insurance and legal systems.
Example: Compensation for destruction of religious or spiritually significant place.

4. Incommensurable: Effects of a given action that can, with some effort, be assigned monetary value.
Example: Cost of monitoring sulfur dioxide pollution created by a coal-fired electrical generating plant.

B. Strategies for the Including Environmental Cost of Doing Business:

1. The problem with Common Property Resources
Garrett Hardin (1868) "The Tragedy of the Common" Science 162: 1243-1248.
Over use of lumber resources on publicly held land.
Extraction of mineral resources on publicly held land.
Pollution of Air and Water by individuals and industry
Social Costs: The cost of producing and delivering goods or service, including traditional economic cost and externalities.

2. Models for recovering social costs.
a) Society Pays: Federal and state taxes assessed on public for problems created by residuals. Such a tax could be charged in the form of a general sales tax. The problem with this model is it is anti-free market. The real cost of using natural resources is not apparent to the consumer and it does not encourage the consumer to alter behavior.
b) Polluter Pays Principle: Covers the cost of negative residuals released during refining and manufacturing. Does not cover the cost associated with negative residuals produced on consumption.

Residual tax
Effluent (water discharge) charge
c) Throughput Tax: Charge placed on producer of products which include cost of all residuals including residual cost of consumption of product or service.
Disposal Charge

Many "button batteries" conatain significant amounts of Mercuy (Mercuric oxide batteries typically contain 35 to 50% Mercuy by weight). A throughput tax which could be partically recoverable through a deposite program could be used to reduce pollution

d) Consumer Pays Model: Tax placed on sale of product which will cover cost pollution caused by use of product or disposal of any residual remaining after its use.

Pollution tax on gasoline: except for a fraction of a penny used for LUST site cleanup there is no pollution tax on Gasoline in Wisconsin. Wisconsin has the 2nd highest gas tax in the country, 32.1¢/gallon plus 18.4¢ federal tax. In Wisconsin state gasoline tax is a dedicated to the DOT for highway construction and matainace. Gasoline tax currenly covers about 90% of the state highway cost.
How could we calculate fair costs of pollution from our automobiles?

e) Incentive-based regulation uses the economic behavior of firms and households to attain desired environmental goals. Incentive-based programs involve taxes on emissions or tradable emission permits. The primary strength of incentive-based regulation is the flexibility it provides the polluter to find the least-cost way to reduce emissions.

3. Models for environmental planning:
a) Cost effectiveness Analysis:
Summing all the cost and monetary returns involved in implementing a single plan in order to determine the return on the investment.
b) Benefit-Cost Analysis (or B:C ratio):
Compares the costs and benefits of several competing plans at the same time.
Shopper in the supermarket analogy.
4. Quantifying Externalities: Putting the Price on Incommensurables
a) Shadow Pricing (creating a fudge factor) included in B:C ratio analysis
b) Willingness to Pay:

Ask consumers what they are willing to pay for incommensurables.
Contingent valuation method (CVM): questionnaire including competing scenarios
c) Proxy Value:
Example: The value of deer hunting to an individual is equal to the cost of his equipment, hunting license, time off work, travel expenses, etc.
d) Replacement Cost:
The Cost of replacing the resource.
Example: If an oil spill fouls a beach, what is the cost of replacing the polluted sand with clean sand.

e) Avoidance Cost:
If an individual or industry is legally exploiting a resource that is of value to society, ask society how much it will pay an individual not to use a resource.
Example: Farmers abusing ground water in Texas

C. Examples of application of models:

Clean Air Act of 1990: Pollution credits program

Source: http://tinyurl.com/49rzd