Assignment Code: BECE-143/TMA /2022-23

Course Code: BECE-143

Assignment Name: Environmental Economics

Year: 2022-2023

Verification Status: Verified by Professor

Maximum Marks: 100

Answer all the questions

A. Long Answer Questions (word limit-500 words). Each question carries 20 marks. 2 × 20 = 40

Q1) Explain Command and Control Approach (CAC) approach. Outline its advantages and disadvantages.

Ans) Under the CAC approach, government enacts environmental laws and ordinances to:

1. Control the activities that are produced and consumed.

2. Motivate individuals and organisations to adopt a socially desirable behaviour.

3. Utilize enforcement tools to ensure compliance (court, police, fines, etc).

The CAC approach specifies particular pollution emission caps and/or required pollution-control technologies. Setting emission standards, for instance, entails giving polluters a legal limit on their emissions before doing so incurs legal repercussions. In the CAC strategy, the government directly interferes with polluters' operations to force them to behave consistently. CAC includes both rules that outline the maximum amounts of pollution that are permitted and legislation that stipulate which pollution-control methods must be implemented. It instructs the commercial organisations to put in place particular pollution-treatment machinery or technologies.

The regulator/authority:

1. limits the amount of pollution a source is permitted to produce.

2. provides guidelines, standards, and monitoring/implementation so that each polluter is required to take action to produce pollutants below the established limit.

When the "marginal abatement costs" (MACs) of pollution treatment are the same for all businesses in the regulated industry, CAC is favoured above other regulatory tools. However, it might be challenging for a regulator to learn about such costs due to asymmetric information. The commercial entities may also strategically distort information. As a result, the CAC policy of environmental regulation may result in less than ideal results because to the information that is unequal regarding the many components of the regulated activities.

Advantages of the CAC Approach

1. Greater control of intricate environmental systems,

2. Greater certainty regarding the extent to which restrictions reduce pollution

3. Monitoring the adherence to a rule more easily.

Disadvantages of the CAC Approach

1. The CAC laws make it highly expensive for regulators to gather the essential data. They frequently have to obtain it directly from the polluters, raising the potential of receiving inaccurate information from them.

2. The CAC rule does not encourage environmental quality improvement beyond what is required by a given statute. There is little incentive for pollutants to improve once the CAC regulation has been met. Therefore, there is no motivation to innovate and think of new ways to cut emissions.

3. The difficulty in implementing the equi-marginal principle of pollution control costs among several polluters producing the same pollution is the main theoretical issue with CAC regulation.

4. Since CAC measures frequently use the same pollution-control technique for all polluters, they are viewed as being rigid. Therefore, it is improbable that the interventions would reduce emissions at a reasonable cost since MAC differs among sources.

5. It is suggested that because legislators are the ones who draught CAC regulations, their influence over the political process makes them vulnerable to compromise.

6. When technology is continually changing, it becomes challenging to implement the CAC strategy effectively. As technology advances, the regulating body must frequently modify its criteria.

7. According to CAC laws, the polluter only pays for pollution control; damage from pollution that is still released even after control is in place is not covered. In reality, this amounts to a subsidy for the polluter who causes the distortions. There will therefore be more pollution than is necessary.

Q2) Differentiate between the stated preference and revealed preference methods of evaluating environmental resources and describe the Travel cost method.

Ans) The differences between the stated preference and revealed preference methods of evaluating environmental resources are as follows:

A way of valuing the environment using revealed preferences is the travel cost method (TCM). The fundamental idea behind TCM is that by examining how much effort an individual or family expends to visit a recreation site, one can infer the value that person places on that resource (i.e., in terms of the time and money spent). TCM is commonly used to evaluate the worth of natural parks and recreational areas as well as the harm done to the environment. For illustration, suppose that beachgoers decide not to go because the beach is polluted. TCM can be used to appraise the beach in both its pure and contaminated states. The difference between these numbers provides a quantifiable assessment of the harm pollution has done to the beach.

The most significant issue with the application of the travel cost technique is the calculation of the value of time. Since people value travelling more than working, they may not view the opportunity cost of travel time as being equal to the wage rate. Instead, they may view it as being lower. Additionally, traffic congestion may restrict access to the recreational site, in which case TCM may provide estimates that are biased to the lower side. It is also challenging to account for other elements that influence access to the recreational site, such as the availability of a highway and alternative recreational options. TCM can only assess recreational advantages, hence it is ineffective for measuring benefits received by resource's commercial users. Additionally, TCM has the drawback of only being able to quantify the "user value," leaving out the "existence value."

B. Medium Answer Questions (word limit-250 words). Each question carries 10 marks. 3 × 10 = 30

Q3) Explain the efficiency in product-mix with the help of efficiency in consumption and efficiency in production.

Ans) The aforementioned two conditions, which involve both production and trade, are combined to form the product-mix efficiency condition. We attain product mix efficiency when the slope of the production possibilities frontier (PPF) equals the MRS of the persons in the economy, which is the optimal allocation given the PPF. Let's define MRTL as the increase in the output of Y attained by repurposing a little portion of the labour formerly used to produce X to produce Y. Similarly, we shall define MRTK as the increase in the output of Y obtained by shifting a small amount of capital from use in the production of X to use in the production of Y.

Using these two quantities, the condition for product mix efficiency can be specified as:

MRTL = MRTK = MRTX = MRTY

At this allocation, the economy satisfies the requirements for efficient consumption, efficient output, and efficient product mix. A fully efficient static allocation of resources is what this is. The allocation in the figure below that results in product-mix efficiency is shown at point 'b':

The locus XMYM depicts the production possibilities frontier where the slope is equal to the marginal rate of transformation (MRT) between goods X and Y. The production efficiency requirement is met at the three sites indicated by the letters a, b, and c (all of which are, in general, located on the frontier), i.e., we have MRTSX = MRTSY at each of these points. The society’s ‘indifference curve’ has a slope of  at point b.

The preceding condition implies that at the point of allocation satisfying the product mix efficiency, the slope of the production possibilities frontier (MRT) should be equal to the slope of the agents' indifference curves because the slope of the production possibilities frontier (MRT) can be rewritten as the ratio of the marginal rates of transformation of labour and capital (MRS).

Q4) Elucidate the rationale behind ‘Pigouvian Tax’. How does it work?

Ans) A tax known as the "Pigouvian Tax" is imposed on economic actions that result in costs that are paid by unrelated third parties. The final cost of a good or service does not account for the costs caused by negative externalities. The market consequently becomes ineffective.

Pigouvian taxes are primarily used to counteract market inefficiencies by raising the marginal private cost by the amount of the negative externality's production. The total social cost of the economic activity will be reflected in the final cost (original cost + tax) in this scenario. The detrimental externality will then become internalised.

Pigouvian taxes may be implemented in order to restrict the following actions:

1. Environmental pollution

2. Harmful substances (tobacco and alcohol)

3. Congestion

In honour of British economist Arthur C. Pigou, one of the externality theory's most well-known proponents in the early 1900s, the Pigouvian Tax bears his name.

Working of a Pigouvian Tax

When the social marginal benefit (SMB) equals the personal marginal cost (PMC1), which is lower than the social marginal cost (SMC) because of the additional costs produced by the economic activity, there is a market equilibrium under free market conditions. A market equilibrium like this is inefficient.

The Pigouvian tax should, in a perfect world, be applied at a rate that is equivalent to the costs related to the negative externality. The supply of the economic activity creating the negative externality will decline when Pigouvian taxes are applied.

As a result, while the price will rise, the amount requested will go down. Because the social marginal cost will match the private marginal cost, the market equilibrium will become socially efficient.

Q5) Explain the efficient provision of a public good with the help of a diagram.

Ans) As an example, suppose we're talking about installing some streetlights in a neighbourhood. We want to know how many streetlights should be installed and what the socially optimal number is. The rule is that we should install as many streetlights as the marginal social benefit equals the marginal social cost. In essence, we could inquire of each person or attempt to calculate hypothetically what would be the marginal benefit to each person how much would they pay for one additional unit one additional streetlight under different scenarios so say okay if the quantity is X how much would person a pay for one additional streetlight and so on and so forth. Once we know the preferences of the people, we can then put together a demand curve for each person who lives in that n..

The ideal Streetlights are a public asset that is socially efficient, so we'll use them where the marginal benefit is the greatest. Right here is where the two curves intersect, and the green line right here they intersect is where marginal benefit equals marginal cost. The quantity at that point is 2 so what that means is that the efficient of level is right here, where the two curves intersect.

C. Short Answer Questions (word limit 100 words). Each question carries 15 marks. 2 × 3 × 5 = 30

Q6) Differentiate between:

(a) Weak sustainability and Strong Sustainability

Ans) The differences between Weak Sustainability and Strong Sustainability are as follows:

(b) Willingness to Pay and Willingness to Accept

Ans) The differences between Willingness to Pay and Willingness to Accept are as follows:

The Marginal Willingness to Accept (MWTA) compensation is the same as the Marginal Willingness to Pay (MWTP). In most situations, this is accurate, but not always. Think about the demand for a typical item like gasoline. In this case, the person values an extra unit of fuel at $1 per litre. In other words, the MWTP for an additional litre of gasoline about equals the MWTA payment for an omitted litre of fuel. There is practically any distinction between MWTP and MWTA in this case. Now think about a benefit to the environment, like fresh air. We might believe that MWTP > MWTA. This is due to the fact that WTP is constrained by the individual's wealth, but WTA is not.

Another example: A person's WTP to prevent flooding might not be equal to the WTA compensation after flooding. Therefore, WTP and WTA may not be the same for environmental commodities. Understanding this disparity is crucial because it will help us decide whether to utilise WTP or WTA when analysing the demand for environmental goods. If (a) the change in the environmental good is significant enough to make compensating losses by increasing consumption of market products difficult and (b) the environmental good's uniqueness makes it challenging to substitute it for other commodities, we can expect the WTA and WTP to vary significantly.

(c) Negative and Positive Externality

Ans) The differences between Negative and Positive Externality are as follows:

Q7) Write short notes on the following.

(a) Global Commons

Ans) "A tract of land or water owned or used jointly by the members of a community" is the definition of a commons. The open ocean, the living resources found there, and particularly the atmosphere are all considered to be a part of the global commons because they lie outside of national borders. Antarctica is the only landmass recognised as a component of the global commons (UNEP/WWF).

Global common-pool resources have a similar meaning to common pool resources in that they cannot be excluded. They also confront the tragedy of the commons problem due to congestion, misuse, or degradation (which makes them rivalrous). It has a significant negative externality concern. External costs are incurred by pollution when it crosses national borders since neither the emitters nor the countries where it does so have the right incentives to regulate it. The management of global commons is extremely challenging due to the political challenges of establishing any comprehensive, cost-effective regulation encompassing all the stakeholder nations.

(b) Social Optimality

Ans) We can acquire the idea of social optimality, or the maximisation of society's welfare, by combining the two concepts of efficiency and equity. Naturally, in order to maximise social welfare, we must first determine the function that best captures the welfare of society. This is unmistakably the "aggregate social welfare function" that reflects the general preferences of society. Since this cannot be accomplished owing to Arrow's impossibility finding, in order to move further we must make the assumption that such a preference aggregation is somehow feasible. With this supposition, the social welfare function can convert each member of society's utility level to a number in a way that offers higher utility values to the more socially acceptable functions (e.g., health and education).

(c) Limitations of Coasian Bargaining

Ans) The limitations of Coasian Bargaining are as follows:

Transaction or Bargaining Costs are Zero (or Negligible): We must proceed under the premise that there are no obstacles to negotiation. It is impossible to believe that in real life, a nearby individual would approach a cigarette smoker and offer him to cut down on his smoking in exchange for a suitable reward! Coasian bargaining is made more challenging in practise by the existence of bargaining expenses, or more generally, transaction costs.

No Wealth or Income Effects: With quasilinear preferences, the quantity of the externality is independent of how the property rights were initially distributed, meaning that every optimal solution will have the same amount of the externality regardless of how the rights are distributed.

Involvement of Multiple Agents: Negotiating between two agents is generally simple, but when there are more than two agents involved, difficulties develop because it's possible that no arrangement or contract will be reached that is acceptable to all of the agents. Coasian bargaining may be impossible in real-world situations as a result of this.

Problem of Identification and Assignment of Rights: To allocate property rights for which negotiation can take place, it is necessary to identify the polluter(s) and/or victim (s). Identification of the impacted parties would be challenging since the conversion of emissions into ambient concentrations is hampered by geographical, temporal, and seasonal aspects. When it comes to shared resources or diffused sources of pollution, victims may not be aware of their situation, making negotiation challenging and ineffective.