Economics of the environment: selected readings

Selected

Readings

Third Edition

Edited by

Robert Dorfman

and

Nancy S. Dorfman

ECONOMICS OF THE

ENVIRONMENT

Selected Readings

Edited by

ROBERT DORFMAN

NANCY S. DORFMAN

w ■ w ■ NORTON & COMPANY

New Y ork L ondon

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Copyright © 1993, 1977, 1972 by w. w. N orton & C om pany, Inc.

ALL RIGHTS RESERVED

T he text o f this book is com posed in Tim es R om an

C om position by Com C om

M anufacturing by H addon C raftsm en

Book design by N atash a Sylvester

L ibrary o f C ongress Cataloging-in-Publication D ata

Econom ics o f the environm ent : selected readings / edited by

R obert

D orfm an and N ancy S. D orfm an. — 3rd ed.

p. cm.

Includes index.

1. Pollution— E conom ic aspects. 2. E nvironm ental

policy— Costs.

I. D orfm an, R obert. II. D orfm an, N ancy S.

H C 79.P55D 65 1993

363.7— dc20 92-17707

ISBN 0-393-96310-1

W. w . N orton & C om pany, Inc., 500 Fifth Avenue

N ew Y ork, N .Y . 10110

W. w. N o rto n & C om pany L td., 10 C optic Street

L ondon W C1A 1PU

1234567890

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To Joni and Loren

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CONTENTS

P R E F A C E IX

I

AN OVERVIEW________________________________________________ 1

1 ■ The Tragedy o f the Com m ons g a r r e t t h a r d in 5

2 • The E conom ic Com m on Sense o f Pollution i a r r y e . r u f f 20

3 ■ Analysis o f E nvironm ental Pollution a l l e n v. k n e e s e 37

4 • EPA and the Evolution o f Federal R egulation p a u l r .

PORTNEY 57

II

ECONOMIC PRINCIPLES_____________________________________75

5 • Some C oncepts from W elfare Econom ics r o b e r t d o r f m a n 79

6 • The E conom ic Theory o f a C om m on-Property Resource:

T he Fishery h . s c o t t c o r d o n 97

7 • T he Problem o f Social Cost r o n a l d c o a s e 109

8 ■ O n Divergences between Social Cost and Private Cost

RALPH TURVEY 139

9 ■ T he Problem o f M arket Failure a la n r a n d a l l 144

1 0 ■ T he Econom ics o f Resources or the Resources o f Econom ics

ROBERT M. SOLOW 162

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11 ■ Sustainability: An E conom ist's Perspective r o b e r t m .

s o l o »

1 2 ■ Conservation Reconsidered j o h n v . k r u t il l a

HI

DESIGNING AND IMPLEMENTING

ENVIRONMENTAL POLICIES

1 3 • R egulatory Strategies for Pollution C ontrol

A. M IC H A E L S P E N C E / M AR TI N L. W EI TZ M AN

1 4 ■ Land, W ater, and O w nership J. H. d a l e s

1 5 ■ Transferable D ischarge Perm its and the C ontrol o f Stationary

Source A ir Pollution t h o m a s h . t ie t e n b e r c

1 6 ■ Econom ic Incentives in the M anagem ent o f H azardous W astes

CLIFFORD S. RUSSELL

1 7 ■ W eighing A lternatives for Toxic W aste C leanup p e t e r

PASSELL

IV

BENEFIT-COST ANALYSIS AND MEASUREMENT

18 • An Introduction to Benefit-Cost Analysis r o b e r t

DORFMAN

19 ■ C riteria for Social Investm ent k e n n e t h j . a r r o w

20 ■ C om parisons o f M ethods for Recreation E valuation

J A C K L. K N E T S C H / R O B E R T k . DA VI S

21 • Bidding G am es for V aluation o f Aesthetic Environm ental

Im provem ents

A L A N R A N D A L L / B E R R Y I V E S / C L Y D E E A S T M A N

2 2 ■ T he Econom ic Value o f Life: Linking T heory to Practice

J . S T E V E N L A N D E F E L D / E C G E N E P . S E S K I N

2 3 • T he Life Y ou Save M ay Be Y our Own t h o m a s c .

SCHELLING

2 4 ■ Risk Assessment and C om parisons: An Introduction

R I C H A R D W I L S O N / E . A. C . C R O I C H

179

188

199

205

225

241

271

288

293

297

323

336

354

377

388

409

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25 • C ontrolling U rban A ir Pollution: A Benefit-Cost Assessment

ALAN J . KRUP NIC K / PAUL R. P O RT N EY 421

V

THE GLOBAL ENVIRONMENT______________________________ 439

26 ■ International C ooperation for E nvironm ental Protection

SCOTT BARRETT 445

27 • Some Econom ics o f G lobal W arm ing t h o m a s c .

SCHELLING 464

28 ■ Econom ic Activity and the G reenhouse Effect y o s h ik i

o c a w a 484

29 • Adverse Environm ental Consequences o f the G reen Revolution

D A V I D P I M E N T E L / M A R C I A P I M E N T E L 497

30 ■ D eforestation and Species Loss k e n t o n r . m il l e r /

W A L T E R V. R E I D / C H A R L E S V. BA RB ER 501

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PREFACE to the Third Edition

Concern over the profligate way in which people throughout the globe

have been exploiting the natural environm ent has not abated since the

First Edition o f this collection appeared in 1972. If anything, it has grown

m ore insistent as alarm ing evidence o f potential and actual dam ages to the

atm osphere and climate of the entire planet has captured the w orld’s

attention. Econom ists have a twofold interest in the m atter: to preserve the

viability and healthfulness o f the environm ent, and to ensure th at the

measures taken to protect the environm ent be effective and at the same

time not reduce the flow o f ordinary useful goods and services any m ore

than is necessary. This second concern is the special province of econo￾mists. The m ore severe the environm ental dam ages that need to be con￾tained, the greater the im portance o f targeting the ones that pose the

greatest threat to the well-being of the planet and containing them in the

least costly way possible. All o f the papers in this collection are concerned

in one way or another with meeting this challenge.

W ith few exceptions, the thirty papers presented here have appeared

previously in other publications. R obert D orfm an’s introduction to bene￾fit-cost analysis (C hapter 18) is new, and “ Some C oncepts o f W elfare

Econom ics" (C hapter 5) has been revised and m oved from the Introduc￾tion in the earlier editions of this collection. M ost o f the papers are

presented in their entirety as they appeared originally. Exceptions to this

rule are indicated.

A lm ost two thirds o f the papers are new to this T hird E dition, selected

to take account o f im portant recent contributions to environm ental eco￾nomics, suggestions from users o f earlier editions, and shifts in the general

focus o f interest within the field. An entire section is now devoted to

problem s o f the global environm ent, and m ore attention is paid than

previously to the concept o f tradable emissions perm its. T he presentation

o f benefit-cost analysis has been strengthened considerably, by popular

dem and. The ten papers that are retained from earlier editions have w ith￾stood the test o f time to become w hat m any readers describe as "classics."

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As in previous editions, we begin in Section I with an overview of the

sources o f the problem o f environm ental degradation, the econom ist s

approach to solutions, and a brief history of policy. Section 11 again

develops the concepts and m ethods o f economic analysis that are applied

to environm ental problem s; and Section 111 evaluates alternative policy

solutions. Section IV is now devoted to the difficult task o f analyzing and

m easuring the benefits and costs o f im proving the environm ent, and Sec￾tion V focuses on the global dimensions o f the problem . T h roughout, we

have tried to strike a balance between articles of mainly analytical interest

and those th at provide insights into the nature o f specific environm ental

problem s.

In the twenty years since the First E dition o f this collection appeared,

a num ber o f excellent textbooks on the econom ics o f the environm ent

have become available. Some m ay w onder w hether there rem ains a need

for such a collection. There are, indeed, draw backs as well as advantages

in trying to gain insight into a difficult social problem by studying a

collection o f source m aterials such as this. T he m ain draw back is th at the

collection cannot be as neat, tidy, and coherent as a textbook or treatise.

But collections can reflect the liveliness, the heat o f controversy, the ear￾nestness o f firsthand testim ony th at placid texts and treatises cannot con￾vey. Collections like this one perm it the reader to explore in considerable

depth some o f the real live problem s o f the environm ent and to observe

in detail the way th at econom ists struggle to com e up with solutions. Some

m ight say th at the purpose o f such a collection is to “ put the m eat on the

bones” o f analysis th at often can be arid and lacking in verisim ilitude. So,

in this volum e we are allow ing some o f the m ain contenders to speak with

their own voices, and by the sam e token we are allow ing readers to draw

their own conclusions from the assorted evidence and argum ents.

We are grateful to the m any users o f the Second E dition w ho took the

trouble to write us abo u t w hat they liked an d did n ’t like and w hat they

w anted to see m ore of, especially to the thirty-five instructors w ho re￾sponded to our questionnaire. T heir suggestions were invaluable to us in

preparing this T hird Edition.

M arch 1992

N SD

R D

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I ----------------------■ ------------------------

AN OVERVIEW

In the very first paper in this collection, Garrett Hardin sets forth the

essence of the problem of environmental degradation. “The Tragedy of

the Commons," now a classic, was one of the earliest contributions to the

environmental movement when it was written in 1968. Hardin, a biologist,

observed that overgrazing unrestricted commonlands, prior to their

enclosure, was a metaphor for the overexploitation of all of the earth's

land, air, and water resources that are common property. The root cause

of overgrazing was the absence of a mechanism for obliging herdsmen to

take into account the harmful effects of their own herds' grazing on all of

the other herdsmen who shared the common. The solution lay in assigning

property rights so that owners could limit the use of the commons.

But Hardin recognizes that air, water, and many other environmental

resources, unlike the traditional commons, cannot readily be fenced and

parceled out to private owners who would be motivated to preserve them.

This observation foreshadows the central question raised in succeeding

chapters in this volume and, indeed, in the entire field of environmental

economics: How can we oblige users to internalize the damages they

inflict on environmental resources that, by their very nature, cannot be

owned by anyone?

Larry E. Ruff focuses on solutions to the problem of environmental

pollution. Hardin pointed out that the degradation of the commons arose

from the fact that individual users bore only a small fraction of the cost

of their own damages. Ruff's solution, a theme that will be repeated and

elaborated in this volume, is to charge a price for using the environment

that will cause its users to internalize all of the costs they impose on the

rest of society.

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Under normal circumstances, people have to pay for the resources and

commodities they use. They are led thereby to use only the amounts that

will yield them marginal benefits that are worth the price. When we are

not required to pay for venting fumes into the atmosphere, pouring

pollutants into lakes and rivers, or depositing garbage in landfills, we

disregard the costs of these activities to society. We clutter the

environment with our wastes when the benefits we enjoy are far less than

the external costs we impose on other people. The price system fails when

there are external effects like these because it doesn’t apply to such costs.

Hardin saw the emergence of the “tragedy” as a consequence of

increasing resource scarcity due to unrestrained population growth. But

we now know that population growth is not the only culprit. Assaults on

the environment, some of them of global proportions, can be traced as

well to increases in consumption and changes in the nature of

consumption and production in societies whose populations are relatively

stable.

Along with most other economists, RufT argues that “putting a price

on pollution” would incorporate the environment into the normal

operation of the price system. Charging for using the environment as a

depository for wastes would lead firms and individuals to weigh their

marginal benefits against the cost, resulting in the same relatively efficient

use of the environment that charging for privately owned resources and

commodities induces. As a practical matter, it is virtually impossible to

achieve the same level of efficiency through direct governmental

regulation as through charging, especially when the pollution comes from

multiple sources.

Ruff emphasizes the importance of finding the right price to charge.

The objective is not to prohibit the discharge of all wastes, but to limit

total emissions to the amount that equates the marginal damages of

emissions to the marignal cost of abatement. In the twenty years or so

since RufT wrote this article, economists have discovered how hard it is to

identify the right price, and attention has turned more recently to

schemes that use marketable emissions permits, which set the total level

of emissions by all dischargers in some region and allow the price of

permits to be determined in the market. The policy alternatives are

discussed at greater length in Section III.

The third paper, by Allen V. Kneese, reminds us that the generation of

waste is not an anomaly that can simply be outlawed. It is a natural and

unavoidable by-product of all human activity. Unless they are

continuously recycled or permanently stored in inventories or structures,

all goods that are produced must sooner or later be returned to the

natural environment in one form or another. Thus the total volume of

residuals that is eventually discharged into the waste stream will be

approximately equal to the weight of basic fuels, food, and other raw

materials that enter the processing and production system, plus gases

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taken from the atmosphere. The rate at which virgin materials are turned

into wastes can, however, be slowed by improvements in the efficiency of

energy conversion and of materials utilization and reutilization

(recycling).

The recipients of these wastes are the earth’s land, air, and water

resources. Kneese’s materials balance model shows that, given the volume

of residuals, any effort to restrict their flow into one of these receptors

will necessarily increase the flow into others. Therefore the protection of

land, air, and water resources cannot be viewed as separate problems.

They are closely intertwined.

In the final paper in this section, Paul R. Portney takes us into the

practical world of environmental policy-making as it has evolved in the

United States from the early 1970s to the present. Portney leads us

through the series of policy decisions that must be wrestled with once a

government has decided to control a class of emissions, and then surveys

the manner in which Congress has dealt with the decisions. The decisions

of most interest to economists concern the basis to be used for setting

policy goals, and the method for allocating responsibility for attaining

these goals among different dischargers.

Portney describes the environmental policy that has actually evolved in

the United States as a hybrid. There is not much consistency among the

various standard-setting frameworks that have been embodied in laws

governing the discharge of different wastes. Some reflect a zero-risk

philosophy, others require the “best possible” abatement technology, and

occasionally a benefit-cost balancing is called for. But until passage of

the 1990 Clean Air Act, Congress was fairly consistent in one respect: it

almost uniformly eschewed the recommendations of economists to employ

price incentives for allocating responsibility for abatement among

dischargers. Centralized command and control systems that either set

standards of performance or mandate the use of specific technologies have

generally been the rule. The Clean Air Act of 1990 introduced the first

incentive system on a scale of any significance when it specified a

program of marketable discharge permits for the control of acid rain

deposition caused by sulfur dioxide ( S 0 2) emissions from the nation’s

major electric utilities.

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The Tragedy of the Commons

GARRETT HARDIN

G arrett Hardin is Professor of Human Ecology Emeritus at

the University of California at Santa Barbara.

A t the end o f a thoughtful article on the future o f nuclear w ar, J. B.

W iesner and H. F. Y ork concluded that “ Both sides in the arm s race

are . . . confronted by the dilemma o f steadily increasing m ilitary power

and steadily decreasing national security. It is our considered professional

judgm ent that this dilemma has no technical solution. If the great powers

continue to look for solutions in the area o f science and technology only,

the result will be to worsen the situation.” 1

I would like to focus your attention not on the subject o f the article

(national security in a nuclear world) but on the kind o f conclusion they

reached, namely, that there is no technical solution to the problem . An

implicit and alm ost universal assum ption o f discussions published in p ro ­

fessional and sem ipopular scientific journals is that the problem under

discussion has a technical solution. A technical solution may be defined as

one that requires a change only in the techniques o f the natural sciences,

dem anding little or nothing in the way o f change in hum an values or ideas

o f m orality.

In our day (though not in earlier times) technical solutions are always

welcome. Because o f previous failures in prophecy, it takes courage to

assert th at a desired technical solution is not possible. W iesner and Y ork

exhibited this courage; publishing in a science journal, they insisted that

the solution to the problem was not to be found in the natural sciences.

"The Tragedy of the Commons,” by Garret Hardin, from Science, v.

162 (1968), pp. 1243^18. Copyright 1968 by the AAAS. Reprinted by

permission.

1J B. W iesn er and H . F. Y ork, S cien tific A m erican 211 (N o . 4 ), 27 (1964).

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They cautiously qualified their statem ent with the phrase, “ It is o u r con￾sidered professional judgm ent. . . Whether they were right or not is not

the concern o f the present article. R ather, the concern here is with the

im portant concept o f a class o f hum an problem s which can be called "no

technical solution problem s,” and m ore specifically, with the identification

and discussion o f one o f these.

It is easy to show th at the class is not a null class. Recall the gam e of

tick-tack-toe. Consider the problem , "H ow can I win the gam e o f tick￾tack-toe?” It is well know n that I cannot, if I assum e (in keeping with the

conventions o f game theory) that my opponent understands the game

perfectly. Put another way, there is no “ technical solution" to the p rob￾lem. I can win only by giving a radical m eaning to the w ord ■win." I can

hit my opponent over the head; or I can falsify the records. Every way in

which I “ w in" involves, in some sense, an abandonm ent o f the game, as

we intuitively understand it. (I can also, o f course, openly abandon the

game— refuse to play it. This is w hat m ost adults do.)

T he class o f "n o technical solution problem s” has m embers. M y thesis

is that the "population problem ," as conventionally conceived, is a m em ­

ber o f this class. H ow it is conventionally conceived needs some com m ent.

It is fair to say that m ost people w ho anguish over the population problem

are trying to find a way to avoid the evils o f overpopulation w ithout

relinquishing any o f the privileges they now enjoy. They think th at farm ­

ing the seas or developing new strains o f w heat will solve the problem —

technologically. I try to show here th at the solution they seek cannot be

found. The population problem cannot be solved in a technical way. any

m ore than can the problem o f winning the game o f tick-tack-toe.

WHAT SHALL WE MAXIMIZE?

Population, as M althus said, naturally tends to grow "geom etrically.'' or.

as we would now say, exponentially. In a finite w orld this m eans th at the

per-capita share o f the w orld's goods m ust decrease. Is ours a finite w orld?

A fair defense can be put forw ard for the view th at the w orld is infinite;

or that we do not know th at it is not. But, in term s o f the practical

problem s that we m ust face in the next few generations w ith the foresee￾able technology, it is clear th at we will greatly increase hum an misery if we

do not. during the im m ediate future, assum e th at the w orld available to

the terrestrial hum an population is finite. "Space” is no escape.:

A finite world can support only a finite population; therefore, p o p u la￾tion grow th m ust eventually equal zero. (The case o f perpetual wide

fluctuations above and below zero is a trivial variant th at need not be

2G H ardin. Journal o f H e re d ity 50. 68 (19 5 9 ), S. v o n H o er a o r, S cien ce 137. 18 < 1 9 6 2 1

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discussed.) W hen this condition is met, w hat will be the situation of

m ankind? Specifically, can Bentham ’s goal o f “ the greatest good for the

greatest num ber” be realized?

No— for two reasons, each sufficient by itself. The first is a theoretical

one. It is not m athem atically possible to maximize for two (or more)

variables at the same time. This was clearly stated by von N eum ann and

M orgenstern,3 but the principle is implicit in the theory o f partial differ￾ential equations, dating back at least to D ’Alem bert (1717-1783).

The second reason springs directly from biological facts. T o live, any

organism m ust have a source o f energy (for example, food). This energy

is utilized for two purposes: mere m aintenance and work. F o r m an, m ain￾tenance o f life requires about 1600 kilocalories a day (“ m aintenance calo￾ries”). A nything that he does over and above merely staying alive will be

defined as w ork, and is supported by “w ork calories" which he takes in.

W ork calories are used not only for w hat we call work in com m on speech;

they are also required for all forms o f enjoym ent, from swimming and

autom obile racing to playing music and writing poetry. If our goal is to

maximize population it is obvious what we m ust do: We m ust m ake the

work calories per person approach as close to zero as possible. N o gour￾met meals, no vacations, no sports, no music, no literature, no art. . . . I

think that everyone will grant, w ithout argum ent or proof, that maximiz￾ing population does not maximize goods. Bentham 's goal is impossible.

In reaching this conclusion I have m ade the usual assum ption that it is

the acquisition o f energy that is the problem The appearance o f atom ic

energy has led some to question this assum ption. However, given an

infinite source o f energy, population grow th still produces an inescapable

problem . The problem of the acquisition o f energy is replaced by the

problem o f its dissipation, as J. H. Frem lin has so wittily show n.4 The

arithm etic signs in the analysis are, as it were, reversed; but B entham 's

goal is unobtainable.

The optim um population is, then, less than the m axim um . The diffi￾culty o f defining the optim um is enorm ous; so far as I know, no one has

seriously tackled this problem. Reaching an acceptable and stable solution

will surely require m ore than one generation of hard analytical w ork— and

much persuasion.

We w ant the m axim um good per person; but w hat is good? T o one

person it is wilderness, to another it is ski lodges for thousands. T o one it

is estuaries to nourish ducks for hunters to shoot; to another it is factory

land. C om paring one good with another is, we usually say, impossible

because goods are incom m ensurable. Incom m ensurables cannot be com ­

pared.

3J. v o n N e u m a n n and O . M orgen stern. T heory o f G am es a n d E con om ic B ehavior (P rinceton

U n iversity Press, P rin ceton , N .J ., 1947), p. 11.

4J. H . F rem lin. N e w S cien tist. N o . 415 (1964), p. 285.

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