dararattpublicgoods

Public Goods: Pricing and Costing: 

Public Goods: Pricing and Costing By Dararatt Anantanasuwong, Ph.D. (Economics) School of Development Economics National Institute of Development Administration December 13, 2005

What is a Public Good?: 

What is a Public Good? Market failures: Market mechanism can not provide an efficient outcome, i.e., optimum prices and quantities that maximize social welfare. Cases of market failures: imperfect competition, imperfect information, public goods, and externalities.

What is a Public Good? (cont.): 

What is a Public Good? (cont.) Characteristics of public goods: Nonrivalness: indivisible benefits of consumption (i.e., when the good is consumed by one person, another person is not preempted from consuming it at the same time), e.g. TV broadcasts Nonexcludability: preventing others from sharing in the benefits of a good’s consumption is not possible, e.g. national defense

Type of Public Goods?: 

Type of Public Goods? Pure public goods: nonrivalness & nonexcludability, e.g. air Impure public goods: Goods as roads and parks, but the utility of one user typically is reduced by an increase in the number of other users.They have some degree of congestion (i.e., “cost” are related to the use of a good by many people) and rivalry in use. Club goods/mixed goods: They, categorized between private goods and public goods, can be consumed by many individuals without diminishing the consumption of others, e.g. a movie. However, exclusion (of nonmembers) is possible.

Type of Public Goods? (cont.): 

Type of Public Goods? (cont.) Common property resources: Natural resources that have no formal owners, but typically some form of ownership control is exercised, collectively or by private individuals, e.g. fish, wildlife or woods. These resources act like local public goods or club goods except that they are generally more a source of production inputs than goods for direct consumption.

Public Goods: Environmental Quality: 

Public Goods: Environmental Quality Government Intervention in environmental problems: The Command-and-Control Approach (CAC): technology-based standards, performance standards, environmental quality standards, etc. Market-based/Economic Incentive Approach: charges, fees, taxes, subsidies, deposit-refund system, tradable permits, etc. Voluntary Approach: initiatives, directives, etc. Moral Suasion Approach

How Does the Government Intervene?: 

How Does the Government Intervene? Environmental Public Policy Development: PHASE I: IDENTIFICATION OF THE ENVIRONMENTAL PROBLEM Problem formation Policy agenda PHASE II: ENVIRONMENTAL DECISION MAKING AND RISK ANALYSIS PHASE II: ENVIRONMENTAL POLICY APPRAISAL Policy evaluation

The Risk Assessment Process: 

The Risk Assessment Process RISK ASSESSMENT Qualitiative and Quantitative Evaluation of Risk Scientific Research and Data Collection Hazard Identification Dose-Response Analysis Exposure Analysis Risk Characterization RISK MANAGEMENT Formulating Policy Responses to Risk

Assessing Benefits for Environmental Decision Making: Identifying: 

Assessing Benefits for Environmental Decision Making: Identifying Primary Environmental Benefits: A damage-reducing effect that is direct consequence of implementing environmental policy, for example, Health benefits including decreased mortality and reduced morbidity More stable ecosystems and improved aesthetics. Economic benefits – a more prosperous fishing industry due to the enactment of clean water regulation

Assessing Benefits for Environmental Decision Making: Identifying (cont.): 

Assessing Benefits for Environmental Decision Making: Identifying (cont.) Secondary Environmental Benefits: An indirect gain to society that may arise from a stimulative effect of primary benefits or from a demand-induced effect to implement policy, for example, Higher worker productivity that results from the primary benefits of improved health. Higher productivity increases the availability of goods and services, which may lead to a decline in prices. The increased demand for labor to implement a new environmental policy, i.e, the economic gains of an improved labor market.

Assessing Benefits for Environmental Decision Making: Valuing: 

Assessing Benefits for Environmental Decision Making: Valuing User value: Benefit derived from physical use or access to an environmental good (e.g. the benefits from using a lake) Direct user value: Benefit derived from directly consuming services provided by an environmental good (e.g. swimming, fishing) Indirect user value: Benefit derived from indirect consumption of an environmental good (e.g. a view of the lake or its aesthetic qualities)

Assessing Benefits for Environmental Decision Making: Valuing (cont.): 

Assessing Benefits for Environmental Decision Making: Valuing (cont.) Existence value: Benefit received from the continuance of an environmental good (e.g. the rain forests, the Grand Canyon, or the bald eagle). The motives for existence value are: Vicarious consumption: The utility associated with knowledge that others derive benefits from an environmental good. Stewardship: The sense of obligation to preserve the environment for future generation.

Assessing Benefits for Environmental Decision Making: Valuing (cont.): 

Assessing Benefits for Environmental Decision Making: Valuing (cont.) Total value = User value + Existence value (Direct and indirect user value) (vicarious consumption and stewardship valule)

Benefit Estimation Methods: 

Benefit Estimation Methods

Benefit Estimation Methods (cont.): 

Benefit Estimation Methods (cont.)

Assessing Costs for Environmental Decision Making: 

Assessing Costs for Environmental Decision Making Incremental costs: the change in costs arising from an environmental policy initiative. Explicit costs: Administrative, monitoring, and enforcement expenses paid by the public sector plus compliance costs incurred by all sectors. Capital costs: Fixed expenditures for plant equipment, construction in progress, and production process changes that reduce or eliminate pollution generation. Operating costs: Variable expenditures incurred in the operation and maintenance of abatement processes.

Assessing Costs for Environmental Decision Making (cont.): 

Assessing Costs for Environmental Decision Making (cont.) Implicit costs: The value of any non-monetary effects that negatively influence society’s well-being, e.g. The value of diminished product variety arising from a ban on certain inputs, the time costs of searching for substitutes, and the reduced convenience that environmental control policies might impose.

Assessing Costs for Environmental Decision Making (cont.): 

Assessing Costs for Environmental Decision Making (cont.) Estimation Methods for Measuring Explicit Costs: The engineering approach: Estimates abatement expenditures based on least-cost available technology. The survey approach: Polls a sample of firms and public facilities to obtain estimated abatement expenditures.

Benefit-Cost Analysis in Environmental Decision Making: 

Benefit-Cost Analysis in Environmental Decision Making The Adjusting for Time Dimension of B-C Analysis: Present Value Determination PV = [1/(1 + r )t ]*FV PV = present value FV = future value 1/(1 + r )t = discount factor r = discount rate t = number of periods

Benefit-Cost Analysis in Environmental Decision Making (cont.): 

Benefit-Cost Analysis in Environmental Decision Making (cont.) Inflation Correction: (adjusts for movements in the general price level over time) Real valueperiod x = [1/(1+p)t ]*Norminal valueperiod x+t Real valueperiod x = a magnitude adjusted for the effects of inflation Norminal valueperiod x+t = a magnitude stated in terms of the current period [1/(1+p)t ] = deflating factor p = the rate of inflation t = number of periods

Benefit-Cost Analysis in Environmental Decision Making (cont.): 

Benefit-Cost Analysis in Environmental Decision Making (cont.) Comparing Environmental Benefits and Costs: Benefit-cost ratio (B/C ratio) (PVB/PVC) > 1 (the option is considered feasible) Present Value of Net Benefit (PVNB) PVNB (PVB – PVC) > 0 (feasible)

Environmental Project Management: 

Environmental Project Management Public ownership: directly owned by the government (local or national) or state enterprise, e.g. central wastewater treatment plant, public solid waste landfill site, public waste incinerating facility Joint venture: by the government and a private company, e.g. GENCO ( an industrial waste treatment and landfill facility jointly owned by MOI and a private company). Contract-out: the government invests in the facility and contracts a private company to operate. Franchise: the government grants a private company to build, operate, and maintain the facility and regulates its prices and services