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Chapter 8-1.docx

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University of Lethbridge
ECON 3220
Ali Kamar

Chapter 8-1 CBA: Estimating Costs How to estimate costs  Recall Chapter 6 of a proposed government project to reduce sulfur emissions from 365 to 265 kilotonnes over 20 years with the following data on costs and benefits Cost benefit analysis (from Chapter 6)  Recall the MAC-MD model: o At unregulated market emissions E M  TDC (area under MD curve) is max  TAC is 0, as there is no abatement cost o If, for a regulation, emissions are reduced from E to E’, TAC will increase from 0 to area D  In chapter 8 our focus is on the MAC curve and TAC  Recall, that each point on the MAC curve gives the marginal cost to polluters for reducing emissions by one unit  Area under the MAC curve gives total abetments costs (TAC) of reducing pollution  Note that all costs should be measured in terms of opportunity costs of resources used for abatement, not the accounting costs. Components of Costs  Total costs of an environmental regulation policy or project can include a number of component’s o Abatement / compliance costs  These include actual clean-up costs, installation of new equipment, and their operating costs to meet the target set by the regulation  Usually towards producers, some can be consumers  It results to a loss of producer surplus as MC of production rises o Enforcement costs/ regulatory costs  These are the costs of administering and monitoring environmental laws and regulations, environmental policing, legal and prosecution fees due to violations  Since these costa are borne by the government with tax dollars, it represents a loss of consumer surplus o Damage costs/ environmental costs  If the policy has negative effect on another attribute of the environment o Ex. A waste water treatment facility to reduce water pollution may have unintended negative effects on air and land in terms of odor at the plant site and the sludge disposal lands  Damage costs usually results to a loss of consumer surplus, but it can also be a loss of producer surplus also as we have seen in chapter 7 o Indirect costs  These include other costs such as buying a right of way for building a new bike path, media awareness campaign, etc. Levels of environmental regulations  Can target o Single firm/facility o Single sector/industry o Multiple sectors/industries together  So the estimation of costs of such policy or project is better understood at a single facility level first, and then progressing to a single sector or multiple sectors level  Single firm facility o Here the focus is on different aspects of costs of reducing pollution by a single firm or project  Flood control project, solid waste managements, public parks, etc. o We mainly rely on engineering/technological parameters to estimate total costs of a single facility assuming that this is the lowest costs technology of achieving the environmental quality standards set by regulation Costs of a single firm/ facility example  Consider the costs of a small wastewater treatment plant  A) Construction costs o It has three types of construction costs  Treatment plant costs  Conveyance costs  Sludge-disposal costs o Plus, construction related environmental mitigation costs o Salvage value is the residual value let after depreciation o Higher salvage values act to lower total cost of the project they are –ve costs  B) Annual costs o Operation & Maintenance (O&M) costs of pumping o Treatment plant o Sludge-disposal costs o Plus mitigates and unmitigated environmental costs such as odor issues both at the plant and on the sludge disposal lands  C) Present Value o All components are initial costs are added under the “TOTAL” column and PV (@ 8%) is calculated for the projects entire lifetime (40 years) costs o This is why PVs are larger than the initial costs o As noted before, salvage values are shown with –ve signs as they lower total project costs Opportunity costs  The potential benefit of these resources society has given up if they had been used in their highest alternative purposes 
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