Because learning changes everything.

Chapter 3
Criteria for Evaluating
Environmental Policies

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 Learning Outcomes

1. Recall External costs and externalties

2. Discuss the market failure
3. Review different policy evaluation criteria

© McGraw-Hill Education
 Decisions in the market economy

Producers aim to maximize profits and minimize private costs, such as

energy, raw materials, etc. The private cost depends on the prices of
inputs.

However, the market does not pay attention to the external cost, which is
imposed on the society as a result of production, and firms do not
consider external cost when making decisions.

For example, firm’s pollution of air has a negative impact on human

health. However, firms does not account this type of external cost when
they decide the level of output they aim to produce. Therefore, market
fails to address the problem of external cost.

© McGraw-Hill Education 3
 Externality
When you drive your car, you receive a personal benefit, but also
impose costs on other people due to the air pollution, noise
pollution and congestion you create. However, you do not have to
compensate other people for the costs you impose on them.

These costs are known as an externality or external costs or

effects, because you impose the costs on others, but do not have
to pay compensation.

© McGraw-Hill Education
 Market failure

In the case of externalities, when the environmental quality

and social values are affected by some economic activities,
the market economy is not efficient. It means that market will
not produce commodities that are socially efficient.

Therefore, there is a need to introduce environmental

policies that boost the economy towards social efficiency and
maintain environmental quality.

© McGraw-Hill Education 5
 Criteria for evaluating environmental policies

There are many different types of environmental policies. Each type anticipates that
administrators and polluters will respond in particular ways. Each type has specific
characteristics that make it more likely to succeed in some circumstances and not in
others.
When we evaluate the effectiveness of a policy for addressing a given problem in
environmental pollution control, it is important to have clearly in mind a set of policy
evaluation criteria.
The criteria used to discuss specific environmental policies are the following:
• Efficiency
• Cost-effectiveness
• Fairness
• Enforceability
• Flexibility
• Incentives for technological innovations
• Moral considerations

© McGraw-Hill Education
 Efficiency

A situation is efficient if it is one that produces for society a maximum

of net benefits.
Note that we have said “society.” Efficiency is sometimes
misconstrued to mean the maximum of somebody’s net income.
Although efficiency does not rule that out, it involves substantially
more than this; it involves the maximum of net benefits, considering
everybody in the society.

Efficiency in the case of pollution control implies a balance

between abatement costs and damages.
An efficient policy is one that moves us to, or near, the point
(either of emissions or of ambient quality) where marginal
abatement costs and marginal damages are equal.

© McGraw-Hill Education 7
 Cost-Effectiveness

It is often the case that environmental damages cannot be

measured accurately.
This sometimes makes it useful to employ cost-effectiveness
as a primary policy criterion.

A policy is effective if:

• it produces the maximum environmental improvement
possible for the resources being expended or,
• it achieves a given amount of environmental
improvement at the least possible cost.

© McGraw-Hill Education 8
 Cost-Effectiveness

The capability of a policy to achieve cost-effective

emission reductions (i.e., yield the maximum
improvement for the resources spent) is also
important for another reason.
If programs are not cost-effective, the policymakers
and administrators will be making decisions using an
aggregate abatement cost function that is higher than
it needs to be, leading them to set less restrictive
targets in terms of desired amounts of emission
reductions.

© McGraw-Hill Education 9
 Cost-Effectiveness

This is shown in Figure 9.1, for a case of sulfur dioxide (SO2)

emissions.
With a cost-ineffective policy, the perceived marginal
abatement cost is the higher one, labeled MAC1;
whereas with a cost-effective approach, marginal abatement
costs would be MAC2.
Thus, with the MD function as shown, the emissions level a1
appears to be the efficient level of pollution, whereas with a
cost-effective program, the efficient level would be a2.

© McGraw-Hill Education 10
 FIGURE 9.1 Mistaking the Efficient Emissions Level When
Abatement Technologies Are Not Cost-Effective

© McGraw-Hill Education 11
 Fairness

Fairness, or equity, is another important criterion for

evaluating environmental policy (or any policy, for
that matter).
Equity is a matter of morality and the concerns
about how the benefits and costs of environmental
improvements ought to be distributed among
members of society.

Fairness does not necessarily mean equal.

© McGraw-Hill Education 12
 Example: costs and benefits of several alternative
approaches to controlling air pollution in each region

© McGraw-Hill Education 13
 Example: costs and benefits of several alternative
approaches to controlling air pollution in each region

The first three columns show total costs, total benefits, and net benefits
for each program. Suppose Groups X and Y refer to a low-income group
and a high-income group, respectively.

Programs A and B have the same net benefits, but these are distributed
more progressively in B than in A, i.e., Group X (low-income) receives
more of the net benefits in Program B than Group Y.

We might agree that B is preferable to A because it has the same net

benefits and “better” distributional effects.

© McGraw-Hill Education 14
 Example: costs and benefits of several alternative
approaches to controlling air pollution in each region

Compare Programs B and C. The net benefits of Program C are much

higher than in B. Unfortunately, they are not distributed as progressively
as those of B; in fact, they are distributed more toward high-income
people (70 vs. 20).
How should we choose between B and C? Some might argue that B is
best, for equity reasons; others might argue for C on overall efficiency
grounds.

Now compare Programs B and D. In this case, D has the advantage in

overall efficiency (net benefits are 90), although, as in the case of C,
more of the net benefits go to high-income people (50 vs. 40). Here we
also see that low-income people would be better off in absolute terms,
although not relatively, with D than with B. On these grounds, D might be
preferred.

© McGraw-Hill Education 15
 Enforceability

There perhaps is a natural tendency among people to think that enacting

a law automatically leads to the rectification of the problem to which it is
addressed.
Among some in the environmental community, this tendency is
depressingly strong. But anybody with even a cursory understanding of
public policy knows this is not true.

Regulations have to be enforced. Enforcement takes time and resources,

just like any other activity, and because public budgets are always limited,
the requirements of enforcement have to be balanced with those of other
public functions.

© McGraw-Hill Education 16
 Enforceability

There are two main steps in enforcement:

1. monitoring refers to measuring the performance of
polluters in comparison to whatever requirements are set
out in the relevant law.

2. sanctioning refers to the task of bringing to justice those

whom monitoring has shown to be in violation of the law.

© McGraw-Hill Education 17
 Enforceability

The objective of enforcement is to get people to comply with

an applicable law.
Thus, some amount of monitoring is normally essential.
Monitoring polluting behavior is far more complicated than,
say, keeping track of the temperature.
Polluters, however, can often find ways of frustrating the
monitoring process. The more sophisticated and complicated
that process, the easier it may be for polluters to find ways of
evading it. In recent years, great strides have been made in
developing monitoring technology, particularly for large
sources of airborne and waterborne pollutants.

© McGraw-Hill Education 18
 Enforceability

Sanctioning refers to the task of bringing to justice those whom

monitoring has shown to be in violation of the law.

The related problem is that in many cases the data underlying the
sanctions will be imperfect, leading to challenges and costly conflicts.
Therefore, very often authorities try to achieve voluntary compliance and
encourage violators to remedy the situation without penalty.

© McGraw-Hill Education 19
 Flexibility

A valuable characteristic of any policy or instrument

is that it be sufficiently flexible to be adapted to
changing circumstances. Most environmental
regulations are put in place in accordance with what
is known about the situation to which they are
applied, for example, the known or estimated
benefits and costs of the case.
When these change, such as new estimates of
benefits and/or costs become available, the policies
ought to be altered.

© McGraw-Hill Education 20
 Incentives for Technological Innovations

In our studies of environmental policy, much of the focus

normally gets put on the performance of public officials
because they appear to be the source of that policy.
What needs to be kept clearly in mind, however, is that it is
private parties, firms, and consumers whose decisions
actually determine the range and extent of environmental
impacts, and the incentives facing these private parties
determine how and where these impacts will be reduced.
Thus, a critically important criterion that must be used to
evaluate any environmental policy is whether that policy
provides a strong incentive for individuals and groups to find
new, innovative ways of reducing their impacts on the
ambient environment.
© McGraw-Hill Education 21
 Incentives for Technological Innovations

The importance of the technological change, flowing from

programs of research and development (R&D), is that it shifts
the marginal abatement cost function downward.
So, the greater the incentives, the better the policy.

In some cases policymakers may utilize technology-forcing

regulations that is, regulations that will require polluters to
find innovative technology in order to meet pollution-control
targets with reasonable cost.

© McGraw-Hill Education 22
 Moral Considerations

We earlier discussed questions of income distribution and

the impacts of different environmental policies on people with
different levels of wealth. These are ethical issues on which
different people will have varied opinions, but they are
important to discuss when deciding on alternative public
policies.
But moral considerations extend beyond these distributional
questions. The innate feelings that people have about what is
right and wrong undoubtedly affect the way they look at
different environmental policies. These have to be weighed in
the balance along with the more technical criteria discussed
previously.

© McGraw-Hill Education 23
 Moral Considerations

An idea grounded in morality is that those who cause a

problem ought to bear the major burden of alleviating it.
We see this, for example, in discussions of global
environmental issues. The industrial nations, especially the
most economically developed among them, are largely
responsible for the atmospheric buildup of CO2 and the
deterioration of the protective ozone layer.
Many people take the view that these countries ought to bear
the major burden in rectifying the situation.

© McGraw-Hill Education 24
 Discussion

“Efficiency implies cost-effectiveness, but cost-

effectiveness does not imply efficiency.”
Explain this statement.

“The costs of achieving emission reductions in the

future will depend greatly on the types of policies
used to reduce emissions today.”
Explain.

© McGraw-Hill Education 25
Because learning changes everything. ®

[Link]

© 2021 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.