en. ec. week 50-2010-11
TRANSCRIPT
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Excursion on Friday, 21January at 14.00 -15.00 p.m. !!!
Subject:
Newest energy saving technology for large buildings
Heat /Cold Storage in underground layers
Place:
Zernike complex , start Blue room, Duisenberg building
Organisation:
Call for volunteers ;students who arewilling and able
to translate theexplanation in English
Mail to [email protected]
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Environmental Economics
The economic theory of natural resources III1. Water
2. Biological Renewable resources : Fisheries
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I.Global water trends
II.Economic studies of water resources
i.Economics of large scale flooding ( sea or rivers)
ii. Efficiency studies of drinking water companies, water purification plant anwaterboards
iii. A sustainable use of ground water in theNetherlands
III. The EconomicTheory of Fisheries
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I. Global water issues
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Halpern, B. S. et al (2008) ,A Global Map on
Human Impact on Marine Ecosystems, Science,
319, no 5856, 948-952.
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environmental economics, d.wiersma4/11/2011 6Published by AAAS
B. S. Halpern et al., Science 319, 948 -952 (2008)
Global map (A) of cumulative human impact across 20 ocean ecosystem types
A. Pollution of the oceans
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World water shortage; projected water scarcity in
2025 Souce: United Nations
B. Fresh water quantity
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C Fresh water quality:
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II.Economic studies of water resources
i.Economics of large scale flooding ( sea or rivers)
ii. Efficiency studies of drinking water companies,
water purification plant and waterboards
iii. A sustainable use of ground water in theNetherlands
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i. Water management policy of large scale flooding
1953: a terrifying flood in the provinces South Hollandand Zealand
Damage :
1835 people died
200.000 cows , horses and pigs died
200.000 hectares of land unusable for many years
72.000 peoplewereevacuated to other areas
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Policy measures :
The Delta Plan; a combined strategy of building higher dikes
and the developing of theentire delta.
theexecution was concluded in 1997 with the movable storm
barrier near Rotterdam.
Economic th
eory :
calculation of a fixed exceedence probability aftereach
investment in the relevant safety structure ( Van Dantzig).
This method is still in use in CBA of flood protection
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Movable storm barrier in Rotterdam
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Primary objective :protection against flooding forevery part of the
country without consideration of differences in
economic activity
Criticism :
All over protection against flooding does not take
into account the spacial distribution ofeconomic
activity , so the protection policy is not very cost-
effective
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Since 2004: a gradual shift in water management policy
From :defending against to living with water
room forwater , let the river be the river
give more space to natural waterflows
example: the creation oflower flood levels of the River Rhine bij
increasing the capacity of the discharge from 14.000 m3/s
to 16.000 m3/s in 2015 and 18.000 m3/s at the
end of this century
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Area for storage of
water
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New approach ofwatermanagement:
Integration of
watermanagement
spatial planning
economic development
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ii. Efficiency studies in the water sector
1. drinking watersupply companies
characteristics:
* traditional natural monopolies because of a network of pipelines
* input: groundwater
surfacewater
* interconnection of networks of firms may give health problems
because of the different types of inputs and it is difficult to find out
which firm is legally resposible
* separation of the network and the production on the network,
likeelectricity and natural gas is not possible
* Priceelasticity of demand for drinking water is relative low
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regulation of drinking water companies
Traditionalregulation by the government: prices has to cover total cost
Problem ofregulation: the government has less information about the
specific cost of the different firms than the firms itself.
Result:
*drinking water companies have no incentive to produce at minimum
cost
*higher than minimum prices can be charged, because the companiesface no competition.
Inefficiency and welfare loss for society!!
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Actual price
Lowest price
Actual demand Optimal demand
X- inefficiency at firm level
ACmin = Minimum Average Cost
ACactual= Actual Average Cost
MC
ACmin
ACactual
X- inefficiency
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Empirical estimated inefficiency, NL , 1991-1995
Drinking water
companies
Waste water purification
plants
% of costs
15.2
30.0
Joint research RUG with Erasmus University Rotterdam
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Innovations of regulation to decrease inefficiency in thewatersector
UK
Privatization ofwater companies, combined with price cap regulation
(Offwat)
Result : Cost inefficiency is significant lower than in theNetherlands
France
Tender system in which the most efficient firm receives the right to supply
drinking water for a specific period in a specific region
Netherlands
System ofbench marking in the sector itself: publication of cost comparisons
between firms
Result : costs are going down in the period 1997 2004 by 1.3% per year
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ii. Efficiency studies in thewatersector
2. Collective waste waterpurification plants
Public firms with prices based on cost coverage
Public Monopoly (no competition)
X inefficiency (production not by lowest cost
Private firms who can clean their own waste water cheaper has leftleft the public firm
As a result the public firm gets over capacity and prices have
increased
In a study we proved that an X-inefficient firm with prices based
on cost coverage can become efficient , when the public firm withmarket power at the supply side will be confronted with market
power at the demand side
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Wastewater purification plant
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iii. Efficient allocation of groundwater resources
by means of economic incentives
Case study of theNetherlands
Desertification of
nature bydecrease of
groundwater
level
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Groundwater use Damage to ecosystems
Main developments in the last 50 years:
1. Increased dewatering and drainage of agricultural areas (70%)
2. Increased extraction of groundwater for drinking water and
industrial/agricultural use (30%)
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Groundwater level
Damage
ForestNature sensitive to
water
About 400.000
hectares
11% of total area
ofNL
Agricultural
revenue
loss
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Damaged areas in theNetherlands
(Red and yello areas)
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Government policy :
Since 1990.
Main objective: Sustainable use of groundwaterwithin 50 years
2 stages
1. 1990 -2000 to stop increase of damage to ecosystems
2. 2000- 2050 recovering ecosystems
Measures:
1. Improved water management
2. Limitation ofextraction of groundwater
( groundwater is used for drinking,
industry for cooling and agriculture in very dry periods )
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Past allocation of groundwaterextraction
Main instrument: quantity regulation per region by means of licences
criterion : no expected damage to other users
Inefficiencies
1.Damage to ecosystems was not taken into account
2. Inefficient allocation among extractors
( extraction licences was not based on differences
in economic value of groundwater among users)
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Adjusted measures to limit groundwaterextraction
* limiting groundwater extraction for drinking by means of a publicity
campaign with the objective to reduce the extraction by 15 % in 2010
*Industrial self extraction of groundwater (especially for coolingpurposes) will be reduced by means of the existing system of regulation
Inefficiencies
Inefficient allocation between extractors
( extraction measures are not based on differences
in opportunity costs between drinking water firms and industry)
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Alternative allocation
Efficient allocation: regional auctions of groundwaterextraction permits
Problem: thin regional water markets with a few big extractorsTo correct for strategic behavor: special design of the auction
Result of an auction:
Same
reduction ov
er 1990 -2010 at 10
%lowe
r total costs!!Water companies save money , industry pays more
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III. BIOLOGICAL RENEWABLE RESOURCES
- Capacity for reproduction and growth
- For ests, fisheries: populations of biological mechanisms;
Focus on fisheries!!
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Fisheries
1. biological sub-model- logistic growth curve= stylized prescription of
population dynamics2. economic sub-model ;
description of behavior of fisheryman
3. steady stateequilibrium: static efficiency
4. open access fishery
5. dynamic allocation6. policies to avoid extinction of the resource
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1. Biological sub-model ; logistic growth approach to the
behaviour of fish population (stock)
Competition
for scarcity of
food
Reproduction
time
Stock SS max
S min
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Relation between the stock (S) and the natural
growth rate g of the stock
Smax =40
g =dS/dt
MSY
Example:
g = 4S 0.1 S
g= S(4- 0.1S) = 0;
Smin = 0; Smax = 40
dg/dS = 4- 0.2S=0;
S = 20
gmax = g (S=20) = 40
40
20
gmax =MSY = maximum sustainable yield
0
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2. Economic sub-model
a) Harvest function or production function of the fishery sector:
H (harvest) = H(E,S)
E = Fishing effort (capacity of the ships, the time spend at the ocean)
S = Size of the stock
Assumption 1.
Following Schaefer, 1954 and Munro, 1981,1982 a good approximation of
the production function is : H =e ExS
With e is a measure of the catch efficiency
In case ofe=1 we have: H= ExS
Assumption 2.
Steady stateequilibrium H = g
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Production function
H( harvest) = E (effort) x S (stock)
ES
H*
SO S* Smax
H, g
C
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H=g
H
So Smax
h0
h1
h2h3
0 2 4
E0S
E1S
E2S
E3S
h0
h1 h2 h3
Transformation of H=H(S) to H= H(E)
Assume E0 < E1
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b) Costs and benefits and profit of fishing
Total costs of harvesting: C = C(E)
Assume a linear function : C =wE (2)
withw the cost per unit ofharvesting (w is constant)
c) B denote the gross benefit from harvesting:
B =B(H)
Assume that in the commercial fishery that fish are sold in a competitive
market, each firm takes the market price P as given and the revenue
obtained from the harvest H is
B = HP (3)
d) Fishing profits (net Benefits) :NB = B-C (4)
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TC=wE
TB=PH
E* E(ffort)
TB,TC
3.Staticefficiency:max.net benefits
Assumptions:
Totalbenefits (Revenues): TB = PH
Total Costs TC = wE
Calculation example:
Assume P=1, w=10
H = 40 E -10E (1)
TB = PH= 40 E -10E (2)
TC = wE =10E (3)
NB =TB-TC= 30 E 10E
Max.NB ; d(NB)/ dE =0
dNB/dE = 30 - 20E= 0 ; E* =1.5
TB = 37.5; TC =15; NB=22.5
1.5
S = 40-10 E = 25
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4. Open access fisheries
characteristics:
* Harvesting by a large number of independent firms
* No barriers to entry or exit for the fishery
* No enforcable property rights to the in situ fish resources
* Perfect competition: effort applied will continue to increase as long
as it is possible to earn a positive economic profit
* Entry continue until the profits will become zero
Long run free access equilibrium NB=0 orTB=TC
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Equilibrium : Free access
Average =marginal costs
Average BenefitsMarg. Benefits
E(ffort)
PH
wE TC
Efree accesE efficient
Calculation example:
Free access case
TB = TC
40 E -10E = 10E
E= 0; E= 3
S = 40-10E=10
TB
31.5
Free access
AB =TB/E = 40 -10E
AB = AC; 40-10 E = 10;
E =3; S=10
Efficient MB equal MC
MB =d(TB)/dE = 40-20E
MC= 10 ;E=1.5; S =25
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FreeAccess:
2 types ofexternalities:
- contemporaneous: overcapacity of fishing
- scarcity rent of the resourcewill be dissipated
(inefficient)
- intertemporal: overfishing reduces stock for future
generations, so future profits will be lower (not
sustainable)
CONCLUSION
Free access violates conditions forefficiency and sustainability
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5. Dynamic efficiency: time preference!
E static efficient E free access
Dynamic efficiency?
r=0 : Static efficient
r>o : time preference : E Stock
r = g: no value for future revenues: E = E free access
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0.000
10.000
20.000
0.000
40.000
50.000
0.000
0 20 40 0 0 100 120 140 1 0 1 0 200 220 240 2 0 2 0 00
0.000
0.200
0.400
0. 00
0. 00
1.000
1.200
to cort
Stock and effort dynamic paths for an illustrative model.
Perman, et. al.
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Probability ofextinction of the species?
No extinction in steady stateequilibria
Possibleextinction when the critical Smin is at
a relative high level of the stock
Extinction is in a lot of cases irreversable
6 P li l i ffi i ll i
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6. Policy solutions to get an efficient allocation
1. A tax t on Effort or on access for fishing
* Assume free access behaviour:
TB= TC
HP =(w +t)E
example: 40 E 10E = (10+t) E (1)
Social objective:efficient level E*=1.5 (2)
Substitution of(2) in (1) gives 60 22.5= 15 + 1.5 t ; t* =15
1.5 3 E
TC =10E
TC=(10+t)E
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2. A Command and Control approach a quantity restriction
by means of fish quota
TC=10 E
1.5 3 E
At E=1.5 ; TB = 40 E -10 E= 37.5 ; TC = 10 E = 15; NB = 22.5>0
There is a positive incentive to fish more and a tendency for entry
Entry can be limited by licenses for the incumbent fishing firms
To restrict the effort of the incumbent firms strict control is needed
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3. Transferable (marketable) rights on fishing effort
Government issues for E = 1. 5 rights on effort, which can be
bought by the fishing firms.
The willingness to pay is the maximum value (NB per unit E)
the firms have to pay for the rights.
The fishing rights are free tradable on the market
NB = 30 E -10 E ;Average NB per E is 30 -10E
Demand function of fishing rights P = 30-10E
1.5 3 E
30
15
S
D
Demand: P = 30 10 E
Supply : E =1.5
P* =15
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World:
World fish harvest: 100 - 120 million tonnes
1. Employment; - directly 30 million jobs
- indirectly 200 million jobs
2. Exploitation of the stocks:
- 25%moderately
- 50% fully
- 25% overexploited or depleted
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Policy European Union (1)
-1977: 200 Miles limit
-1983 -2002: Common Fisheries Policy (CFP)
Objective: sustainable use of fish stocks
Measures: -ceiling on annual fish quotas
(total allowable catches (TAC)
-distributed over member states, based on historical
catches over 1973-1978.
-Control and enforcement by the member states
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Evaluation CFP
-large number of stocks below biological reasonable
levels
-Current fleet is still over-sized
-Legal systems and sanctions are not harmonized
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Policy European Union (2)
-reform policy after 2002
*Shift from short run to a long term approach
(not just one species but a group of interdependent species)
Measures:
1. Total Allowable Catches to limit the amount of fish over a specific period
of time.
2. Technical measures, such as mesh sizes, closed areas
3. Limiting fishing effort by reducing the number of fishing days at sea
4. Fixing the number and type of fishing vessels
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Market alternatives :
(proposed by Netherlands Institute of Agriculture and Economics)
1. Quotas for fishing effort (fleet capacity and fishing periods(advantage: restriction of capacity and easier control)
2. Licences for access to specific region and per type of fish
3. Tax on fishing effort
4. Auction of fishing effort rights, which are tradable at a market