Taking into account the cost of the externality shifts the supply curve up a This could be the pollution units paid to watermen and policymakers in our April 1 2013 I II experiment What s the change in consumer surplus a Consumer Surplus Calculations i Without the Externality 1 40 20 x100 1000 b What happened i Including some of the harm from the pollution externality into the market resulted in 1 Less being produced 2 At a higher price 3 Consumers are clearly worse off 4 Producers are usually worse off unless price goes up a real lot ii But the bay is less polluted So what bottomline c What you need to know i Economic definition of value ii More clicked powerpoint slide too fast III IV Video a Arguing that the voluntary regulations are working just fine b Counter argument is that voluntary regulations are not working c As an economist he makes the argument that the Clean Water Act was not well written and that TMDL does not incorporate the cost What s the big question a b Even if we all agree that we would like to see a restored Chesapeake Bay Is it worth it ecosystem we may disagree i When we add all these individual values together we say the cost of doing this might be quite high and there is not a limitless amount of money we are willing to invest in the bay ii Corollary There may be some level of restoration below the ideal restored Bay that might be worth it from an individual or societal perspective c What level of restoration is best i Consider heavily polluted bay human health effects fishing swimming boating etc V Who is this weird bearded man and why is he important a Wilfredo Pareto 1848 1923 Italian philosopher and economist b Policy Outcomes i Pareto improvement a change in conditions policy allocation of resources etc that leaves some individuals or groups better off and all other individual or groups at least as well off as they were before the change some people improve some stay the same ii Pareto efficient free market outcome without externalities no additional change can be made that is a Pareto improvement you get to a point where things can t improve from the way they were c Kaldor Hicks Compensation Principle i Some groups individuals are made worse off losers and some are made better off winners But the amount that the winners gain is more than the amount the losers lose The winners could compensate the losers ii The decision on whether or not to actually use gains to compensate the losers is a political decision not an economic decision iii Basically the benefits outweigh the costs d Benefit Cost Analysis i The compensation principle is the basis 1 What are all the benefits of a policy of action a Who are the winners b How much do they gain 2 What are all the costs a Who are the losers b How much do they lose ii If the total of all the benefits the total of all the costs then the policy action is preferred to the status quoi iii A policy action with the highest net benefit VI The problem of applying benefit cost analysis to Chesapeake Bay Issues a Many of the economic benefits related to the environment are difficult to measure i Recreation ii Aesthetics iii Preserving an ecosystem b If they are difficult to measure and thus not included in the benefit cost analysis the results of the analysis will be flawed and biased against environmental improvements c Remember What constitutes economic value i Must be valued either directly or indirectly by humans 1 NO Bay anchovies are an economically valuable species because they are a major food source for Striped Bass rockfish 2 YES Bay anchovies are an economically valuable species because they are a major food source for Striped Bass rockfish which are valued by humans for food consumption and recreation ii Measured in terms of tradeoffs what is the maximum one would be willing to pay d What do we value about the Chesapeake Bay i Seafood Commercial fishing processing industry seafood restaurants retail consumers ii Recreation fishing crabbing boating swimming beach use iii Other Waterfront Waterview home restaurant park VII Types of Values will influence how we measure them a Use value can observe behavior or choices made under different scenarios i Market value price and quantity data available to measure demand curve e g commercial fishing ii Non market value can observe choice behavior but not prices e g recreational fishing b Passive Use Values i Existence Value person s willingness to pay to preserve a resource for which he has no current or future plans for personal use ii Altruistic Value willingness to pay to preserve someone else s use value iii Bequest Value willingness to pay for use value for future generations iv Option Value