Economic Features of Materials Degradation - ACS Publications

26 Economic Features of Materials Degradation Thomas D. Crocker

Downloaded by UNIV LAVAL on July 13, 2016 | http://pubs.acs.org Publication Date: September 25, 1986 | doi: 10.1021/bk-1986-0318.ch026

Department of Economics, University of Wyoming, Laramie, WY 82071 This paper provides an overview of the economic problem of valuing materials degradation. Differences in engineering, physical science, and economics perspectives are discussed, and a general economic framework in which engineering studies of materials damages are a necessary component is set forth. Particular emphasis is placed upon the role that materials play in "making markets." It is argued that conventional economic assessment techniques neglect this role and therefore existing estimates of materials damages from acid deposition likely embody a substantial downward bias. A l l p a r t s o f s o c i e t y must r e g u l a r l y c o n f r o n t t h e problem o f " o p t i m a l l y " managing a b i o t i c m a t e r i a l s . A f a c t o r y manager . s c h o i c e o f equipment maintenance a c t i v i t i e s , a homeowner s c h o i c e o f e x t e r i o r t r i m f o r h i s house, and an a r c h i t e c t s c h o i c e o f a r t w o r k f o r a p u b l i c square can a l l be c a s t as problems o f m a t e r i a l s management. M a t e r i a l s can then be r e g a r d e d as components o f p r o c e s s e s t h a t produce d e s i r e d o u t p u t s and s e r v i c e s which may be enhanced by some human a c t i v i t i e s ( e . g . , d e v o t i n g l a b o r t o c l e a n i n g ) and h i n d e r e d by o t h e r s ( e . g . , a t m o s p h e r i c p o l l u t i o n ) . J u s t a s a farmer r e q u i r e s a d e s c r i p t i o n o f h i s crop p r o d u c t i o n p r o c e s s i n o r d e r t o a l l o c a t e h i s r e s o u r c e s e f f i c i e n t l y , t h e manager of a c o l l e c t i o n o f i n a n i m a t e m a t e r i a l s must have a d e s c r i p t i o n o f the p r o c e s s by w h i c h t h e o u t p u t s he d e s i r e s a r e produced as w e l l as the e f f e c t s on t h e s e o u t p u t s o f any f a c t o r s w h i c h he may c o n t r o l . A model o f t h e i n t e r n a l w o r k i n g s of t h e p r o d u c t i o n p r o c e s s , i n c l u d i n g t h e r o l e s t h a t m a t e r i a l s p l a y , must be a fundamental p a r t o f any economic v e r s i o n o f i t s o p t i m a l management. I n t h i s paper, I t r y t o e x p l a i n and p r e s e n t examples o f t h e economic approach, w i t h s p e c i a l emphasis upon t h e i n f o r m a t i o n r e q u i r e d from o t h e r d i s c i p l i n e s . [See Johansen(j_) and Marsden, e t a l . (.2) f o r t r e a t m e n t s w h i c h emphasize t h e c o n n e c t i o n s between e n g i n e e r i n g i n f o r m a t i o n and the economic n o t i o n o f a p r o d u c t i o n f u n c t i o n . ] 1

0097-6156/86/0318-0369S06.00/ 0 © 1986 American Chemical Society

Baboian; Materials Degradation Caused by Acid Rain ACS Symposium Series; American Chemical Society: Washington, DC, 1986.

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M A T E R I A L S D E G R A D A T I O N C A U S E D BY A C I D RAIN


I n the next s e c t i o n , I d i s c u s s d i f f e r e n c e s i n the e n g i n e e r i n g and the economic p e r s p e c t i v e s on the problem of d e s i g n i n g production processes. A g e n e r a l economic framework i n w h i c h n a t u r a l s c i e n c e s t u d i e s of m a t e r i a l s damage a r e a necessary component i s s e t f o r t h i n the t h i r d s e c t i o n . A l t h o u g h t h i s treatment a t t e m p t s t o e l u c i d a t e r a t h e r t h a n r e s o l v e , I t r y t o p r o v i d e an i d e a of the s i g n i f i c a n c e of dynamic elements i n complete s t u d i e s of m a t e r i a l s damage. The approaches d e s c r i b e d i n t h i s s e c t i o n a r e w e l l known. A f o u r t h s e c t i o n adopts the p e r s p e c t i v e of the consumer t o argue t h a t m a t e r i a l s damages have p l a u s i b l y i m p o r t a n t f e a t u r e s t h a t a r e u n c o n v e n t i o n a l i n economic assessments. I n the i n t e r e s t of communication r a t h e r than the m a x i m i z a t i o n of d i s c i p l i n a r y i n t e g r i t y , the d i s c u s s i o n throughout i s t h o r o u g h l y heuristic. The

E n g i n e e r i n g and the Economic P e r s p e c t i v e s

W h i l e drawing upon known p h y s i c a l p r i n c i p l e s , the e n g i n e e r f o c u s e s upon the d e s i g n and o p e r a t i o n of p r o c e s s e s c a p a b l e of p r o d u c i n g d e s i r e d o u t p u t s w i t h minimum e x p e n d i t u r e of v a l u e d m a t e r i a l i n p u t s . The i n p u t p r i c e s t h a t determine c o s t s a r e taken as g i v e n . The e n g i n e e r thus seeks t o s o l v e a c o n s t r a i n e d o p t i m i z a t i o n problem i n v o l v i n g d e t a i l e d knowledge of the expected c o s t s of m a t e r i a l i n p u t s . I f a l l n o n m a t e r i a l i n p u t s , such as l a b o r were f r e e , these e n g i n e e r i n g s o l u t i o n s would a l o n e , i n economic terms, d e c i d e the o p t i m a l p r o c e s s d e s i g n . However, n o n m a t e r i a l i n p u t s are a l s o c o s t l y , and b o t h m a t e r i a l and n o n m a t e r i a l c o s t s can change. E n g i n e e r i n g r e s u l t s t h u s i d e n t i f y the t e c h n i c a l l y e f f i c i e n t s e t of m a t e r i a l s c o m b i n a t i o n s w i t h i n the l a r g e r s e t of u l t i m a t e p h y s i c a l and b i o l o g i c a l l i m i t s f o r p r o d u c i n g a g i v e n l e v e l and type of d e s i r e d output. E c o n o m i s t s , such as H i l d e n b r a n d ( 3 ) , who study p h y s i c a l p r o d u c t i o n p r o c e s s e s a l s o f i x t h e i r gazes upon a c o s t m i n i m i z a t i o n o b j e c t i v e but they assume t h a t the e n g i n e e r has a l r e a d y s o l v e d h i s c o n s t r a i n e d o p t i m i z a t i o n problem. The economic t h e o r y of c o s t and p r o d u c t i o n d e s c r i b e s the e f f e c t s of v a r i a b l e i n p u t p r i c e s upon c o s t - m i n i m i z i n g c o m b i n a t i o n s of m a t e r i a l and n o n m a t e r i a l i n p u t s . From the s e t of c o s t - m i n i m i z i n g c o m b i n a t i o n s , the t h e o r y p r o v i d e s r u l e s f o r i d e n t i f y i n g t h a t c o m b i n a t i o n h a v i n g the l o w e s t m a t e r i a l and n o n m a t e r i a l c o s t s , and i t s p e c i f i e s how t h i s "minimum of the minima" w i l l be a l t e r e d as r e l a t i v e i n p u t p r i c e s change. I t i d e n t i f i e s economically e f f i c i e n t input combinations. In t h i s fundamental sense, t h e n , economics p o r t r a y s the r e s u l t s of e n g i n e e r i n g r e o p t i m i z a t i o n i n terms of the e f f e c t s of changes i n t e c h n o l o g i c a l and b i o l o g i c a l p o s s i b i l i t i e s and the r e l a t i v e p r i c e s of i n p u t s on the c o s t - m i n i m i z i n g c o m b i n a t i o n of i n p u t s . W i t h r e s p e c t t o p o l l u t i o n i m p a c t s , i t d e s c r i b e s the e f f e c t s of d i f f e r ences i n these i m p a c t s upon the c o s t s of the a l t e r n a t i v e p h y s i c a l and b i o l o g i c a l ways an economic agent has t o meet h i s o b j e c t i v e s . The e n g i n e e r c o n s i d e r s a l l i n p u t c o m b i n a t i o n s c o n s i s t e n t w i t h known p h y s i c a l laws s i n c e h i s o b j e c t i v e i s t o d e v e l o p and u l t i m a t e l y implement a d e t a i l e d p l a n f o r a p a r t i c u l a r p r o d u c t i o n p r o c e s s . Subsequent e f f o r t s t o improve upon t h i s p l a n w i l l c e n t e r upon any i n p u t o r subset of i n p u t s a p p e a r i n g t o p r o v i d e s u b s t a n t i a l opport u n i t i e s f o r c o s t r e d u c t i o n . I n c o n t r a s t , most b a s i c s c i e n t i f i c



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s t u d i e s of m a t e r i a l s damage from a i r p o l l u t i o n ( e . g . , Nriagu(4_) have c o n c e n t r a t e d on the p o l l u t i o n impacts f o r a s i n g l e i n p u t c o m b i n a t i o n i n some p r o d u c t i o n p r o c e s s . Many have s t u d i e d the impact i n d e p e n d e n t l y of any c o s t - m i n i m i z i n g p r o d u c t i o n p r o c e s s . One need not depend o n l y upon economic arguments t o r e c o g n i z e how m i s l e a d i n g the f a i l u r e t o c o n s i d e r the p l a c e of the a f f e c t e d m a t e r i a l i n a p r o d u c t i o n p r o c e s s can be. Natural science findings w i l l o f t e n s e r v e the purpose. Sereda(5) p o i n t s o u t , f o r example, t h a t s u l p h u r compounds, by r e a c t i n g w i t h c a r b o n a t e s , cause b l i s t e r i n g , s c a l i n g , and l o s s of s u r f a c e c o h e s i o n i n s t o n e . These r e a c t i o n s induce s i m i l a r e f f e c t s i n neighboring m a t e r i a l s which would o t h e r w i s e be immune t o a t t a c k . Hence, a t b e s t , the f o c u s has been upon a s m a l l s e t of the f e a s i b l e i n p u t c o m b i n a t i o n s . These h i g h l y d e t a i l e d s t u d i e s t y p i c a l l y assume t h a t o t h e r i n p u t t y p e s and q u a n t i t i e s remain c o n s t a n t . They t h e r e f o r e f r e q u e n t l y f a i l t o p r o v i d e the d e s i g n i n f o r m a t i o n the economist r e q u i r e s i f he i s t o e s t i m a t e the economic consequences of the changes i n c o s t - m i n i m i z i n g input combinations that p o l l u t i o n induces. The b a s i c s c i e n c e , s e p a r a b l e , p i e c e - b y - p i e c e approach t o the study of p o l l u t i o n impacts upon m a t e r i a l s makes t r u l y awesome the t a s k of c o v e r i n g and s y n t h e s i z i n g the t e c h n i c a l l y e f f i c i e n t o r even the f e a s i b l e i n p u t c o m b i n a t i o n s . I n m a n u f a c t u r i n g a l o n e , thousands of d i f f e r e n t t y p e s of m a t e r i a l i n p u t s e x i s t . Each i n p u t t y p e i s , i n t u r n , embodied i n one or more p r o d u c t i o n p r o c e s s e s o r o u t p u t s w h i c h may appear i n a v a r i e t y of forms and w h i c h can be put t o a number of d i s t i n c t i v e u s e s . Moreover, t h e r e may be e n v i r o n m e n t a l c o f a c t o r s such as temperature and m o i s t u r e t h a t a c t i n c o n c e r t w i t h p o l l u t i o n t o a g g r a v a t e o r t o s o f t e n i t s impact. B a s i c s c i e n c e s t u d i e s of p o l l u t i o n impacts upon m a t e r i a l s have r e c e i v e d l i t t l e guidance about w h i c h of t h e s e embodiments, v a r i e t i e s , and uses take on economic s i g n i f i c a n c e . One key problem, t h e n , i s t o r e c o n c i l e the b a s i c s c i e n c e and the economic approaches t o m a t e r i a l s damages by d e v e l o p i n g c r i t e r i a f o r d e c i d i n g how much m a t e r i a l s s c i e n c e d e t a i l must be r e t a i n e d i n any p a r t i c u l a r c i r c u m s t a n c e . When one of the s e v e r a l r e a s o n a b l e o b j e c t i v e s of m a t e r i a l s s c i e n c e p o l l u t i o n impact s t u d i e s i s t o p r o v i d e i n f o r m a t i o n u s e f u l f o r e s t i m a t i n g economic consequences, the b a s i c q u e s t i o n i s whether more o r l e s s m a t e r i a l s d e t a i l w i l l a l t e r the economic e s t i m a t e s i n a n o n t r i v i a l way. Both the m a t e r i a l s s c i e n t i s t and the economist must r e f i n e t h e i r knowl e d g e such t h a t the r e l a t i o n s between p o l l u t i o n and m a t e r i a l s damages are d e f i n e d i n d i m e n s i o n s c o r r e s p o n d i n g t o t h o s e i n w h i c h economic agents choose t o d e f i n e them. Because the p r a c t i c i n g e n g i n e e r i s r e s p o n s i v e t o economic phenomena, h i s i n s i g h t s can be h i g h l y i n s t r u c t i v e i n p r o s p e c t i v e attempts to capture these d i mensions. The

Economic Assessment Problem

The o b j e c t i v e of e f f o r t s t o a s s e s s the economic consequences of p o l l u t i o n - i n d u c e d m a t e r i a l s damages i s t o e s t i m a t e d i f f e r e n c e s i n the sums of consumer s u r p l u s e s and p r o d u c e r q u a s i - r e n t s over two o r more p o l i c y - r e l e v a n t p o l l u t i o n l e v e l s . Consumer s u r p l u s p o r t r a y s the d i f f e r e n c e between the maximum a r e p r e s e n t a t i v e consumer would be w i l l i n g t o commit h i m s e l f t o pay f o r a g i v e n q u a n t i t y of a



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commodity and what he i n f a c t has t o pay. S i m i l a r l y , a producer q u a s i - r e n t i s the d i f f e r e n c e between what the owner of the i n p u t s to a p a r t i c u l a r a c t i v i t y r e c e i v e s f o r s u p p l y i n g a p a r t i c u l a r output q u a n t i t y and the minimum he must r e c e i v e i n o r d e r t o be w i l l i n g to commit t o t h a t s u p p l y . The sum of consumer s u r p l u s and p r o d u c e r q u a s i - r e n t i s thus a measure of the n e t b e n e f i t s a s s o c i a t e d w i t h the consumption and the p r o d u c t i o n of a commodity. The o b s e r v a b l e u n i t p r i c e s of o t h e r commodities t h a t p r o v i d e him e q u a l s a t i s f a c t i o n s e t an upper bound t o the consumer's maximum w i l l i n g n e s s - t o pay; the o b s e r v a b l e e a r n i n g s h i s i n p u t s c o u l d o b t a i n i n o t h e r a c t i v i t i e s s e t a lower bound on the minimum reward t h e p r o d u c e r must r e c e i v e . Maximum w i l l i n g n e s s - t o - p a y r e p r e s e n t s demand; the minimum n e c e s s a r y reward d e f i n e s s u p p l y . F i g u r e 1 t r a c e s the s e t of f a c t o r s t h a t must be accounted f o r i f a complete assessment of the economic consequences of p o l l u t i o n induced m a t e r i a l s damages i s t o be performed. Assume t h a t a m a n u f a c t u r e r i s t r y i n g t o d e c i d e what k i n d and how much of a p r o d u c t t o produce. The m a t e r i a l s used i n some p r o d u c t i o n p r o c e s s e s f o r t h e s e p r o d u c t s a r e s u s c e p t i b l e t o a i r p o l l u t i o n damages. F o r a g i v e n l e v e l of expected a i r p o l l u t i o n e x p o s u r e s , the p o r t i o n of the f i g u r e l y i n g t o the l e f t of t h e l e f t m o s t d o t t e d l i n e r e p r e s e n t s t h e problem of d e t e r m i n i n g the l e a s t c o s t l y way of p r o d u c i n g a g i v e n p r o d u c t . I t answers the q u e s t i o n : g i v e n the a l t e r n a t i v e ways I have t o produce any p a r t i c u l a r l e v e l of o u t p u t f o r t h i s p r o d u c t , which ways a l l o w me t o employ the minimum c o m b i n a t i o n s of t h o s e c o s t l y i n p u t s p h y s i c a l l y necessary f o r p r o d u c t i o n . V a r i a t i o n s i n p o l l u t i o n l e v e l s w i l l a l t e r t h e s e minimum n e c e s s a r y c o m b i n a t i o n s . I d e n t i f i c a t i o n of t h e s e c o m b i n a t i o n s f o r each p o l l u t i o n l e v e l e n a b l e s the m a n u f a c t u r e r t o maximize the o u t p u t of the p r o d u c t t h a t he o b t a i n s from a g i v e n e x p e n d i t u r e on i n p u t s . However, s o l u t i o n of t h i s problem cannot t e l l him which of t h e a l t e r n a t i v e p r o d u c t s to produce: i t can o n l y show the l e a s t c o s t l y p l a n f o r p r o d u c i n g a p a r t i c u l a r p r o d u c t , and the manner i n which t h i s p l a n w i l l v a r y as air pollution varies. The p o r t i o n of F i g u r e 1 l y i n g between the d o t t e d l i n e s d e p i c t s t he problem of c h o o s i n g among the a l t e r n a t i v e p r o d u c t s , g i v e n p r i o r i d e n t i f i c a t i o n of the l e a s t c o s t l y time and means w i t h w h i c h t o produce each good. I n t h i s p o r t i o n , the p r o d u c e r i s a l l o w e d t o adapt by s u b s t i t u t i n g p r o d u c t s t h a t a r e more o r l e s s prone t o q u a n t i t y and/or q u a l i t y r e d u c t i o n s from expected a i r p o l l u t i o n l e v e l s . The problem of t h i s m i d d l e p o r t i o n can be c o n t r a s t e d w i t h t he problem of the f i r s t p o r t i o n , where the producer c o u l d o n l y adapt by m a n i p u l a t i n g the time and/or the p r o c e s s used t o produce a p a r t i c u l a r p r o d u c t . B a s i c a l l y , the p r o d u c e r has a s e t of a l t e r n a t i v e p r o d u c t s d i c t a t e d t o him by b i o l o g i c a l and p h y s i c a l s c i e n c e knowledge of the laws of n a t u r e , as w e l l as by i n s t i t u t i o n a l c o n s t r a i n t s ( t h e laws o f man) l i m i t i n g a l l o w a b l e p r o c e s s e s f o r p r o d u c i n g t h e s e goods. F o r each of t h e s e known and a l l o w a b l e p r o c e s s e s f o r each good, he e s t i m a t e s the l e a s t c o s t time and p r o c e s s ; f o r g i v e n output p r i c e s and p o l l u t i o n l e v e l s , he then s e l e c t s the c o m b i n a t i o n of goods t h a t he e x p e c t s t o g e n e r a t e t h e maximum q u a s i - r e n t . In the r i g h t m o s t p o r t i o n of F i g u r e 1 r e s i d e s the consumer. There a r e two r o u t e s whereby p o l l u t i o n - i n d u c e d m a t e r i a l s damages can i n f l u e n c e h i s b e h a v i o r , thus a l t e r i n g t h e consumer s u r p l u s he



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o b t a i n s from the output i n q u e s t i o n . F i r s t , an i n c r e a s e (decrease) i n m a t e r i a l s damage t h a t i s r e g i s t e r e d i n s e r v i c e f l o w r e d u c t i o n s w i l l i n c r e a s e (decrease) c o s t s . C o n s e q u e n t l y , the minimum p r i c e the producer must r e c e i v e i n o r d e r t o be w i l l i n g t o commit h i m s e l f to supply any g i v e n q u a n t i t y of the output w i l l i n c r e a s e (de c r e a s e ) . I n a d d i t i o n , a l t e r e d l e v e l s of a i r p o l l u t i o n may impact the a t t r i b u t e s of the o u t p u t , thus changing the consumer's w i l l i n g ness-to-pay and the consumer s u r p l u s he a c q u i r e s from any q u a n t i t y of the output. The change i n c o s t i m p l i e s a s h i f t i n the p r o d u c e r ' s supply f u n c t i o n , w h i l e the change i n w i l l i n g n e s s - t o - p a y i s r e p r e sented by a s h i f t i n the consumer's demand f u n c t i o n . Both r e s u l t i n a change i n the market p r i c e of the output. G i v e n t h a t p r o d u c e r s and consumers have a l r e a d y adapted so as to m i n i m i z e t h e i r p r o s p e c t i v e l o s s e s , or t o maximize t h e i r p r o s p e c t i v e g a i n s , F i g u r e 2 d e p i c t s f o r a p r e d e t e r m i n e d time i n t e r v a l one example of the changes an a i r p o l l u t i o n i n c r e a s e can have upon consumer s u r p l u s and producer q u a s i - r e n t . The a i r p o l l u t i o n i n c r e a s e reduces the d e s i r a b l e p r o p e r t i e s of the o u t p u t , making s m a l l e r the consumer's w i l l i n g n e s s - t o - p a y and c a u s i n g h i s demand f u n c t i o n t o s h i f t from D to D . I t s i m u l t a n e o u s l y i n c r e a s e s the l e a s t - c o s t of p r o d u c i n g any p a r t i c u l a r output q u a n t i t y , thereby c a u s i n g an upward s h i f t i n the supply f u n c t i o n ^ f r o m S to S . Market p r i c e f o r the output drops from Ρ t o Ρ , p a r t l y because of the g r e a t e r r e l a t i v e magnitude of the s h i f t i n the demand f u n c t i o n , and p a r t l y because of i t s l e s s e r r e l a t i v e s l o p e . Consumer s u r p l u s was the a r e a ^ P Q D ; i t i s now the area dP'e. Producer quasi-rent was the a r e a f P b; i t i s now the a r e a gP'e. T o t a l economic s u r p l u s from the p r o d u c t i o n and use of the output i n q u e s t i o n i s thus reduced by the a r e a fghb p l u s the a r e a adeh. Of c o u r s e , a l t e r n a t i v e r e l a t i v e s h i f t s i n demand and supply r e l a t i o n s , r e f l e c t i n g d i f f e r e n t impacts i n the p r o d u c t i o n and consumption s e c t o r s , w i l l y i e l d r e s u l t s of a m o d i f i e d c h a r a c t e r . For example, i f the demand curve s h i f t s t o D" r a t h e r than^D', market p r i c e w i l l r i s e t o P". I f the supply s h i f t from S to S' i s s m a l l enough, p r o d u c e r s c o u l d thus a c t u a l l y see an i n c r e a s e i n t h e i r q u a s i - r e n t s . Q u a l i t a t i v e r e s u l t s a r e unchanged, however: a l t e r a t i o n s i n p r o d u c e r q u a s i - r e n t s and consumer s u r p l u s r e s u l t from the p o l l u t i o n - c a u s e d changes i n the two s e c t o r s . These two examples serve t o i l l u s t r a t e the i s s u e s of concern here: consumers and p r o d u c e r s can b e a r v e r y d i f f e r e n t economic g a i n s o r l o s s e s depending on the r e l a t i v e s h i f t s of the demand and supply f u n c t i o n s . Moreover, the d i s t r i b u t i o n of these economic consequences can d i f f e r d r a s t i c a l l y w i t h the s l o p e of the demand f u n c t i o n r e l a t i v e to the s l o p e of the supply f u n c t i o n . The above o b s e r v a t i o n s s e t out i n the most g e n e r a l of terms the substance of the problem of c a l c u l a t i n g the economic b e n e f i t s of c o n t r o l l i n g p o l l u t i o n - r e l a t e d m a t e r i a l s damages. Dynamic i s s u e s c o m p l i c a t e t h i s r a t h e r s t r a i g h t f o r w a r d substance. [See C r o c k e r and Cummings(6) f o r a f o r m a l a n a l y t i c a l t r e a t m e n t . ] Consider, f o r example, the output and i n v e s t m e n t d e c i s i o n problem c o n f r o n t e d by a f i r m whose e x i s t i n g c a p i t a l s t o c k does not s u f f e r from a i r p o l l u t i o n exposures. I n c r e a s e d c u r r e n t o u t p u t , because i t i n c r e a s e s wear and t e a r and reduces the e f f e c t i v e n e s s of a m a i n t e nance program, draws down the c a p i t a l s t o c k a v a i l a b l e f o r a l l f u t u r e p e r i o d s . I n any s i n g l e f u t u r e p e r i o d , p r o d u c t i o n c o s t s w i l l


374


— CONSUMER

-PRODUCERCOSTS OF SUBSTITUTE PRODUCTS

POLLUTION

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ALTERNATIVE MATERIALS PRODUCTION" REQUIREMENTS PROCESSES

'PUT

PRODUCT CHOICE COSTS OF SUBSTITUTES

MATERIALS RESPONSES- OPERATING "^ COSTS Downloaded by UNIV LAVAL on July 13, 2016 | http://pubs.acs.org Publication Date: September 25, 1986 | doi: 10.1021/bk-1986-0318.ch026

l

MAINTENANCE AND REPLACEMENT COST• OF CAPITAL F i g u r e 1.

-MARKET PRICE The s o u r c e s of economic consequences

PRICE

F i g u r e 2.

QUANTITY Changes i n p r o d u c e r s q u a s i - r e n t and consumer's s u r p l u s . 1



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be i n c r e a s e d because l e s s c a p i t a l w i t h w h i c h t o combine o t h e r i n p u t s w i l l be a v a i l a b l e . Moreover, s i n c e the e x i s t i n g c a p i t a l s t o c k w i l l be d e p l e t e d more r a p i d l y , some o p t i o n s f o r p r o d u c i n g o u t p u t s i n a l l f u t u r e p e r i o d s are f o r e c l o s e d . The o p p o r t u n i t y l o s s e s a s s o c i a t e d w i t h the f o r e c l o s e d o p t i o n s a r e u s e r c o s t s . They can be viewed as foregone f u t u r e revenues. A l t e r n a t i v e l y , the f i r m can i n c r e a s e the p r e s e n t v a l u e of i t s net revenues i n a l l f u t u r e p e r i o d s by r e d u c i n g c u r r e n t p e r i o d p r o d u c t i o n and/or by i n v e s t i n g , perhaps v i a b e t t e r maintenance, i n c u r r e n t p e r i o d c a p i t a l s t o c k which w i l l , a t the expense of c u r r e n t o u t p u t , reduce f u t u r e p r o d u c t i o n c o s t s and u s e r c o s t s . More g e n e r a l l y , s i n c e the f i r m ' s output and i n v e s t m e n t d e c i s i o n s of each p e r i o d a f f e c t the c a p i t a l s t o c k a v a i l a b i l i t i e s and the o u t p u t p o s s i b i l i t i e s of f u t u r e p e r i o d s , a s e q u e n t i a l problem e x i s t s i n w h i c h the impact t h a t c u r r e n t d e c i s i o n s have upon the accumulated f u t u r e consequences of p a s t d e c i s i o n s must be weighed. Suppose now t h a t a i r p o l l u t i o n i n c r e a s e s . A l l e l s e e q u a l t h i s i s e q u i v a l e n t t o a r e d u c t i o n i n c u r r e n t p e r i o d maintenance a c t i v ities. I t s consequence i s a r e d u c t i o n i n f u t u r e c a p i t a l s t o c k s . P r o d u c t i o n c o s t s and u s e r s c o s t s j n c r e a ^ e . These h i g h e r c o s t s r e s u l t i n a l e f t w a r d s h i f t from S t o S of the s u p p l y f u n c t i o n i n F i g u r e 2. I f demand i s unchanged, h i g h e r f u t u r e p r i c e s and lower f u t u r e o u t p u t s r e s u l t . The d i s c o u n t e d v a l u e of the stream of changes i n q u a s i - r e n t s r e p r e s e n t the economic consequences of the a i r p o l l u t i o n i n c r e a s e f o r the f i r m . I m p l i c i t i n the d i s c u s s i o n immediately above i s the assumption t h a t the f i r m i s f o r e v e r l o c k e d i n t o a p a r t i c u l a r p r o d u c t i o n p r o c e s s and o u t p u t b u n d l e . However, the a i r p o l l u t i o n i n c r e a s e may d i f f e r e n t i a l l y a f f e c t the p r o d u c t i o n and the u s e r c o s t s of a l t e r n a t i v e p r o c e s s e s and b u n d l e s . The f i r m w i l l s u b s t i t u t e toward the l e a s t c o s t l y a l t e r n a t i v e . B r i c k r a t h e r than p a i n t e d wood may now, f o r example, e n c l o s e the f i r m ' s o f f i c e s . A complete assessment of the q u a s i - r e n t consequences of the a i r p o l l u t i o n i n c r e a s e f o r the f i r m r e q u i r e s t h a t these induced t e c h n i c a l changes as w e l l as p r o d u c t i o n and u s e r c o s t changes be t a k e n i n t o account. As F i g u r e 2 d e m o n s t r a t e s , these changes f o r the f i r m w i l l a l s o have consumer s u r p l u s consequences. A l l c a p i t a l s t o c k s a r e not owned by f i r m s ; many a r e owned by consumers. The b u i l d i n g of the p r e v i o u s paragraph c o u l d be a r e s i d e n c e r a t h e r than an o f f i c e . F u n d a m e n t a l l y , the a n a l y t i c a l problem i s no d i f f e r e n t s i n c e d i r e c t a n a l o g s of changes i n t e c h n i q u e , p r o d u c t i o n c o s t s , and u s e r c o s t s a l s o e x i s t f o r consumers. [See C r o c k e r and Cummings(6)]. I n a t l e a s t one r e s p e c t however, t h e r e i s a b i g d i f f e r e n c e between the two s e t s of problems: the a e s t h e t i c f e a t u r e s of m a t e r i a l s are l i k e l y t o be s i g n i f i c a n t f o r consumers. To the e x t e n t t h a t s o i l i n g and c o r r o s i o n a f f e c t these f e a t u r e s , the p s y c h o p h y s i c a l p r o p e r t i e s of human p e r c e p t i o n s and p e r c e p t i o n t h r e s h o l d s w i l l i n f l u e n c e economic consequences. I n p a r t i c u l a r , t h e r e i s u n l i k e l y t o be even an approximate one-to-one correspondence between p h y s i c a l s o i l i n g and c o r r o s i o n measures and a e s t h e t i c p e r c e p t i o n s . Numerous p s y c h o p h y s i c a l e x p e r i m e n t s i n v o l v i n g human p e r c e p t i o n s of sensory e v e n t s such as l i g h t and c o l o r changes have been c o d i f i e d i n the form of Fechner's law, w h i c h s t a t e s t h a t the s t r e n g t h of a j u s t n o t i c e a b l e increment i n a s e n s a t i o n i s p r o p o r t i o n a l t o the l o g a r i t h m of i t s s t i m u l u s [ B a i r d



376


and Noma(7)]. These p s y c h o p h y s i c a l r e s u l t s are c o n s i s t e n t w i t h t h a t c l a s s of arguments i n economics w h i c h p o s i t s a " t h r e s h o l d of s e n s i t i v i t y " [Georgescu-Roegan(8) , (9) o r a "zone of i n d i f f e r e n c e " [ L u c e ( l O ) ; M a r c h ( l l ) ] w i t h i n w h i c h c h o i c e s a r e randomly made or an " i n e r t i a of c h o i c e " p r e v a i l s [ D e v l e t o g l o u ( 1 2 ) ] . The l i k e l y absence of a known isomorphism between p h y s i c a l measures and human p e r c e p t i o n s of m a t e r i a l s damage i m p l i e s t h a t assessment s t u d i e s must develop n o n a r b i t r a r y mapping f u n t i o n s . The presence of p e r c e p t i o n t h r e s h o l d s means t h a t u n p e r c e i v e d changes i n p h y s i c a l m a t e r i a l damages w i l l have no economic consequences f o r the consumer [Watson and J a k s c h ( 1 3 ) ] ; once t h e t h r e s h o l d i s c r o s s e d , i t can a l s o mean t h a t the m a r g i n a l b e n e f i t s of reduced damages w i l l be i n c r e a s i n g and t h a t the m a r g i n a l c o s t s of i n c r e a s e d damages a r e d e c r e a s i n g [ C r o c k e r ( 1 4 ) ] . A c c o u n t i n g f o r these d i s c o n t i n u i t i e s and nonconvex economic damage f u n c t i o n s r e q u i r e s a s u b s t a n t i a l l y more s o p h i s t i c a t e d a n a l y t i c a l and e m p i r i c a l treatment of the consumer's problem than i s c o n v e n t i o n a l i n most assessments of the economic b e n e f i t s of p o l l u t i o n c o n t r o l . [See, f o r example, Arrow, e t a l . ( 1 5 ) and Hausman(16)]. Existence

Values

R e c e n t l y , the e n v i r o n m e n t a l economics l i t e r a t u r e [ e . g . , S c h u l z e , e t a l . ( 1 7 ) ] has d i s t i n g u i s h e d between " e x i s t e n c e v a l u e " and "use v a l u e , " where the former r e f e r s t o something f o r w h i c h an i n d i v i d u a l i s w i l l i n g t o s a c r i f i c e some of h i s w e a l t h even though he does not and w i l l not use the good i n q u e s t i o n . G e n e r a l l y , the examples p r o v i d e d are unique n a t u r a l , b i o l o g i c a l , o r c u l t u r a l a s s e t s such as the Grand Canyon, whooping c r a n e s , and the S t a t u e of L i b e r t y . With v e r y few e x c e p t i o n s , however, the l i t e r a t u r e f a i l s t o supply any f o r m a l framework f o r a n a l y z i n g the v a l u e i m p l i c a t i o n s of e x i s t e n c e v a l u e . M i l l e r and Menz(18) i s the f i r s t e x c e p t i o n of which t h i s a u t h o r i s aware. They p r e s e n t a model i n w h i c h s t o c k s as w e l l as f l o w s of s e r v i c e s from w i l d l i f e a r e arguments i n the o b j e c t i v e f u n c t i o n of the consumer's c o n s t r a i n e d u t i l i t y m a x i m i z a t i o n problem. When s t o c k s appear t h u s l y , they show t h a t a c t i v i t i e s , such as c u r r e n t s e r v i c e f l o w s o r a i r p o l l u t i o n , w h i c h d e p l e t e the s t o c k e n t a i l a u s e r c o s t . For the consumer as w e l l as the p r o d u c e r , i t f o l l o w s t h a t damages t o the s t o c k must be examined not o n l y i n terms of foregone c u r r e n t s e r v i c e f l o w s but a l s o i n terms of f o r e c l o s e d f u t u r e o p t i o n s . The l a t t e r i n c l u d e foregone f u t u r e s e r v i c e f l o w s and t h e u t i l i t y v a l u e of the s t o c k . The M i l l e r and Menz(18) argument i s a p p e a l i n g ; however, t h e r e a r e a d d i t i o n a l ways of a n a l y t i c a l l y m o t i v a t i n g e x i s t e n c e v a l u e s . In p a r t i c u l a r , the i n d i v i d u a l may r e g a r d a s s e t s t h a t he does not own but t o w h i c h he has p o t e n t i a l a c c e s s as p a r t of h i s w e a l t h . H i s unowned a s s e t s thus e n t e r h i s c o n s t r a i n t system r a t h e r than h i s o b j e c t i v e f u n c t i o n . Though f o r him they a r e c o m p l e t e l y i l l i q u i d , they may n e v e r t h e l e s s be combined as i n p u t s w i t h o t h e r a s s e t s t h a t the i n d i v i d u a l does own so as t o produce a c u r r e n t p e r i o d cash f l o w . P l a u s i b l e examples range from the mundane such as t o l l b r i d g e s w h i c h reduce the c o s t s of t r a n s p o r t i n g goods, t o the e x o t i c such as a monument w h i c h i n s p i r e s b e l i e f i n and d i s c o u r a g e s d e v i a n t b e h a v i o r from the c u l t u r a l and economic norms w h i c h a s o c i e t y p r o f e s s e s . The unowned a s s e t s enhance t h e i n d i v i d u a l ' s a b i l i t y t o


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d i s c o v e r , c r e a t e , and e x p l o i t d i f f e r e n c e s i n wants and advantages among p e o p l e , thus g i v i n g r i s e t o g a i n s from t r a d e w i t h o t h e r s and with nature. C o n s i d e r t h e f o l l o w i n g example from C r o c k e r and Cummings(6). The s t r u c t u r e s and t h e s t a t u a r y o f an urban p u b l i c square p r o v i d e an a e s t h e t i c a l l y p l e a s i n g backdrop f o r t h e s i t e - s p e c i f i c p r o d u c t i o n o f p r i v a t e m u s i c a l performances and a r t w o r k . The backdrop reduces t h e a r t i s t s c o s t s o f a t t r a c t i n g an a u d i e n c e t h a t might purchase t h e i r work. Away from t h e s q u a r e , t h e u n i t c o s t s o f a t t r a c t i n g an a u d i e n c e exceed any a r t i s t ' s r e s e r v a t i o n p r i c e f o r p r o d u c i n g a r t . I n s h o r t , t h e a r t would n o t be s u p p l i e d i n t h e absence o f t h e square. I n e s s e n c e , t h e s e a s s e t s reduce t h e i n d i v i d u a l ' s c o s t s o f t r a n s a c t i n g and, by making markets l e s s t h i n , thereby expand h i s t r a d i n g o p p o r t u n i t i e s . The u n i t c o s t o f t r a n s a c t i n g v a r i e s d i r e c t l y w i t h t h e t h i n n e s s of markets. Baumol(19) p o i n t s out t h a t p u t t i n g any c o o r d i n a t i o n system l i k e a market i n p l a c e i n v o l v e s lumpy s e t - u p c o s t s t h a t imply t h e presence o f s c a l e economies. Moreover, t h i n markets reduce demands f o r goods. C o n s e q u e n t l y , p r i c e s f a l l , p r o d u c t i o n i s d i s c o u r a g e d , and t h e expected w a i t i n g time r e q u i r e d t o s e l l a t any p a r t i c u l a r p r i c e i s increased. F i n a l l y , as Clower and H o w i t t ( 2 0 ) show, t h e owned a s s e t s i n c r e a s e t h a t t h e i n d i v i d u a l must s t o r e i n o r d e r t o a c h i e v e h i s o p t i m a l l i f e t i m e consumption p a t h , thus r a i s i n g h i s h o l d i n g c o s t s . W i t h t h i n m a r k e t s , he i s l e s s a b l e t o enjoy t h e f i n e a r t s when and where he wants t o and he has t o worry more about from where h i s next meal i s coming. C o n v e n t i o n a l b e n e f i t s assessment t e c h n i q u e s d i s r e g a r d t r a n s a c t i o n s c o s t s . They t h e r e f o r e i m p l i c i t l y t a k e t h e s i z e o f t h e market, as d e f i n e d by t h e number o f p o t e n t i a l t r a d i n g p a r t n e r s , as given. Some o f t h e i m p l i c a t i o n s f o r b e n e f i t s assessments o f a l l o w i n g t h e s i z e o f t h e market t o v a r y c a n be c a p t u r e d by a s i m p l e model adapted from a framework o r i g i n a l l y s e t f o r t h by Brunner and MeltzerCn) . L e t t h e i n d i v i d u a l be r e p r e s e n t e d by a t w i c e d i f f e r e n t i a b l e , quasi-concave u t i l i t y f u n c t i o n


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(1)

( 2 )

where t ^ . i s t h e q u a n t i t y o f good i n t r a n s f o r m e d i n t o a u n i t o f good j» ?^. i s t h e p r i c e r a t i o , p./p., and Q i s a v e c t o r o f a s s e t s , whether owned o r unowned, w h i c h enhance t h e i n d i v i d u a l s a c c e s s t o trading partners. Some elements of Q c o u l d a l s o appear i n ( 1 ) . For s i m p l i c i t y , P.. i s c o n s i d e r e d t o be exogenous, and t . . ( . ) i s homogeneous o f degree one. L e t t h e u n i t c o s t o f t ^ . t o t h e i n d i v i d u a l be c^.. A c . , need not be e q u a l t o c „ . The u n i t c o s t o f exchanging clean a i r l i r b u i l d i n g m a t e r i a l ^ w i l l l i k e l y d i f f e r from t h e u n i t c o s t o f e x changing b u i l d i n g m a t e r i a l s f o r c l e a n a i r , f o r example. The c.. r e p r e s e n t t h e i n d i v i d u a l ' s c o s t s o f g a i n i n g a c c e s s t o o r engaging Q. They c o u l d r e p r e s e n t t h e t o l l on a b r i d g e o r highway o r even the o p p o r t u n i t y c o s t o f t h e time t h e i n d i v i d u a l expends promoting s o c i a l cohesion. 1


378

in


The i n d i v i d u a l ' s problem i s t o maximize h i s expected u t i l i t y (1) s u b j e c t t o t h e budget c o n s t r a i n t


Σ ρ (W - Y ) - Σ Σ c. . t . . = 0 η η η . . ιι ιι η ι j

(3)

where W i s a measure o f t h e i n d i v i d u a l ' s endowment a t t h e b e g i n n i n g of t h e p e r i o d . (W - Y ) i s t h e r e f o r e t h a t p a r t o f h i s o r i g i n a l endowment w h i c h t h e i n d i v i d u a l r e t a i n s a t t h e end of t h e p e r i o d . E x p r e s s i o n (3) says t h a t t h e v a l u e o f what he r e t a i n s a t t h e end o f the p e r i o d most equal t h e net v a l u e of each good he buys and s e l l s p l u s t h e c o s t o f exchange. From t h e p e r s p e c t i v e o f t h e market, t h i s n e t v a l u e must be z e r o ; t h a t i s , t h e market o r a c c o u n t i n g v a l u e o f t h e goods t h e i n d i v i d u a l s e l l s must e q u a l t h e market o r a c c o u n t i n g v a l u e o f those he buys. The L a g r a n g i a n f o r t h i s problem i s L = U( ) + Σρ λ [(W - Y ) - Σ lc..t..] n η η η . . ιι ιι η ι j r

(4)

Note t h a t i n c o n t r a s t t o t h e t r a d i t i o n a l statement o f t h e consumer's problem, each good has i t s own m u l t i p l i e r , λ , w h i c h r e f l e c t s d i f f e r e n c e s among goods i n t h e ease o f convertïng them i n t o money and thence i n t o t h e expected m a r g i n a l u t i l i t y of money income. One o f t h e f i r s t - o r d e r c o n d i t i o n s f o r (4) i s

ljr-λρχ 3Y

(5)

r

n n η

η w h i c h , as u s u a l , says t h a t i n e q u i l i b r i u m t h e m a r g i n a l u t i l i t y o f a p a r t i c u l a r good w i l l be e q u a l t o t h e m a r g i n a l v a l u e o f t h e e x p e n d i t u r e s on i t . However, t h e presence of λ i m p l i e s t h a t d i f f e r e n c e s i n t r a n s a c t i o n s c o s t s among goods c a u s e , f r o m t h e i n d i v i d u a l ' s p e r s p e c t i v e , a g i v e n change i n t h e d o l l a r v a l u e o f an endowment t o g e n e r a t e d i f f e r e n t shadow p r i c e s f o r d i f f e r e n t goods. T h i s r e s u l t e n a b l e s one t o develop a s i m p l e diagrammatic i n s i g h t i n t o t h e r o l e t h a t Q p l a y s i n d e t e r m i n i n g t h e v a l u e o f a good t o t h e i n d i v i d u a l consumer. I n F i g u r e 3, t h e i n d i v i d u a l ' s i n i t i a l endowment of Y^ and Y i s a t X. I f t h e exchange a c t i s c o s t l y , an i n i t i a l endowment o f Q i m p l i e s a budget c o n s t r a i n t o f VXV, whereas i f t h e exchange a c t i s c o s t l e s s , t h e budget c o n s t r a i n t i s MM. The s l o p e of MM c o r r e s p o n d s to i n ( 2 ) . When t h e i n d i v i d u a l has^exhausged a l l g a i n s from t r a d e , he w i l l f i n i s h t h e p e r i o d w i t h Y^ and i f MM i s o p e r a t i v e . I J VXV i s t h e o p e r a t i v e budget c o n s t r a i n t , he w i l l s e l e c t Y^ and Y^. The k i n k i n VXV i m p l i e s t h a t t h e t r a n s a c t i o n c o s t s o f exchang i n g Y^ f o r Y^ d i f f e r from t h e t r a n s a c t i o n s c o s t s of exchanging Y„ f o r Y^. I f some p o i n t on MM o t h e r than X c o n s t i t u t e s t h e i n i t i a l endowment, c o s t l y a c t s of exchange w i l l mean t h a t a budget con s t r a i n t d i f f e r e n t from e i t h e r VXV o r MM may be o p e r a t i v e because the c o s t s o f exchange a c t s may d i f f e r by t h e r e l a t i v e q u a n t i t i e s o f goods i n t h e i n i t i a l endowment as w e l l as by t y p e s o f goods. Thus the i n d i v i d u a l ' s budget c o n s t r a i n t may v a r y a c c o r d i n g t o t h e form n




CROCKER


380



i n w h i c h h i s i n i t i a l endowment was accumulated, a l t h o u g h the market v a l u e of t h i s endowment as determined by Ρ may be i d e n t i c a l f o r many c o m b i n a t i o n s of and Y^. S i n c e c o s t s of exchange d i f f e r a c c o r d i n g t o the o r i g i n a l (Y^,Y^) c o m b i n a t i o n , each c o m b i n a t i o n w i l l r e s u l t i n a d i f f e r e n t , g e n e r a l l y n o n l i n e a r budget c o n s t r a i n t . I t f o l l o w s t h a t , from the i n d i v i d u a l ' s p e r s p e c t i v e , a d o l l a r i s not an i n v a r i a n t p e c u n i a r y measure. I n s t e a d , the s u b j e c t i v e v a l u e of an a d d i t i o n a l d o l l a r depends on the form of the income change, i . e . , on the good i n w h i c h the increment i s embodied. Moreover, i t appears t h a t r e a l i z e d market b e h a v i o r s and the i n d i v i d u a l ' s s u b j e c t i v e g a i n s from these b e h a v i o r s a r e dependent not o n l y on money incomes and r e l a t i v e market p r i c e s of goods, but a l s o upon the c o m b i n a t i o n of goods i n the i n d i v i d u a l ' s endowment. That i s , r a t h e r than the customary Y^ = Υ (ρ , ... , ρ , W), η η ι η the demand f u n c t i o n f o r a good i s

i = 1, ...

, η

Υ

(6)

= Υ (ρ, ... , ρ , W,, ... , W ) (7) η η η 1 η [See Samuelson and Sato(22) f o r a development of the i m p l i c a t i o n s f o r consumer t h e o r y of t h i s f o r m u l a t i o n ] . Now c o n s i d e r changes i n the Q v e c t o r of (2) w h i c h tend t o reduce c o s t s of exchange. I n immediate terms, c o n s i d e r an a c i d d e p o s i t i o n r e d u c t i o n which n o t i c e a b l y slows the c o r r o s i o n and d i s c o l o r a t i o n r a t e s of b u i l d i n g , monument, and p u b l i c i n f r a s t r u c t u r e s u r f a c e s i n an urban a r e a . The s l o w i n g of b u i l d i n g decay i n c r e a s e s the expected r e t u r n s from b u i l d i n g i n v e s t m e n t s and p l a u s i b l y i n c r e a s e s the number of p o t e n t i a l t r a d e r s a v a i l a b l e f o r the i n d i vidual. Improved p u b l i c i n f r a s t r u c t u r e enhances communication, t h e r e f o r e r e d u c i n g the c o s t of t r a d e . S i m i l a r l y , i f the appearance of the urban a r e a i s improved, more p o t e n t i a l t r a d e r s may be m o t i v a t e d t o r e s i d e i n i t and the b e h a v i o r of these t r a d e r s a f t e r an exchange has been consummated may be made more p r e d i c t a b l e . Each of these f e a t u r e s reduces exchange c o s t s , and, f o r the o r i g i n a l endowment a t X i n F i g u r e 3, causes VXV t o r o t a t e outward toward MM. I f the a c i d d e p o s i t i o n r e d u c t i o n were adequate t o wipe out a l l exchange c o s t s , the v a l u e of t h i s r e d u c t i o n would be the money ^ e q u i v a l e n t of the d i f f e r e n c e between the expected u t i l i t y l e v e l s U and U i n F i g u r e 3. A complete assessment of the economic conse quences of the a c i d d e p o s i t i o n r e d u c t i o n r e q u i r e s t h a t t h i s g a i n be added t o those d i s c u s s e d e a r l i e r . The g a i n might r e a s o n a b l y be l a b e l l e d e x i s t e n c e v a l u e . The o b v i o u s problem w i t h t h i s f o r m u l a t i o n i s t h a t the budget l i n e MM may be t o t a l l y f o r e i g n t o the i n d i v i d u a l ; t h a t i s , i t may l i e t o t a l l y o u t s i d e h i s e x p e r i e n c e . He may be i g n o r a n t of the u t i l i t y g a i n s he c o u l d a c q u i r e i f i t were made o p e r a t i v e . In these c i r c u m s t a n c e s , i t i s indeed q u e s t i o n a b l e whether the i n d i v i d u a l ' s r e v e a l e d p r e f e r e n c e s s h o u l d be used t o i n f o r m the d e c i s i o n about s u p p l y i n g the Q. For example, an a r t consumer who would e v a l u a t e ex ante the p r o v i s i o n of the p u b l i c square must make c a l c u l a t i o n s i n v o l v i n g two k i n d s of c o n j e c t u r e s about the f u t u r e , c o n d i t i o n a l on h i s c u r r e n t a c t i o n . F i r s t , he must s t a t e a b e l i e f about f u t u r e w o r l d s t a t e s and t h e i r r e s p e c t i v e p r o b a b i l i t i e s ; second, he must e s t i m a t e the e x t e n t t o w h i c h h i s



26.

CROCKER


381

t a s t e s w i l l be s a t i s f i e d . T h i s a r t consumer w i l l f i n d i t e x c e e d i n g l y d i f f i c u l t t o e v a l u a t e ex ante the p r o v i s i o n of the p u b l i c square i f he i s u n a b l e t o a c q u i r e and a r r a y i n f o r m a t i o n on the a r t t h a t w i l l be s u p p l i e d . Because h i s i n f o r m a t i o n about the a r t i s d i s t o r t e d o r d i f f u s e , the p r e f e r e n c e s w h i c h he r e v e a l s may not r e f l e c t h i s a c t u a l t a s t e s . Of c o u r s e , he c o u l d be s u p p l i e d w i t h more i n f o r m a t i o n . A l t e r n a t i v e l y , i n accordance w i t h Hammond ( 2 3 ) , the u t i l i t y l e v e l s i n F i g u r e 3 c o u l d be i n t e r p r e t e d as ex p o s t u t i l i t y l e v e l s and the Q-goods of e x p r e s s i o n (2) m i g h t , i n accordance w i t h M u s g r a v e ( 2 4 ) , be termed " m e r i t goods" w h i c h have existence value. I t seems r e a s o n a b l e t h a t p l a n n e r s i n N o r t h American democracies need not r e s p e c t i n d i v i d u a l b e l i e f s about f u t u r e p o s s i b i l i t i e s i n the same manner as they r e s p e c t i n d i v i d u a l t a s t e s . T a s t e s may be r e f i n e d o r v u l g a r ; s t i l l , i t may be h e l d t h a t a person's t a s t e s must be r e s p e c t e d . B e l i e f s , however, can be wrong and i t may be v e r y c o s t l y t o c o r r e c t them. I n t h e s e c i r c u m s t a n c e s , a p l a n n e r might make d e c i s i o n s about Q-goods on t h i s b a s i s of h i s e x p e c t a t i o n s of the i n d i v i d u a l ' s ex p o s t u t i l i t y l e v e l . E x i s t e n c e v a l u e would then be the p l a n n e r ' s p e r c e p t i o n of d i f f e r e n c e s i n the i n d i v i d u a l ' s ex p o s t u t i l i t y l e v e l , where the p l a n n e r ' s ex a n t e b e l i e f s have been s u b s t i t u t e d f o r the i n d i v i d u a l ' s . The u s u a l economic e f f i c i e n c y ( P a r e t o o p t i m a l i t y ) c o n d i t i o n s would s t i l l a p p l y . The danger of p a t e r n a l i s m i n w h i c h the p l a n n e r s u b s t i t u t e s h i s own t a s t e s f o r t h o s e of the i n d i v i d u a l i s acknowledged. I n a d d i t i o n , account would have t o be t a k e n of the a c c u r a c y and p r e c i s i o n of the p l a n n e r ' s knowledge of w o r l d s t a t e s and the i n d i v i d u a l ' s t a s t e s . T h i s n o t i o n i s not as odd as i t perhaps seems a t f i r s t g l a n c e . In f a c t , one might c h a r a c t e r i z e an e x p e r t as someone whom o t h e r s a l l o w t o make d e c i s i o n s f o r them about the p r o v i s i o n of p a r t i c u l a r goods and s e r v i c e s . The codes of e t h i c s of most s o c i e t i e s of e x p e r t s ask them t o r e s p e c t the i n d i v i d u a l ' s s o v e r e i g n t y but t o do so i n an ex p o s t r a t h e r than ex a n t e f a s h i o n . Perhaps a common phrase used by p a r e n t s i s a p t ; "You may not be g r a t e f u l now, but you w i l l be l a t e r . " The h i g h e r e d u c a t i o n and the m e d i c a l p r o f e s s i o n s a r e t r a n s p a r e n t examples. P e o p l e who know how t o use m a t e r i a l s t o make markets l e s s t h i n and more h o s p i t a b l e might a l s o q u a l i f y . Conclusions I n C r o c k e r ( 2 5 ) , ( 2 6 ) , I s t a t e d my b e l i e f t h a t the a b i o t i c r e s o u r c e s commonly known as m a t e r i a l s s u f f e r more from a c i d d e p o s i t i o n than any s i n g l e c a t e g o r y of b i o t i c r e s o u r c e s . The statement a c h i e v e d a f a i r degree of n o t o r i e t y , not a l l of w h i c h was l a u d a t o r y . The a n a l y t i c a l b a s i s of the s t a t e m e n t , however p o o r l y i t was a r t i c u l a t e d a t the t i m e , was the e x i s t e n c e v a l u e argument s e t f o r t h h e r e i n S e c t i o n IV. A l t h o u g h e m p i r i c a l support f o r the argument i s n o t a b l y weak, be aware t h a t the $2.6 t r i l l i o n U.S. 1980 g r o s s n a t i o n a l p r o d u c t (GNP) i s a measure of the a n n u a l exchange v a l u e of f i n a l o u t p u t o n l y . The $2 b i l l i o n t h a t I a s s i g n e d t o a c i d d e p o s i t i o n - i n d u c e d m a t e r i a l s damages i s l e s s than o n e - t e n t h of one p e r c e n t of 1980 GNP.


382

MATERIALS

Literature 1. 2.

3. 4.


5.

6.

7. 8. 9. 10. 11.

12. 13.

14. 15.

16.

17.

18.

DEGRADATION

CAUSED

BY ACID RAIN

Cited

Johansen, L., Production Functions, Amsterdam: North-Holland Publishing Co. (1972). Marsden, J., D. Pingrey, and A. Whinston, "Engineering Foundations of Production Functions," J. of Economic Theory 9 (1974), 124-140. Hildenbrand, W., "Short-Run Production Functions Based on Microdata," Econometrica 49 (1981), 1095-1125. Nriagu, J.O., Sulfur in the Environment, Part II, New York: John Wiley & Sons (1978). Sereda, P.J., "Effects of Sulfur on Building Materials," in NRC Associate Committee on Scientific Criteria for Environmental Quality, Sulfur and Its Organic Derivatives in the Canadian Environment, Ottawa, Ontario: National Research Council of Canada (1977), 359-426. Crocker, T.D., and R.G. Cummings, "On Valuing Acid Deposition-Induced Materials Damages: A Methodological Inquiry," in D.D. Adams, ed., Acid Deposition: Environmental, Economic, and Policy Issues, New York: Plenum Press (forthcoming). Baird, J.C., and E. Noma, Fundamentals of Scaling and Psychophysics, New York: John Wiley & Sons (1978). Georgescu-Roegan, Ν., "The Pure Theory of Consumer's Behavior, The Quarterly J. of Economics 50 Feb. 1936), 18-33. Georgescu-Roegan, Ν., "Threshold in Choice and the Theory of Demand, Econometrica 26 (Feb. 1958), 157-168. Luce, R.D., "Semiorders and a Theory of Utility Discrimination," Econometrica 24 (1956), 178-191. March, J.G., "Bounded Rationality, Ambiguity, and the Engineering of Choice," The Bell J. of Economics 9 (Autumn 1978), 587-608. Devletoglou, N.E., "Thresholds and Transactions Costs," The Quarterly J. of Economics 85 (Feb. 1971), 163-170. Watson, W.D., and J.A. Jaksch, Production of Household Cleanliness in Polluted Environments, Working paper, Reston, VA: U.S. Geological Survey (undated). Crocker, T.D., "On the Value of the Condition of a Forest Stock," Land Economics 61 (Aug. 1985), 244-254. Arrow, K.J., L. Hurwicz, and H. Uzawa, "Constraint Qualification in Maximization Problems," Naval Research Logistics Quarterly 8 (June 1961), 175-190. Hausman, J.Α., The Econometrics of Non-linear Budget Sets, Fisher-Schultz Lecture for the European Econometric Society Meetings, Dublin, Ireland, Sept. 1982, Revised draft (April 1984). Schulze, W.D., D.S. Brookshire, et al., "The Value of Visibility in the National Parklands of the Southwest," Natural Resources J. 23 1983), 149-165. Miller, J.R., and F.C. Menz, "Some Economic Considerations for Wildlife Preservation," Southern Economic J. 45 (Jan. 1979), 718-729.



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19. Baumol, W.J., "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly J. of Economics, 66 (Nov. 1952). 545-556. 20. Clower, R.W., and P.W. Howitt, "The Transactions Theory of the Demand for Money: A Reconsideration," J. of Political Economy 86 (June 1978), 449-446. 21. Brunner, Κ., and A.H. Meltzer, "The Uses of Money: Money in the Theory of an Exchange Economy," The American Economic Review 61 (Dec. 1971), 784-805. 22. Samuelson, P.Α., and R. Sato, "Unattainability of Integrability and Definiteness Conditions in the General Case of Demand for Money and Goods," The American Economic Review 74 (Sept. 1984), 588-604. 23. Hammond, P.J., "Ex-ante and Ex-post Welfare Optimality under Uncertainty, Economica 48 (1981), 235-250. 24. Musgrave, R.A., The Theory of Public Finance, New York: McGraw-Hill Book Co. (1959). 25. Crocker, T.D., "What Economics Can Currently Say About the Benefits of Acid Deposition Control," in H.M. Trebing, ed., Adjusting to Regulatory, Pricing, and Marketing Realities, East Lansing, MI: Institute of Public Utilities, Michigan State Univ. (1983), 724-744. 26. Crocker, T.D., "Statement," Select Committee on Small Business and Committee on Environment and Public Works, Economic Impact of Acid Rain, U.S. Senate, 96th Cong., 2nd Sess. (Sept. 23, 1980), 100-111. RECEIVED

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Economic Features of Materials Degradation - ACS Publications

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