7.1 Economic Benefits: An Overview

To understand the effect that an environmental regulation has on the service flows provided by the natural environment, one must consider three functional relationships ( Freeman, 1993). The first relationship describes the effect of human activities on environmental quality. This relationship estimates ambient concentrations of pollutants in environmental media as a function of air emissions. Fate and transport models are used to characterize this relationship. The second functional relationship is that between environmental quality and the service flows provided by the natural environment. This relationship characterizes such service flows as a function of ambient pollution concentrations, usually in the form of concentration-response or dose-response function. The third, and final, relationship translates environmental service flows into human welfare. The use of these functional relationships in estimating the benefits of a regulation is presented in Figure 7-1.

Recall from the discussion above that the benefits of OAQPS regulations result from changes in emissions to the atmosphere. Therefore, the first functional relationship presented in Figure 7-1 relates these changes in emissions to changes in ambient concentrations of pollutants in environmental media through fate and transport models. The boxes at the top of Figure 7-1 represent emissions under two different states of the world—the baseline and the control. The baseline corresponds to the state of the world in the absence of the regulation. In contrast, the control corresponds to the level of emissions in a world with the regulation. The difference between these emissions levels is the primary result of the regulation.

Once the change in ambient concentrations has been estimated by applying fate and transport models to the change in emissions, the analyst must use concentration-response relationships or dose-response relationships to determine reductions in the damages resulting from the changes in ambient concentrations. Economic valuation methods can then be used to estimate the value individuals place on these improved environmental service flows.