Dynamic Efficiency, Equality, and Sustainability
Suppose Pandora is deciding how to dispose of some hazardous waste. She can contain it safely at a cost of $175 or bury it in the local landfill. If she chooses the second option, in ten years' time the stuff will have seeped out enough to permanently ruin the vineyard of Bacchus, who lives next door to the landfill. The vineyard has a value to him in ten years of $450 (i.e., he'd sell it then for $450). This is the only damage the hazardous waste will ever do. Assume there is no inflation.
1. What is the present value of $450 in ten years at a discount rate of 10%?
2. In the absence of regulation, Pandora is likely to bury the stuff and save $175. If the interest rate is 10%, is it efficient for Pandora to bury her waste in the landfill? To answer this, discuss how Bacchus could maximize his utility if he had the legal right to prevent the dumping (and was not an ardent environmentalist). What does this say about the relative size of the total net monetary benefits under the two alternatives? How do total net benefits relate to efficiency?
3. Could the use of an environmental bond satisfy a fairness problem if it exists?
4. Is burying the waste sustainable from a neoclassical point of view? Why or why not?