QUANTIFICATION OF DECONTAMINATION COST AND ENVIRONMENTAL PROTECTION - A MACROECONOMIC APPROACH

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1 106 Quantification of decontamination cost and environmental protection - a macroeconomic approach QUANTIFICATION OF DECONTAMINATION COST AND ENVIRONMENTAL PROTECTION - A MACROECONOMIC APPROACH Iuliana Militaru, Cornelia Gabriela Piciu, Antoniu Predescu,, Abstract The pollution, as a global phenomenon, is the result of (continuous) current economic mentality s influence, according to which the target to be achieved permanent is the profit maximization. At macroeconomic level, to achieve the constant target of profit maximization is to record economic growth. But, GDP does not include, in practice, externalities e.g. polluting industrial activities; so, mechanism which generates both GDP and economic and social value of the pollution amplitude comprise at least one direct influence factor of economic growth. In conclusion, increasing the amplitude of pollution is obtainable only by positive contribution of the national economy, e.g. with net exports increasing. Keywords: multiplier decontamination, GDP, pollution, propensity, consumption, JEL Classification: B22, E27, O25 1. Introduction An interesting and, especially, indispensable perspective for analysis is the perspective of the evaluation/measuring the decontamination cost, or environmental protection, from a macroeconomic point of view. The pollution which is, par excellence, the phenomenon that interests even company, being the unit of measure by which it can be calculated the "production" of pollutants is and was still conscious, regarded as a phenomenon that affects more than one manufacturer, or more producers - namely countries and entire continents. This cannot neglect the possibility to quantify the macro(economic) costs of decontamination, notwithstanding the company in this framework. Iuliana Militaru is Associate Professor of Economics at Romanian-American University, Bucharest, iulianapredescu@yahoo.com, Cornelia Gabriela Piciu is PhD of Economics at Financial and Monetary Research Center Victor Slăvescu, Bucharest, gabriela_piciu@yahoo.com, Antoniu Predescu is Assistant Professor of Economics at Universitatea Spiru Haret, Râmnicu Vâlcea, gen3pavo@yahoo.com

2 Romanian Economic and Business Review Special issue 107 The pollution, as a global phenomenon, is the result of (continuous) current economic mentality s influence in a market economy according to which the target to be achieved permanent is the profit maximization. At the macroeconomic level, to achieve the constant target of profit maximization has a different name, namely achieving economic growth. Technologies (pollutants) are used in the economy in the long term, due to the production of new technologies (less polluting/non-polluting) with low increments or even minimal, the contact more or less unilateral, between economic growth and the most important externality generated by it, namely pollution, is a solid one. 2. Content That is, the permanent monitoring of economic growth obtaining - preservation / expansion - is only performed just simultaneously with the production of (increasing) quantities of pollutants substances etc. The quantification of economic growth is done basically using the indicator called Gross Domestic Product (GDP). This product is or has, in brief, the value of goods and services produced, globally, in an (real) economy by identifiable companies, in administrative and economic terms, as being of a certain nationality. In other words, GDP measure the global "amount" of added value produced by real economy as a whole, or it can be measured once the calculated value of expenses incurred in economy in order to obtain this added value, the two values being of the same size. GDP is calculated as the sum of the following macroeconomic-sized expenses: 1) consumer expenses; 2) investment expenses; 3) government expenses; 4) (expenses incurred to generate products that "make") exports; 5) expenses incurred with (= for) imports. To illustrate this, is used the following equation: GDP = C + I + G + (E xp - I mp ) [1]. where: GDP = gross domestic product C = consumer expenses I = investment expenses G = government expenses Exp = exports Imp = imports

3 108 Quantification of decontamination cost and environmental protection - a macroeconomic approach Also, GDP can be calculated by measuring the financial status quo of all those who are paid to produce goods and services sold, gross domestic product being the sum of the income below: (1) income paid by employers (wages & c); (2) income earned by the "self-employed" (clearly the income of those who play the role of self employers in the labor market); (3) rent - specifically, revenue from those leases land to others (as a factor of production) and the living quarters; (4) profits. The concrete link between economic growth and pollution is observed by measuring the economic growth, eg by /of G.D.P, not directly, but indirectly: the first step is to see that the GDP is not a perfect indicator, ie it doesn t measure perfect neither the sum of all incurred expenditures, nor - consequently economic growth. It should be noted in this regard that GDP does not include, in practice, externalities e.g. polluting industrial activities and, therefore, does not include ( both microeconomic level and macroeconomic level), among others [Romer, (1996)]: 1. costs imposed by the de-pollution activities; 2. costs imposed by fighting/pollution prevention. These omissions, along with others, provide the over-evaluation "substance" of the added value produced by the economy, in other words the (calculated) size of gross domestic products. Thus, noting GDP - the real value of GDP, respectively GDP - the nominal value of GDP measured by the usual methods of GDP, we obtain [Miles, (2002)]: (GDP GDP ) 0 GDP 0 [2]. Obviously, the size with which the calculated value of GDP is over-rated - GDP - cannot be entirely attributed to the phenomenon of pollution. It can be assigned a proportion of the total amount of over-assessment, proportion described (principle) within algebraic terms: Pollution value GDP 0, (0,1) [3]. The mechanism by which are generated, GDP, on one hand, and, on the other hand, the economic and social value of the pollution amplitude comprising at least one direct influence factor (which is not mandatory, linear) of economic growth.

4 Romanian Economic and Business Review Special issue 109 We mentioned above that, due to the fact that GDP is computable, ie calculated, as a sum of expenditures, the increasing of its value is an increase in the (total) value of costs. Once a component of GDP is amplified (eg government expenses), economic and financial mechanism that resulted in this increase produces an increase of income both for businesses and for individuals. They in turn will spend their available financial resources (e.g. constituted as revenue - including incremental revenue), and so on, ad infinitum (obviously, in principle). The indicator that, both at the microeconomic and at the macroeconomic level, can provide a projection of amplitude dynamics of expenses is marginal propensity to consume ( c ) [McConnell, (2003)]. The value of this indicator, which quantifies the amplitude increase of consumption when income increases by one monetary unit, has the important feature of: (a) diminishing in the short term, when income increases; (b) increasing in economic and financial conditions comparable, in the long term more than in the short term. Including the perspective of economy GDP calculation, and first in macroeconomic terms, marginal propensity to consume is the marginal propensity (for) spending national income. However, in practice, is not used the value of the marginal propensity to spending national income, but the recorded value for the value of the marginal propensity to consume, in this case from the perspective of a consumer (final) - that is fairly accurate approximation to assume that we calculate exactly rather than approximate. The indicator used to measure these increases of the expenses amplitude is the multiplier, exempli gratia amount of excess/deficit of global production ( equilibrium production GDP) generated by the change - one way or another of independent expenditures mass, indicator whose multiplier formula is expressed below [Miles, (2002)]: 1 [4]. 1 c GDP consists of expenses incurred in the economy, more accurate is the sum of (overall) expenditure the realization of which is obtained (global) production of goods and services. In this sense, the multiplier, viewed through the prism of expenditure, is the size (number of) multiplication phenomenon to be recorded for the amount of overall expenses, in other words for GDP value. This phenomenon is initiated by a (positive) change of aggregate expenses - in this case, at least of one component of GDP (this component, which likely to record

5 110 Quantification of decontamination cost and environmental protection - a macroeconomic approach a positive change in the context of at least the assumption of economic growth is considered, usually, to be government expenditures (G)). In algebraic form, the dynamics described above is shown in the following terms: 1 ( GDP) 0 0 ( GDP) 0 0 [5]. 1 c Marginal propensity to consume usually records positive, and smaller than one values, (while the value recorded, as such, of the multiplier itself is positive, and larger than one): c (0,1) [6]. Hence, the default result that the multiplier is particularly more relevant for this analysis because its size is interdependent with / of economic variables - whose dynamic influences more or less indirectly, the quality and quantity of economic processes that generate pollution. One such variable is the sphere of imports: the imports size (expressed in monetary units), because this is what concerns us here, have an inverse evolution of the size multiplier - and therefore of GDP [McConnell, (2003)]: I mp 1 1 c The above formula can be truly understood if we include it in a broader framework, where we analyze the dynamics (of size) exports. Thus, using the notation above, in the GDP come to an end, the next ("net") variable [Miles, (2002)]: E xp - I mp = Net exports (E xn ) [7] Assuming that exports are constant or grow slowly, while imports increase (the sensible), increased size of imports generates a chain of effects: (1) decreasing size of net exports; (2) decreasing size of multiplier; (3) as a result of (2), mathematically, decreasing size of GDP!; (4) diminishing the amplitude of pollution. In other words, increasing the amplitude of pollution (= GDP ) cannot be done, in a national space, only by positive contribution of the national economy - eg with net exports increasing. In other words, if the economy does not "become"

6 Romanian Economic and Business Review Special issue 111 environmentally friendly, clean, as is the case with (what remains of) the real economy of Romania today (2013), simply disappeared towards polluting industries of the economy - the largest part industry the pollution can still be reduced significantly: 1. if the trade balance (net) records deficits, or 2. if the trade balance (net) is in excess in the conditions under which that State exports, massive, and very lucrative, services (e.g. touristic services). The exports size and the imports size has a direct bearing on the size of the national income, on the one hand, and on the dynamics of consumption (understood as a phenomenon developed an economy-wide), indirectly, on the other hand, shortly - in algebraic terms - on the size of the multiplier, in two(different) ways. Two-way, because the "marginal propensity to spending national income" and "marginal propensity to consume are two equivalent expressions, because describe, using different concepts, but with convergent implications, the mechanism of the real economy functioning in and used by economic growth phenomena. The connection between the national income consumption, at the real economy scale, and the personal income, at the individual consumer scale, and economic growth - including pollution expanding - is quantified by the size multiplier, the indicator where are incorporated the effects of using income planning (more specifically, of two types of income described here), but the plan itself of any consumer income using is carried out taking into account the (net) size of income. More specifically, the marginal propensities to spending national income and to consume, have sizes direct - which is not necessarily (and) linear - proportional to consumers (taxpayers) income level ; fiscal policy is thus a factor of prime importance, even for designing the pollution amplitude size. There are at least two perspectives, to which we approach the quantification of decontamination and environmental protection costs. A view allows assessment of the (average) size of these costs at any time, while the use of the other, the increment of increasing costs mentioned above can shape, even as a (first) approximation. 1) On one hand, in short-term, fiscal policy is certainly stable - and hence the tax burden at the same time is constant. At the same time, a certain amount of marginal propensity to consume determines the multiplier value, and hence a certain growth rate, also constant, of GDP finally, of the expansion area of pollution phenomenon. (2) The working hypothesis according to which, in the long term, extension in order to stimulate economic growth (in the long-term) often materialises in lower tax pressure, is at least acceptable, and probable accurate. It is known that the decreasing of fiscal pressure produces the diminishing of value multiplier [Gregory-Mankiw, (1999)]:

7 112 Quantification of decontamination cost and environmental protection - a macroeconomic approach P 0 [8]. 1 0 Thus : (1 c ) (1 c ) c 1 c 1 c 1 c c c [9]. 1 0 Thus, the fiscal pressure can act thus indirectly as a deterrent pollution. At the same time, the economic growth, so given current technology extending the amplitude of pollution exist and can survive in the long term only as a direct result of increasing marginal propensity to consume. 3. Conclusions This demonstration is quite "cohesive" to enable outlining some conclusions. The benchmark on which we report the content of these findings is that, in reality, the quantifying of these costs is strictly a mathematical operation whose utility consists of drawing the ways to reduce costs. About the marginal propensity to consume, the true axis that moves everything, ie the mechanism of expenditure/income at the macroeconomic level, and thus implicitly but automatically, the mechanism for producing pollution, we mentioned the key elements of any analysis of its dynamics. The size of the marginal propensity to consume tends to decrease, in the long term, given that (average) income of consumers increases. But it was observed that, after decreasing the tax burden in the short term we obtain the following results [Gregory-Mankiw, (1999)]: [10]. c c 1 0 This term, c ( c c1 c0), justifies itself, from that inequality c 0, into drawing a conclusion: the marginal propensity to saving / investment decreases when income increases in the short term and tends to increase in the long term. And this, given that we must note that replacing polluting technologies with technologies less / no pollution requires substantial investments. In conclusion, fiscal impulse it is a tool that in a economic (and legal) framework, in which all other instruments are used properly, allows, if itself it is used in a similar manner, the quantification of the costs of decontamination and protection environmental declining. Besides, and this may be a final conclusion, these costs can be slightly reduced and what obviously cannot get it at all easy in practice when the structure of the

8 Romanian Economic and Business Review Special issue 113 economy is in the long-term, and according to a plan, not random modified to match to a certain environmental policy. This means that pollution can be limited to a maximum, in a state, if this state is characterized by a trade balance that records excess, in the conditions under which the state exports massive and highly profitable services instead of goods. References 1. Gregory-Mankiw, N. (2009). Macroeconomics (7 th edition), Worth Publishers, ISBN-13: , U.S.A. 2. McConnell, C.R.; Brue, S.L.; Barbiero, T.P. (2003). Microeconomics. Ninth Canadian Edition, The McGraw-Hill Companies 3. Miles, D.; Scott, A. (2002). MACROECONOMICS Understanding the Wealth of Nations, John Wiley & Sons, Inc., U.S.A. 4. Romer, D. (1996). Advanced Macroeconomics, The McGraw-Hill Companies, U.S.A.