LECTURE NOTES 1: 1. Environmental Economics: A sub-discipline of Economics _ started in the 1960s The study of environmental problems with the perspective and analytical ideas of economics Focus on : • How and why people make decisions the have environmental consequences • How we can change economic institutions and policies to bring those environmental impacts more into balance with human desires and the needs of the ecosystem itself. Natural environment & the human ecology: two interrelated systems 2. The Economy An economy A complex institutional mechanism designed to facilitate the production, consumption and exchange of goods and services, given resource scarcity and technology, the references of households, and the legal system for resource ownership right (Randall, 1987) A collection of technological, legal, and local arrangements through which a group of people seek to augment their material and spiritual standards of life (Barry, 1994) Differences between economies: The degree of empowerment given to households and firms in their ability to make economic choices, and the legal view of property ownership rights. Capitalist and market-oriented economy: freedom to choice and private ownership of property are strongly held institutional principles Centrally planned-economy: production and distribution of goods are dictated by bureaucratic choices, resource ownership retained by the state Market-oriented economy Composed of the followings elements: • Economic entities: Households and firms Households: the final users of goods and services the owners of resources Firms: transformers of basic resources (labor, capital and natural resources) into goods and services • Market: an area in which exchanges (buying and selling) of final goods and services (product market), and factor of productions _labor, capital and natural, (factor market) take place resources). • Social institutions: articulate and enforce the rules and regulations: ownership rights, competition in the market place, public intervention The concept of resources • A resource: anything that is directly or indirectly capable of satisfy human wants. Traditionally, three broad categories: Labor: productive capacity of human physical and/or mental efforts Capital: the stock of produced items available not for direct consumption, but for further production process (buildings, education). Natural resources: the stock of living and non living materials found in the physical environment (forest, fisheries, minerals,…) • Natural resources: renewable and nonrenewable resources Renewable resources: capable of regenerating themselves within a relatively short period. Nonrenewable resources: exiting in fixed supply, regenerative capacity assumed to be zero. • Clarification of economic notion of resources: 4 key issues - Resource often used as factors of production or as means to produce goods and services. - Economic notion of resources is strictly anthropocentric - All resources are scarce-found in limited quantities and/or quality - Resources are used in combinations, and freely replaced by another in the production process Scarcity and its economic implication Economics deals with the allocation of scarce resources among competing ends All human societies are confronted with the basic problem of scarcity. Human wants are immense/ but in the world of scarcity. Choice: need to make choices and set priorities Opportunity cost: the highest- valued alternative that must be sacrificed to attain something or satisfy a want. An economic choice always entails sacrifice Efficiency: to maximize the desired goods and services that can be obtained from a given set of resources. Social institutions: allocation and distribution of resources always cause conflicts, in the presence of scarcity. 3. The environment Comprised of anything around us: living organisms, and non-biological factors, the Earth’s crust, hydrosphere, biosphere, radiation from the sun The functions of the environment: A natural resource base A waste assimilation capacity A set of natural goods (environmental amenities) A life support system. The environment Households Firms Raw materials Wastes Amenities The laws of thermodynamics lead to propositions: All resource extraction, production and consumption eventually result in waste products ( equal in matter/energy terms to the resources flowing into these sectors. Three is no possibility of the 100 percent return of these waste products ( the second entropy laws of thermodynamics) The fundamental balance M = R P + R C R P + R C = M = G + R p – (R P1 + R C1 ) Three ways of reducing M and residuals discharged: Reduce G : population growth? cumulative environmental impacts! Reduce R P :new production technology; shift the composition of output increase R P1 + R C1 : replace a portion of the flow of virgin materials (M) TERINOLOGY Ambient quality; Environmental quality; Residuals, Emissions, Effluent, Recycling; Pollutants; Pollution; Damages; Source Firms Households Discharged R p Discharged R c Residuals R p Residuals R c Recycled R p1 Recycled R c1 M G . LECTURE NOTES 1: 1. Environmental Economics: A sub-discipline of Economics _ started in the 1960s The study of environmental problems with the perspective and analytical ideas of economics Focus. : • How and why people make decisions the have environmental consequences • How we can change economic institutions and policies to bring those environmental impacts more into balance with human. and freely replaced by another in the production process Scarcity and its economic implication Economics deals with the allocation of scarce resources among competing ends All human societies