Bài giảng Environmental economics

Economics is an important tool for making decisions about the use, conservation, and protection of natural resources because it provides information about choices people make, the costs

1 Overview

From Wikipedia:

 Environmental economics is a subfield of economics concerned with environmental issues.

 Environmental economics is distinguished from Ecological economics that emphasizes the

economy as a subsystem of the ecosystem with its focus upon preserving natural capital [2] One survey

of German economists found that ecological and environmental economics are different

schools of economic thought , with ecological economists emphasizing "strong" sustainability and

rejecting the proposition that natural capital can be substituted by human-made capital [3] For an

overview of international policy relating to environmental economics, see Runnals (2011)

1 Overview

Environmental economics is the subset of economics that is concerned with the efficient

allocation of environmental resources The environment provides both a direct value as well as raw material intended for economic activity, thus making the environment and the economy

interdependent For that reason, the way in which the economy is managed has an impact on the environment which, in turn, affects both welfare and the performance of the economy.

1 Overview

One of the best known critics of traditional economic thinking about the environment is Herman Daly In his first

book, Steady-State Economics, Daly suggested that “enough is best,” arguing that economic growth leads to

environmental degradation and inequalities in wealth He asserted that the economy is a subset of our

environment, which is finite Therefore his notion of a steady-state economy is one in which there is an optimal level of population and economic activity which leads to sustainability Daly calls for a qualitative improvement in people's lives – development – without perpetual growth Today, many of his ideas are associated with the

concept of sustainable development.

1 Overview

Environmental economics takes into consideration issues such as the conservation and valuation of natural resources, pollution control, waste management and

recycling, and the efficient creation of emission standards

Economics is an important tool for making decisions about the use, conservation, and protection of natural resources because it provides information about choices people make, the costs and benefits of various proposed measures, and the likely outcome of environmental and other policies

• Common forms of market failure include externalities, non-excludability and non-rivalry.

1 Overview

• Externality : the basic idea is that an externality exists when a person makes a choice that affects other people that are not accounted for in the market price

• For instance, a firm emitting pollution will typically not take into account the costs that its pollution imposes on others As

a result, pollution in excess of the 'socially efficient' level may occur

• A classic definition influenced by Kenneth Arrow and James Meade is provided by Heller and Starrett (1976), who define

an externality as “a situation in which the private economy lacks sufficient incentives to create a potential market in some good and the nonexistence of this market results in losses of Pareto efficiency.”[6]

• In economic terminology, externalities are examples of market failures, in which the unfettered market does not lead to an efficient outcome.

When one person’s actions imposes a cost or benefit on the well-being of a bystander Externalities usually result in

market failure.

Externalities can be:

1) Positive: Positive: an external benefit is

imposed on someone (examples:

gardens, restored historic buildings, research)

2) Negative: Negative: an external cost is imposed

on someone (examples: exhaust

from autos, barking dogs, noise

from airplanes)

Externalities cause markets to allocate resources inefficiently.

This happens through:

1) CONSUMPTION: consuming a good results in externality.

2) PRODUCTION: producing a good results in externality.

In general, an external cost means the market overproduces the good (ie, paint) An external benefit means the market underproduces the

good (ie, gardens)

Are there benefits for other people in the parking lot

when someone puts their car alarm on?

Yes, because thieves don’t

know which cars have alarms.

What about the club?

Are there benefits for other people in the parking lot when someone puts the club

on their car?

No because the thief

can SEE the club.

1 Overview

• Common property and non-exclusion: When it is too costly to exclude people from access to an environmental resource for which there is rivalry, market allocation is likely to be inefficient The challenges related with common property and non-exclusion have long been recognized

• Hardin's (1968) concept of the tragedy of the commons popularized the challenges involved in non-exclusion and common property "commons" refers to the environmental asset itself, "common property resource" or

"common pool resource" refers to a property right regime that allows for some collective body to devise schemes to exclude others, thereby allowing the capture of future benefit streams; and "open-access" implies no ownership in the sense that property everyone owns nobody owns.[7]

1 Overview

The basic problem is that if people ignore the scarcity value of the commons, they can end up expending too much effort, over harvesting a resource (e.g., a fishery) Hardin theorizes that in the absence of restrictions, users of an open-access resource will use it more than if they had to pay for it and had exclusive rights, leading to environmental degradation See, however, Ostrom's (1990) work on how people using real common property resources have worked to establish self- governing rules to reduce the risk of the tragedy of the commons.[7]

1 Overview

• Public goods and non-rivalry: Public goods are another type of market failure, in which the market price does not capture the social benefits of its provision For example, efforts to mitigate climate change would be a public good since the risks of climate change are both non-rival and non-excludable Such efforts are non-rival since climate mitigation provided to one does not reduce the level of mitigation that anyone else enjoys They are non-excludable actions by one will have global consequences from which no one can be excluded

• A country's incentive to invest in carbon abatement is reduced because it can "free ride" off the efforts of other

countries Over a century ago, Swedish economist Knut Wicksell (1896) first discussed how public goods can be provided by the market because people might conceal their preferences for the good, but still enjoy the benefits without paying for them

What is the difference between a public good and a private good?

Exclusion vs non-exclusion

and Shared consumption (rival good)

vs.

non-shared consumption (non-rival good)

1 Overview

• The key to the environmental economics approach is that there is value from the environment and value from the

economic activity…the goal is to balance the economic activity with environmental degradation by taking all costs and benefits into account

• Measures of economic value are based on what people want – their preferences Economists generally assume that individuals, not the government, are the best judges of what they want Thus, the theory of economic valuation is based on individual preferences and choices People express their preferences through the choices and tradeoffs that they make, given certain constraints, such as those on income or available time In a market economy, dollars (or some other currency) are a universally accepted measure of economic value, because the number of dollars that a person is willing to pay for something tells how much of all other goods and services they are willing to give up to get that item This is often referred to

as ‘willingness to pay

1 Overview

There are two types of values: use and non-use ‘Use value’ is defined as the value derived

from the actual use of a good or service, such as hunting, fishing, bird-watching, or hiking

Use values may also include ‘indirect uses,’ such as the value of a bug that a fish may eat,

which then a fisherperson may catch Though that bug is not directly used by the

fisherperson, it has an indirect value because of its place in the food chain A large part of environmental economics has been devoted to valuing ‘use’ services.

1 Overview

• ‘Non-use values,’ also referred to as ‘passive use’ values, are values that are not associated

with actual use, or even the option to use a good or service Existence value is a type of

non-use value and is the value that people place on simply knowing that something exists, even if they will never see it or use it Many people value the Amazon rainforest, even though they may never

go there Non-use value is the most difficult type of value to estimate.

• Total economic value is the sum of all the relevant use and non-use values for a good or

service.

1 Overview

• Why not zero pollution?

•0 pollution would require 0 use of lawnmowers, not realistic

• Optimal pollution levels determined by the socially efficient output level

• Alternatives to this would incl emission-free lawnmowers but costs too high

Environmental Pollution means changes in

environmental components, which are not appropriate

to the established environmental standards and cause adverse impacts on human beings and living organisms.

Crucial Question

True or False:

The optimal amount of

pollution is zero.

Optimal Pollution

MD MAC

Pollution

$

- Pollution damage depends on

Assimilative capacity of the environment

Existing loads

Location

Tastes and preferences of affected people

- Pollution damage can be

2 Economics of pollution

• Economic tools for pollution controls

Easy to administer May not reduce pollution at dirtiest plants

Encourages pollution prevention

and waste reduction

Can exclude small companies from buying permits

Caps can be too low Can promote achievement of caps Caps must be gradually reduced to encourage innovation

Determining caps is difficult Permit prices determined by market

transactions Must decide who gets permits and why

Administrative costs high with many participants

Confronts ethical problem of how much

pollution or resource waste is

acceptable Emissions and resource wastes must

be monitored

Confronts problem of how permits

should be fairly distributed Sets bad example by selling legal rights to

pollute or waste resources Self-monitoring can promote cheating

2 Economics of pollution

• Extended cost - benefit analysis

The main method used for valuation is cost-benefit analysis (CBA) This analysis is basically compiling the costs of a project as well as the benefits, then translating them into monetary terms and discounting them over time (Discounting

is the process of determining the present value of future benefits and costs.) Ideally, only projects with benefits greater than costs would be acceptable.

Cost - benefit comparisons have some problems First, environmental benefits often lack market value, yet their costs are known Second, benefits are often collected over time, while costs are up front This creates a dilemma, since the question to be answered is in present time Third, it is often difficult to understand what is being measured or to determine values for what is being measured And fourth, results are often controversial and in some cases, could be used against you However, it

is good to remember that you are empowered just by describing each benefit, even if you can t value it ’

King and Mazzotta, loc cit.

2.2 Optimal pollution

- A Perfectly Competitive Market

A perfectly competitive market must meet the following requirements:

– Both buyers and sellers are price takers – The number of firms is large.

– There are no barriers to entry.

– The firms' products are identical.

– There is complete information.

– Firms are profit maximizers.

The Necessary Conditions for

Perfect Competition

• Both buyers and sellers are price takers.

– A price taker is a firm or individual who takes the market price as given.

– In most markets, households are price takers – they accept the price offered in stores

The Necessary Conditions for

Perfect Competition

• Both buyers and sellers are price takers.

– The retailer is not perfectly competitive – A store is not a price taker but a price maker.

The Necessary Conditions for

Perfect Competition

• The number of firms is large.

– Large means that what one firm does has

no bearing on what other firms do.

– Any one firm's output is minuscule when compared with the total market.

The Necessary Conditions for

Perfect Competition

• There are no barriers to entry.

– Barriers to entry are social, political, or economic impediments that prevent other firms from entering the market.

– Barriers sometimes take the form of patents granted to produce a certain good.

The Necessary Conditions for

Perfect Competition

• There are no barriers to entry.

– Technology may prevent some firms from entering the market.

– Social forces such as bankers only lending

to certain people may create barriers.

The Necessary Conditions for

Perfect Competition

• The firms' products are identical.

– This requirement means that each firm's output is indistinguishable from any

competitor's product.

The Necessary Conditions for

Perfect Competition

• There is complete information.

– Firms and consumers know all there is to know about the market – prices, products, and available technology.

– Any technological advancement would be instantly known to all in the market.

The Necessary Conditions for

Perfect Competition

• Firms are profit maximizers.

– The goal of all firms in a perfectly competitive market is profit and only profit – Firm owners receive only profit as

compensation, not salaries.

Perfectly competitive market

• many buyers and sellers,

• identical (also known as homogeneous)

products,

• no barriers to either entry or exit, and

• buyers and sellers have perfect

information.

Demand curve facing a single firm

• no individual firm can affect the market price

• demand curve facing each firm is perfectly

elastic

Profit maximization

• produce where MR = MC

P = MR

Profit-maximizing level of output

Economic Profits > 0

Economic profit

Incentive Based Regulations (IB)

– impose tax on pollutant

– taxes approximate external cost & can achieve efficiency

– better to tax producer (force them to tax external cost into account)

– Firms buying & selling the right to pollute

– there are real-life markets for air pollution rights

– most active market in sulfur emissions

– firms will actively trade is trading is better than any alternative

– Environmentalists can achieve pollution reduction by outbidding companies

& then refusing to sell the permits, forcing companies to decrease pollution