Springer Texts in Business and Economics Springer Texts in Business and Economics (STBE) delivers high-quality instructional content for undergraduates and graduates in all areas of Business/Management Science and Economics The series is comprised of self-contained books with a broad and comprehensive coverage that are suitable for class as well as for individual self-study All texts are authored by established experts in their fields and offer a solid methodological background, often accompanied by problems and exercises More information about this series at http://www.springer.com/series/10099 Alfred Endres and Volker Radke Economics for Environmental Studies A Strategic Guide to Micro- and Macroeconomics 2nd ed 2018 Alfred Endres University of Hagen, Hagen, Germany Volker Radke Baden-Württemberg Cooperative, State University Ravensburg, Ravensburg, Germany ISSN 2192-4333 e-ISSN 2192-4341 Springer Texts in Business and Economics ISBN 978-3-662-54826-4 e-ISBN 978-3-662-54828-8 https://doi.org/10.1007/978-3-662-54828-8 Library of Congress Control Number: 2017953442 © Springer-Verlag GmbH Germany, part of Springer Nature 2018 This work is subject to copyright All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations This Springer imprint is published by the registered company Springer-Verlag GmbH, DE part of Springer Nature The registered company address is: Heidelberger Platz 3, 14197 Berlin, Germany Acknowledgements The authors of this textbook have been teaching economics for environmental studies for many years within the interdisciplinary distance learning program in environmental sciences INFERNUM INFERNUM (Interdisziplinäres Fernstudium Umweltwissenschaften) is a «Joint Venture» of the University of Hagen, Germany, and the Fraunhofer Institut for Environmental, Safety, and Energy Technology (UMSICHT), Germany The authors would like to thank Professor Annette Toeller, University of Hagen, Professor Goerge Deerberg, Fraunhofer UMSICHT, and the other colleagues for the wonderful cooperation, and generations of INFERNUM students for making smart remarks and asking uncomfortable questions All of this enabled us to write a better textbook (Of course, whether we succeeded to write a good one can only be decided by its readers.) Parts of this book were written while Alfred Endres was a visiting scholar at La Trobe University, Melbourne This author is indebted to the Economics Department of La Trobe for its hospitality, and to the University of Hagen for granting a sabbatical Special thanks go to Professors Joanna Poyago-Theotoky and Robert Waschik of La Trobe The authors would also like to thank Gabriele Debray, Annette vom Heede, Daniel Limpinsel, and Vanessa Kuhn, University of Hagen, for providing excellent technical support and for dealing patiently with the somewhat erratic working style of the authors In addition, the authors would like to thank Lucas Radke for technical support as well as for commenting on various parts of the manuscript from a student’s perspective Moreover, the help of Wendy Smith and Daragh Mc Greal, Graduate School of Law and Economics at the University of Hamburg, is gratefully acknowledged These native English speakers checked the style of the original draft of the manuscript They corrected numerous Germanisms and were quite amused about the sometimes humorous tone of the manuscript Among the many jokes which may entertain the readers and make learning more comfortable, they identified a few involuntary ones with their eagle eyes and eliminated them For the second edition, Annette vom Heede took that highly responsible job Finally, the authors would like to thank Dr Martina Bihn, Barbara Feß, Kay Stoll, Ruth Milewski and Claus-Dieter Bachem, Springer Verlag, for accompanying the manuscript from the impulse to write a second edition to the final product with moral support and technical advice Alfred Endres Hagen, Germany Volker Radke Ravensburg, Germany P.S Good news for economics lecturers: to facilitate the use of this textbook as a teaching tool, PowerPoint slides are available on ► http://extras.springer.com List of Symbols and Abbreviations A Efficiency parameter of labour (represents the state of technology) A (1) Certain value of variable A (analogous for all other variables) { A t } Time path of variable A for periods t ∈[0,∞) (analogous for all other variables) AC Abatement cost a Prohibitive price of a single good from an individual consumer’s point of view α K Cobb-Douglas exponent of capital input into production α N Cobb-Douglas exponent of labour input into production α R Cobb-Douglas exponent of natural resource input into production b Satiation quantity of a single good from an individual consumer’s point of view β Individual discount rate of the representative consumer C Total production cost CS Consumers’ surplus c Per capita consumption of the composite commodity («wheat») D Market demand (of all consumers) for a single good d Demand of an individual consumer for a single good d –1 Inverse demand function of an individual consumer for a single good δ Rate of depreciation of man-made capital K δ Z Rate of depreciation of natural wealth Z ∂ Symbol used for a partial derivative of a function of more than one independent variables E Amount of emissions of a certain pollutant e Amount of abated emissions ED Environmental damage e i Amount of emissions of a certain pollutant caused by agent i F Macroeconomic production function F K , F N , F R First partial derivatives of the macroeconomic production function with respect to K , N , and R , respectively (representing marginal returns on capital, labour, and a natural factor of production) F K , t , F N , t , F R , t Marginal returns on capital, labour, and a natural factor of production, respectively, in period t f Per capita production function G Genuine saving GDP Gross domestic product, nominal GDP r Gross domestic product, real GNDP Green net domestic product GPI Genuine Progress Indicator gdp Gross domestic product per capita, nominal gdp r Gross domestic product per capita, real g Growth rate Γ Total consumption of the composite commodity («wheat») γ Real interest rate h Factor scaling macroeconomic production I Investment into technical progress i Subscript indicating a certain consumer or a certain firm ISEW Index of Sustainable Economic Welfare j Subscript indicating a certain consumer or a certain firm K Total stock of man-made capital k Capital-labour ratio, where k ≡ K / N κ Capital per unit of effective labour, where κ ≡ K / AN L Lagrangian function LPI Living Planet Index λ Lagrange multiplier λ k Lagrange multiplier assigned to capital per labourer, k λ z Lagrange multiplier assigned to natural resource use per labourer, z MAC Marginal abatement cost MC Marginal production cost MED Marginal environmental damage MEC Marginal external cost MPC Marginal private cost, where MPC ≡ MC MSC Marginal social cost MWP Marginal willingness to pay m Budget of an individual consumer available for consumption μ Rate of technological progress (i.e the growth rate of A over time) N Number of consumers (population size, identical to labour supply) NDP Net domestic product NDP r Real net domestic product n Rate of population growth (i.e the growth rate of N over time) PS Producers’ surplus p Price per unit of a single good p R Price per unit of a natural resource p x Price per unit of good X p y Price per unit of good Y Π Profit of a single firm ψ Production per unit of effective labour Q Total production of the composite commodity («wheat») q Per capita production of the composite commodity («wheat») R Total extraction from the stock of a natural resource r Per capita extraction from the stock of a natural resource ρ Natural resource input per unit of effective labour into production S Market supply of a single good SEEA United Nations’ System of Environmental-Economic Accounting SNA United Nations’ System of National Accounts s Firm individual supply of a single good s −1 Firm individual inverse supply function of a single good σ Saving rate * Superscript indicating the equilibrium level of an endogenous variable ** Superscript indicating the socially optimal level of an endogenous variable t Time period TC Total cost τ Tax rate U Individual intertemporal utility u Individual periodical utility u t Individual periodical utility in period t u c Individual marginal utility (first derivative of the periodical utility function with respect to consumption c ) u c , t Individual marginal utility in period t V Real value of a society’s wealth v i Component no i of a society’s wealth W Intertemporal social welfare WP Willingness to pay w Real wage rate X Single consumption good x Amount of consumption good X x i Amount of consumption good X demanded by consumer i or supplied by firm i Y Single consumption good y Amount of consumption good Y y i Amount of consumption good Y demanded by consumer i or supplied by firm i Z Total stock of a natural resource z Per capita stock of a natural resource Contents Introduction I Economics: What Is It About and How Does It Relate to the Natural Environment? The Fundamental Problem 2.1 Needs 2.2 Goods 2.2.1 Satisfying Human Needs 2.2.2 Commodities and Services 2.2.3 Excludability and Rivalry 2.3 Production 2.4 Scarcity The Economic Approach 3.1 Acting Economically 3.2 Economic Agents 3.3 The Circular Flow 3.4 Positive and Normative Economic Analysis 3.5 Economic Policy 3.5.1 The Choice of Economic System 3.5.2 Interventions in the Economic Process Integration of the Natural Environment: Socially Undesirable Utilisation of Natural Goods 4.1 Natural Goods 4.2 Production Based on Natural Resources 4.3 The Circular Flow and the Natural Environment Total value of goods which can be produced given a «normal» utilization of the available stocks of productive factors (labour, capital, etc.) Public good Synonym for collective good Rational behaviour Behaviour of economic agents guided by the economic principle Rawlsian welfare function Function which defines the welfare of a society as equal to the utilities of those individual consumers belonging to society who are worst off Recession Phase of a business cycle characterized by actual production falling short of the productive capacity Renewable natural resource Natural resource characterized by an earthly stock which grows over the time span relevant to human planning Rivalry Property of a good which implies that the use of it by one agent prevents other agents ’ using it Social optimality An allocation is said to be socially optimal if the welfare of society based on the social welfare criterion applied cannot be increased Social welfare Level of a society’s well-being derived from the utilities of individual consumers belonging to society Social welfare criteria Definitions of efficiency (Pareto efficiency, Kaldor-Hicks efficiency) and social welfare functions (utilitarian social welfare function, Bergson-Samuelson welfare function, Rawlsian welfare function) Social welfare function Mathematical rule which links the level of society’s well-being to the level of society’s individual consumers ’ utilities ; the rule incorporates a certain view of justice Stability Sustained normal utilization of the productive capacity Stabilizing policy Use of policy measures in order to maintain a normal utilization of the productive capacity Standard oriented environmental policy Policy designed to achieve an exogenously given amount of emissions rather than an internalization of external effects Stock Quantity measured at a fixed date (e.g., the stock of machinery existing on January 1) Sustainable development «Development that meets the needs of the present without compromising the ability of future generations to meet their own needs» (WCED 1987, p 43) Sustainable yield Amount that can be harvested eternally from a given stock of a renewable natural resource if the resource’s periodical growth matches the amount harvested, thereby leaving the stock and its periodical growth unchanged System of solidarity Economic system characterized by private ownership of resources and by an allocation mechanism in the form of an appeal to the common sense of individual members Utilitarian social welfare function Function that defines welfare of society as the sum of the utilities of the individual consumers belonging to society, where all of the individual utilities contribute to social welfare with the same weight Utility Satisfaction an economic agent derives from being in a certain situation, e.g., consuming a commodity or enjoying an environmental amenity Welfare Synonym for social welfare Willingness to pay Amount of money an individual consumer is prepared to give in exchange for a good Index A Abstraction Accounting period Actual production Adjusted Net Saving (ANS) Afforestation Agenda Aggregate demand Aggregation Allocation mechanism Allocative efficiency Allocative policy in environmental and resource economics Altruism ANS See Adjusted Net Saving (ANS) Anthropocentrism in environmental and resource economics Appreciation Arrows Asset boundary and natural resources cultivated biological financial fixed goodwill and marketing non-produced non-financial produced non-financial reserve value of Asymmetric information Atmosphere as a natural collective good B Balance sheet Basic need Behavioural economics Biodiversity decline in Boom Brundtland Commission Brundtland Report Budget constraint time Bureaucracy Bureaucratic system Business cycle C Capital account income market Capital-labour ratio Carbon dioxide Central bank Centralized decision making Circular flow Climate protection stability stabilization Club good natural Collective good natural Commodity natural Competition Competitive market Computable general equilibrium models Concept GDP as a Consumer good natural sector sovereignty Consumption expenditure Cost efficiency function marginal minimization opportunity D Damage function Dasgupta-Heal-Solow-Stiglitz (DHSS) model Decentralized decision making Defensive expenditure and the ISEW in the SEEA Depletion technique Depreciation of man-made capital of natural resource stocks rate of Developed/developing countries DHSS model See Dasgupta-Heal-Solow-Stiglitz (DHSS) model Diffusion Discount Rate Divergences Distribution and the ISEW Distributional/distributive policy Doomsday Double counting Double dividend Durable consumer goods and the ISEW E Ecocentrism Ecological economics Economic agent Economic behaviour Economic growth and the Brundtland Report desirability of driving forces of infinite limits to natural limits to neoclassical model of social desirability of and sustainable development unlimited Economic principle violation of Economic system as a subsystem of nature Economic theory Ecosystems atmospheric Efficiency in environmental and resource economics Efficient Egoism Emerging economies Energy production resource saving technologies Environmental and resource economics and macroeconomics normative analysis Environmental damage and the ISEW Environmental degradation and poverty and the SEEA Environmental economics Environmentally friendly technical progress Environmental technical progress Equilibrium demand Equity EU sustainable development indicators Euler equation European Union set of sustainability indicators Excludability from use Exhaustible natural factor of production Exhaustible natural resource Exhaustion Existence Existence value Experimental economics External cost marginal External effect Externality Extraction F Factor of production natural Factor prices Financial account Financial crisis Firms Firm sector Fish(ing) Fishery Flow definition GDP as a of welfare Fossil fuel Free riding in environmental and resource economics Fuel deposit G GDP See Gross domestic product (GDP) General equilibrium analysis General production boundary Genuine savings 259 GNDP See Green Net Domestic Product (GNDP) Golden rule of capital accumulation Good Government Governmental intervention in environmental and resource economics Governmental planning Government expenditure and the ISEW Government Pension Fund of Norway Great Depression Greenhouse gas Green Net Domestic Product (GNDP) Gross domestic product (GDP) and environmental damage as a flow concept growth in nominal per capita real and sustainable development as a welfare indicator Gross National Income (GNI) Growth model and ecological economics Growth rate Growth theory neoclassical H Hartwick’s rule Hotelling’s rule Household production Human capital and productive capacity and sustainable development I Income like concept Index of Sustainable Economic Welfare (ISEW) 262 Individual freedom of choice Inefficiency Inefficient Inflation Innovation Instability Interest rate Intermediate consumption Internalization Intertemporal allocation Intertemporal profit Intertemporal profit maximization Invention Inventory Investment expenditure good natural in man-made capital in natural resource stocks and sustainable development Invisible hand ISEW See Index of Sustainable Economic Welfare (ISEW) J Justice between generations in environmental and resource economics intergenerational K Knowledge investment in Kyoto Protocol L Labour force investment in Labour income Labour market Labour supply Land Learning by Doing Life support functions Living Planet Index (LPI) M Macroeconomics Man-made capital goods and sustainable development investment in and productive capacity Marginal extraction cost Marginal product Marginal return Marine biodiversity life protected areas species Market economy equilibrium failure due to externalities mechanism power of the OPEC system Maximum principle Merit good Mineral deposit Minimum principle Misallocation Modified ISEW per capita Monetary evaluation Monopoly N National account(ing) Natural environment Natural good Natural resource economics emergence of foundation for productive and productive capacity NDP See Net Domestic Product (NDP) Need basic belongingness esteem of future generations hierarchy information about love safety satisfaction of self-actualization Net Domestic Product (NDP) as sustainable income as a welfare indicator Net price Non-cultivated biological resources Non-excludability of use Non-renewable natural factor of production in the neoclassical growth model Non-renewable natural resource investment in Non-rivalry in use Non-satiation local Normative analysis in environmental and resource economics Normative individualism Norway’s Government Pension Fund O Ocean acidification and the asset boundary stress factor Oil crisis Open access good natural Optimal technical progress Other changes in the volume of assets account Overfishing Ownership of resources Ozone layer P Partial analysis Partial equilibrium analysis Perfectly competitive market Perfect market Pigouvian tax Pollutant Polluter pays principle Population development of growth in the neoclassical growth model Positive analysis Poverty and environmental degradation Preferences Price mechanism regulation system Pricing and standard approach Private good natural Production of final goods function function per capita of intermediate inputs per capita per unit of effective labour scaling of sector of Productive asset utilization of Productive capacity exponential rise in growth in and natural resources rise in utilization of Productive factor natural Productive natural resource Productive potential and natural resources Profit marginal maximization Prohibitive price Public choice theory R R&D Radio spectra Ramsey model Rare earths Rate of growth Rational behaviour Raw material provision of Recession Redistribution Regulation in environmental and resource economics Renewable natural resource Replacement investment Research spillovers Reserves Restriction of individual freedom Returns to scale Revaluation account Rio+20 Rivalry in use S Safety need Saving rate rule for sustainable development for sustainable development Scarcity in environmental and resource economics of a natural resource SEEA See System of Environmental-Economic Accounting (SEEA) Self-interest Service environmental natural SNA See System of National Accounts (SNAs) Soil Solow model Stability Stabilizing policy Standard Standardized base measurement Standard-oriented environmental policy Steady state Steady state growth Stock of an asset of available production methods definition of of endangered species of fish of labour of man-made capital of a natural resource productive of productive assets of productive factors of wealth Substitution for natural resources within natural wealth Sustainability Sustainable development and the Brundtland Commission definition of and free riding and Hotelling’s rule indicators of international negotiations on investment for neoclassical indicators of summits on System of Environmental-Economic Accounting (SEEA) System of national accounts (SNAs) critique of and environmental services and natural resources System of solidarity Systems hierarchy T Technical efficiency Technical knowledge and productive capacity Technical progress rate of Technology Theory of the market economy Thermodynamics Time budget Total analysis Total equilibrium analysis Tradable permits U Unemployment Uniqueness United Nations Conference for Environment and Development (UNCED) Utility function intertemporal marginal maximisation periodical and willingness to pay V Valuable W Waste absorption of emissions of resources Water below the ground surface WCED See World Commission on Environment and Development (WCED) Wealth measures national natural as a sustainability indicator Wealth like concept Welfare measures prerequisites of generating Willingness to pay and budget size marginal and utility Wind energy plants World Commission on Environment and Development (WCED) ... missing an additional roebuck, we may be striving for an additional holiday trip or a second car (and maybe for an additional roebuck as well) But the character of the problem has not changed at all:... International Environmental Problems Summary to Part II and Looking Ahead III Macroeconomics and the Natural Environment Fundamental Concepts of Macroeconomics 9.1 Objectives and Methods of Macroeconomics... is usually called Cockaigne – an imaginary land of plenty, where all goods are always immediately available7 and hardship does not exist at all The problem of scarcity existed (and exists) at every