Economics for environmental studies a strategic guide to micro and macroeconomics, second edition

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