Environmental Economics
Lecture 2
Hendrik Wolff
hgwolff@u.washington.edu
Should I eat fish? (Snickers)
Let’s eat Fish (Snickers)
• Rules:
– Each harvested fish is potentially one
‘participation point’ towards final grade
– No Communication
– No winks or nods
– No violence
– 10 Second to harvest the ocean
– What ever is left on the table after 10 seconds, I
will double in second round of fishing.
Introduction
• What is Environmental Econ (EE)?
• Def. Kolstad, Chapter. 1:
– EE is concerned with
• the impact of the economy on the environment
• the significance of the environment to the economy
• The appropriate way of regulating the economic
activity so that balance is achieved among
environmental, economic and other social goals.
Def. of EE (continued)
• “Economics not about profit max. or ‘capitalism’, but
‘how to make best of things’!
• ‘Things’ includes
–
–
–
–
–
Environment (Air, Water, landscape, forests) as well as
‘capital’
‘human capital’
‘time’
‘music in the pedestrian zone’
•  Max Welfare s.t. constraints. (virtually all econ models have this
set-up)
Def. EE (cont.)
EE Problem?
Environment
Econ
No
Air
Scarce ?
Def. EE (cont.)
EE Problem?
Environment
Econ
No
Air
Scarce ?
Yes
Clean Air
Scarce!  Clean Air has $ value
Def. EE (cont.)
EE Problem?
Environment
Econ
No
Air
Scarce ?
Yes
Clean Air
Scarce!  Clean Air has $ value
Yes
Scenic Rhine
Valley or a Dom
Scarce  value of Cologne 
Def. EE  “Externality”
• Definition of non-pecuniary externality:
– Action by one agent effect utility or production
function of another agent without that others
agent appropriate compensation
– If u2’ (u1) < 0  negative externality (smoker)
– If u2’ (u1) > 0  positive externality (beekeeper)
Def. EE  “Externality”
• Definition of non-pecuniary externality:
– Action by one agent effect utility or production
function of another agent without that others
agent appropriate compensation
– If u2’ (u1) < 0  negative externality (smoker)
– If u2’ (u1) > 0  positive externality (beekeeper)
• EE not concerned with pecuniary externality
Difference between EE and
Resource Econ?
Difference between EE and
Resource Econ?
•
•
•
•
•
•
M = Material
P = Producer
C = Consumer
R = Residual (not pollution!)
d = discharge
r = recycling
Fundamental Material Balance
Equations
• (Rdi ) = M
• First (FMBE) and Second Law (Entropy increases) of
Thermodynamics govern the closed system
– See Nick Hanley et al. Chapter 1 for discussion on ‘limits of
growth’
• 4 Approaches to manage Environment
• M = (Rdi ) = G + RP - (Rri )
–
–
–
–
Traditional Approach: (Rdi )
Moral Approach / Zero Population Growth: G
Technology Innovation: RP
Recycling (Rri )
Fundamental Material Balance
Equations
• (Rdi ) = M
• First (FMBE) and Second Law (Entropy increases) of
Thermodynamics govern the closed system
– See Nick Hanley et al. Chapter 1 for discussion on ‘limits of
growth’
• 4 Approaches to manage Environment
M = (Rdi ) = G + RP - (Rri )
–
–
–
–
Traditional Approach: (Rdi )
Moral Approach / Zero Population Growth: G
Technology Innovation: RP
Recycling (Rri )
Definitions
• 4 Categorisations of Types of Pollutants
Categorization
Dimension
Same
Pollutant?
Global vs. Local
Space
No
Definitions
• 4 Categorisations of Types of Pollutants
Categorization
Dimension
Same
Pollutant?
Global vs. Local
Space
No
Point source vs. nonpoint source
Space
Yes
Definitions
• 4 Categorisations of Types of Pollutants
Categorization
Dimension
Same
Pollutant?
Global vs. Local
Space
No
Point source vs. nonpoint source
Space
Yes
Cumulative vs. noncumulative
Time
No
Definitions
• 4 Categorisations of Types of Pollutants
Categorization
Dimension
Same
Pollutant?
Global vs. Local
Space
No
Point source vs. nonpoint source
Space
Yes
Cumulative vs. noncumulative
Time
No
Continuous vs. Sporadic
Time
Yes
Definitions
• 4 Categorisations of Types of Pollutants
Categorization
Dimension
Same
Pollutant?
Free Riding
on...
Global vs. Local
Space
No
State,
country
Point source vs. nonpoint
source
Space
Yes
Neighbor,
community,
society
Cumulative vs.
noncumulative
Time
No
Future
generation
Continuous vs. Sporadic
Time
Yes
Limited
liability
Chapter 3 of Kolstad
Social Choice: How Much Environmental Protection?
• There are two basic questions in Environmental
Policy
(a) What is the right Balance between Environmental
Protection and Environmental Use?
(b) Given we determined optimal level of Environmental
Protection of question (a): how do we achieve this level?
• Chapter 3 concerned with question (a)
• Social Choice: What should be the thresholds?
More generally, where should we end up on PPC?
Figure: Where should we end up on
Production Possibility Frontier (PPC) in
GDP – E-Quality space
Individual Preferences Regarding
Environmental Protection
• Biocentrism
• Anthropocentrism
Individual Preferences Regarding
Environmental Protection
• Biocentrism
- Pure Biocentrist has Utility function that does
NOT allow to substitute x for existing e
• Anthropocentrism
- Pure Anthropocentrist has Utility function that
does NOT allow to substitute e for potential x
Individual Preferences Regarding
Environmental Protection
• Biocentrism
- Pure Biocentrist has Utility function that does
NOT allow to substitute x for existing e
- Values ‘intrinsic’ value of nature
• Anthropocentrism
- Pure Anthropocentrist has Utility function that
does NOT allow to substitute e for potential x
- Values ‘instrumental’ value of nature
Sustainability
• Strict/Strong Def.:
Mj = ∑Rijd for all elements of j
• Following this FMBE short term has the
advantage:
– guarantees that future generation enjoys same
environmental amenities & resources as we have
today
– no extinction of species
– little extraction of oil
Sustainability
• Strict/Strong Def.:
Mj = ∑Rijd for all elements of j
• Following this FMBE short term has the
advantage:
– guarantees that future generation enjoys same
environmental amenities & resources as we have
today
– no extinction of species
– little extraction of oil
Solow / Weak Sustainability
• Definition by Brundtland Commission 1987:
• “Development that meets the needs of present
generation without compromising the ability
of future generations to meet their own
needs”
• Figure of Solow model using PPC
Solow / Weak Sustainability
– Allows for Substitutions between Capital Types
• Material/Infrastructure Capital
• Human Capital
• Natural Capital
– Non-renewable resources are allowed to become
depleted if sufficient HC & RD develops such that
future generation can make use of renewable
resources.
Quotes from Solow Article!
“UNESCO Def. of Sustainability ‘sounds good’ but is
impractical and ‘fundamentally wrong’
“We do not owe the future any particular ‘thing’”, but well
being.
“I doubt that I would feel myself better off if I had found
the world exactly as the Iroquois left it.”
Instead what we should do:
Invest the harvest of non-renewables in education,
infrastructure
Read Solow Article!
“UNESCO Def. of Sustainability ‘sounds good’ but is
impractical and ‘fundamentally wrong’
“We do not owe the future any particular ‘thing’”, but well
being.
“I doubt that I would feel myself better off if I had found
the world exactly as the Iroquois left it.”
Instead what we should do:
Invest the harvest of non-renewables in education,
infrastructure
How to implement Solow
Sustainability Growth?
• Government serves as trustee (representative of future
interests)
– Pollution Taxes, Subsidies for R&D etc.
• Hartwick Rule
– Norway versus UK in using profits from North Sea Oil Field
• Green National Accounting
• We have to solve the “Sustainability Paradox”:
– What weights more ?
• Concern about future vs. concern about present poor?
• If concerned about current poor, then we should consume
(pollute) more today (instead of investing more today)
Social Choice from Individual
Values
Three Social Choice Mechanisms
• Pareto Criterion
• Compensation Principle (Kaldor
Hicks)
• Voting
Social Welfare Functions
Benthamite
Rawlsian
Egalitarian
i 1 2 3 4 SWFB
10 10 10 10
1
10 10 19
10 10 10 1
SWFE
SWFR
Arrows Impossibility Theorem
6 Axiom:
Completeness
Unanomity
Nondictatorship
Universality
Transivity
Independence of Irrelevant Alternatives
Arrows Impossibility Theorem:
There is no rule satisfying the 6 Axioms for converting individual
preferences into a social preference ordering
This is troubling:
No “optimal” SWF can be constructed.
 No nice neat theory of social decision making, yet decisions must be
made.