Module (2): Environmental (neoclassical) economics:
Traditional paradigm of neoclassical economics: monetary evaluation
Cost-Benefit Analysis
Techniques of monetary evaluation for the environment.
Polluter pays principle
Negative externalities and the reality
The environmental Kuznet curve
Traditional paradigm of neoclassical economics: monetary evaluation
Monetary evaluation gives a clear quantitative result (the product)...
Based on the model of Pareto efficiency and on Kaldhor-Hicks potential compensation
But the latter principle generates distributional issues: if in a project the rich gets
richer more than the poor gets poorer, it is then economically feasible to do
the project, no matter if the compensation happens.
Distributional issues often are not an economist’s problem. The decision-maker should worry
about them.
Cost-Benefit Analysis
Decision making is based on CBA. i.e. for evaluation of alternative projects at the
micro level, or for the implementation of a government policy (environmental tax,
emission limits) at the macro level.
Effective CBA is related to the identification of total economic value; this is
expressed only in monetary terms.
TEV = Direct use value + indirect use value + option value + existence value
USE VALUES
+ NON-USE VALUE
Environmental economics tries to internalize costs that are not present in the market
by using methodologies to price them. “Internalization of externalities”
...but the process to get the number has some distorsions...
Techniques of monetary evaluation for the environment
Willingness to pay/willingness to accept
Travel cost method
Hedonic pricing
Often they simply don’t work: how far can we force the citizen to give a price?
Marketcentric view. CBA has more sense in a context where the market is dominant (i.e. a
western city) than in a context where market mechanisms are highly absent (i.e. the tropical
forest)
One example of an environmental tax
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Polluter pays principle and negative externalities
Based on the Coase theorem, that is to clarify property rights: example of a factory polluting
the waters upstream from a bathing place. Bathers have to travel to another place.
Theorem says that Pareto efficiency can be reached by market forces. The task is to define who
to give property rights, then compensation of negative externalities will be paid if you have the
right.
The polluter pays principle says that the rights are given for a clean environment to the users.
Firm has to pay for the negative externalities. For example the price of travelling to another
place. Two cases:
1. compensation > increased revenues from pollution  stop pollution (no production, or find a
clean technology)
2. compensation < increased revenues from pollution  people are paid to go bathing to
another place
Is internalizing negative externalities enough?
If bathers are totally compensated but the ecosystem dies is enough?
Paying the price in money is a necessary condition but might not be a sufficient condition.
This is a marketcentric and anthropocentric approach.
A more radical view is an ecocentric approach.
But, in the reality
A final comment: in the real world, the acceptance of this principle would be an improvement
in the ecological crisis. Market forces would reduce the output level of pollution.
Polluters do not pay for negative externalities (First problem: the necessary condition is not
respected)
Sometimes the value of life is closely connected to the ecological value, especially for those
people that live directly in contact from the earth, like tribal people, traditional people and rural
people: “what is your willingness to accept for losing the right of use of your land?”
In other cases more close to us there are problems of quantifying the price. mainly these are
issues of ethical nature, but neoclassical economics models do not accept ethics, i.e. the value
of life: imagine for example the ethical non-sense of such a question “what is your willingness
to accept for the death of a friend or a relative?” Often insurance value of life is a monetary
indicator for the price of life, thus discriminating between rich and poor people.
Of course there is no price because other values exist. Only the homo oeconomicus would be
able to give us an answer, but he is only an invention of economists. Reality is different from
the perspective of economics models based on “only money value”.
Ecological and human values are not included in the reduccionism of these models
Ecological economics tries to address these issues because they are part of the reality
Environmental Kuznet Curve
Some environmental economists are optimistic about the future, under the Environmental
Kuznet Curve hypothesis.
What is the relationship between economic growth and environmental degradation?
That of an inverted U shaped curve: environmental degradation rises with income, untill a point
where, as income grows, willingness to have a cleaner environment grows, which implies a
better environment.
This issue is connected to the supposed “dematarialization of the economy” and to the
consideration of the environment as a luxury good.
But in reality there is no evidence yet of dematerialization
And the “NIMBY” (Not-in-my-backyard) perception displaces the environmental loads to
poorer countries
Finally, even if dematerialization will occurr, who guarantees us that the outcome will not be a
“The Matrix” like scenario?
Environmental Kuznet Curve
Paper from EKC Vienna
Wuppertal report pag. 66