HS 200
Environmental Studies
Environmental Economics
Prof. Aditi Chaubal
aditichaubal@iitb.ac.in
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
Overview
• Course objectives and motivation
• Course outline
• Current scenario
• Sustainable development; Climate change
• Externalities and market failure; Economic instruments
• Public goods and common resources
• Main reference: Mankiw, G. (2012): Principles of Economics, 6th edn.
• Chapters 10, 11
• Any additional references will be mentioned in class and on the slides
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
Rationale
• Why is it important?
• Scarcity of natural resources
• Excessive degradation of the environment – pollution, deforestation, etc.
• In formulating strategies for achieving sustainable development, the interrelationship
between the economy and the environment needs to be understood.
• UN defines sustainable development as development that meets the needs of the
present without compromising the ability of future generations to meet their own
needs.
• For sustainable development to be achieved, it is crucial to harmonize three core
elements: economic growth, social inclusion and environmental protection. These
elements are interconnected and all are crucial for the well-being of individuals and
societies.
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
Rationale
• The United Nations Conference on Sustainable Development - or Rio+20 – took place
in Rio de Janeiro, Brazil in June 2012. It resulted in a focused political outcome
document which contains clear and practical measures for implementing sustainable
development.
• Rio+20 focused on two themes:
• A Green economy in the context of sustainable development and poverty
eradication
• The institutional framework for sustainable development
• In Rio, the Member States decided to launch a process to develop a set of Sustainable
Development Goals (SDGs), which would build upon the Millennium Development
Goals and converge with the post-2015 development agenda.
• Growing recognition of the need to formulate strategies for achieving the 17
Sustainable Development Goals or SDGs (or Global Goals)
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
Rationale
• On 1 January 2016, the 17 Sustainable Development Goals (SDGs) of the 2030
Agenda for Sustainable Development – adopted by world leaders in September 2015 at
an historic UN Summit – officially came into force. Over the next fifteen years, with
these new Goals that universally apply to all, countries will mobilize efforts to end all
forms of poverty, fight inequalities and tackle climate change, while ensuring that no
one is left behind.
• Focus of SDGs –
• Eradicate poverty – associated goals (4)
• Sustainable growth and development – climate action, clean energy (7)
• Shared prosperity and economic growth (6)
• Developed vs. developing countries
• Should developed or developing countries bear the burden of reducing emissions?
• Developing countries can benefit being late starters, with proper planning and
perspective about “ideal” mix of the use of resources, preservation of their
environment and achieve economic development
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
India – Some facts
• Third-largest primary energy consumer in the world after China and the United States
in 2021 (Ref: BP Statistical Review of 2022).
• Current share in global primary energy consumption is 6.1% ; likely to increase to
about 9.8% under stated policies scenario by 2050.
• Natural gas accounts for 6% of the country’s energy consumption; India plans to boost
the natural gas market share to 15% by 2030 under plan to reduce air pollution and use
cleaner-burning fuels.
• Aim of achieving 500 GW
installed capacity from non-fossil
fuel based capacity (Hydro, Nuclear,
Solar PV, Wind, Biomass etc.) by 2030.
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
India – Some facts
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
Microeconomic theory – Externalities
Overview:
• Recall: Market equilibrium, inefficiency, welfare economics, producer and
consumer surplus
 Why do markets sometimes fail to allocate resources efficiently?
 How can government policies potentially improve the market’s allocation?
 What policies are likely to work best?
• Externalities – Positive and negative
• Externalities and the social optimum
• Pollution
• Technology spillovers
• Solutions to externalities
• Private – Coase theorem
• Public – Pigouvian taxes, subsidies and regulation, tradable permits
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
Recall…
• Adam Smith’s “invisible hand ” theory of the market
• Self-interested buyers and sellers in a market maximize the total benefit that society
can derive from a market
• Market economy is one which allocates resources through decentralized decisions of
firms and households as they interact in the markets for goods and services.
• Demand and supply for a firm:
• Demand curve: Reflects the value of the product to the buyer measured by the
prices they are willing to pay; negative slope (quantity demanded at different price
levels)
• Supply curve: Reflects costs incurred by the seller / cost of production; positive
slope (quantity supplied at different price levels)
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
Recall…
• Market equilibrium is the quantity which maximizes the total value to the
buyers minus the total costs to the seller
• Market failure refers to a situation in which the market on its own fails to
produce an efficient allocation of resources
• Consumer surplus: buyer’s willingness to pay for a good (or the maximum
amount a buyer will pay for a good) minus amount actually paid
• Producer surplus: measures the benefit to the seller participating in the
market = amount received by the seller – cost of production incurred by the
seller (How is it different from profit?)
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
Consumer and Producer Surplus in market equilibrium
Price A
D
Supply
Consumer
surplus
Equilibrium
price
E
Producer
surplus
B
Demand
C
0
Equilibrium
quantity
Quantity
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
Recall…
• Efficiency: Property of resource allocation to maximize the
total surplus received by all members of the society
• Equity: Fairness of distribution of well-being between the
buyers and sellers
• Welfare economics: Study of how allocation of resources
affects economic well-being
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
Externalities and market inefficiency
• An externality refers to the uncompensated impact of one
person’s (or agent’s) actions on the well-being of a bystander.
• Externalities cause markets to be inefficient (inefficiency in
allocation of goods and resources), and thus fail to maximize
total surplus.
• Other cause of market failure: Market power
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
Externalities and market inefficiency
• When the impact on the bystander is adverse, the externality is
called a negative externality.
• Examples ?
• When the impact on the bystander is beneficial, the externality is
called a positive externality.
• Examples ?
• In both cases, an economic agent is failing to take into account
the external effects of his/her behavior.
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
Externalities and market inefficiency
• Negative externalities lead markets to produce a larger quantity
than is socially desirable.
• In the presence of externalities, society’s interest in a market
outcome extends beyond the well-being of buyers and sellers in
the market; it also includes the well-being of bystanders who are
affected.
• Because buyers and sellers neglect the external effects of their
actions when deciding how much to demand or supply, the
market equilibrium is not efficient when there are externalities.
• The equilibrium fails to maximize the total benefit to society as a
whole.
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023
Thank you
Prof Aditi Chaubal, IIT Bombay, Jan-Apr 2023