EC 145E
Environmental Economics
UCLA
Dr. Bresnock
Lecture 1
Economics – is a social science concerned with the efficient use of limited, or scarce,
resources to achieve maximum satisfaction of human material wants. It is concerned
with decision making by institutions that include consumers, firms, government agencies,
and non-profit organizations such as environmental groups.
Environmental Economics -- is the application of the principles of economics to the
study of how environmental resources are developed and managed. Decision making
includes analysis of the environmental consequences of alternative courses of action so
that environmental quality goals are met along with other societal goals. Focus is air,
water, hazardous and toxic waste management issues.
Resource Economics – is the application of the principles of economics to the study of
extraction and utilization of natural resources. Focus is on mineral, forest, marine, land,
energy, water, agricultural, and biodiversity management issues.
Figure 1
Circular Flow with Environmental and Resource Dimensions
Expenditures
Outputs
Firms
Households
Inputs
Incomes
Extraction
Residuals
Environmental
Endowment
Environmental Economics
Lecture 1
Dr. Bresnock
Note: The environmental is viewed as a composite asset, or endowment, that provides a
steam of services to the economy, i.e. life support, air, water, energy, wildlife, forests,
fisheries, biodiversity, minerals, etc.
Figure 1 illustrates that the Earth is a closed system to which the laws of thermodynamics apply:
(1)
1st Law of Thermodynamics – “Neither energy nor matter can be created or
destroyed”. This law captures what environmental and resource economics refer
to as the “materials balance” perspective. That is:
Mass of Material Inputs = Mass of Material Outputs + Mass of Waste, or
Residuals
If Mass of Waste > “Assimilative Capacity” or
or “Carrying Capacity”
of Environment
Pollution
Damages
Note: Some portion of the waste, or residuals, will be recycled prior to discharge
into environment. The “assimilative capacity”, or “carrying capacity” of
the environment refers to natural processes that dilute, remove, or
otherwise reduce the amount of discharged residuals.
Not all waste, or residuals, becomes pollution, but all pollution is waste, or
residuals. Pollution occurs when a substance, form of energy, or action
degrades the quality of the “ambient”, or surrounding, environment.
Damages are the negative impacts resulting from pollution.
The essence of the 1st Law of Thermodynamics is captured in the equations
below. In the long run:
M = Rpd + Rcd where M = Mass of Material Inputs
Rpd = Residuals Discharged by Producers
Rcd = Residuals Discharged by Consumers
M = G + Rp - Rpr - Rcr where G = Mass of Material Outputs
Rp = Residuals from Production
Rpr = Residuals Recycled by Producers
Rcr = Residuals Recycled by Consumers
(Note: G = Rc -- everything that flows into the consumption sector as a good
eventually ends up as a residual from that sector.)
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Environmental Economics
Lecture 1
Figure 2
Dr. Bresnock
Circular Flow Revisited
Recycled (Rpr)
Residuals (Rp)
Raw
Materials
(M)
Discharges (Rpd)
Producers
Goods (G)
Consumers
Residuals (Rc)
Discharges
(Rcd)
Recycled (Rcr)
Natural Environment
Thus, to ↓ Residuals in the Long Run:
(1)
(2)
(3)
(2)
↓ G -- reduce output; ZPG, but may use more of the environment/person;
impacts may be cumulative;
↓ Rp + Rc -- via ↓ residuals intensity – source reduction , or pollution
prevention , shift output composition toward less residuals – sectoral shift;
↑ Rpr + ↑ Rcr -- reduce usage of virgin materials
2nd Law of Thermodynamics -- aka the “entropy law” where “entropy” is the
amount of energy that is not available for work. This law states that entropy
increases over time. The implication of this law is that no energy conversion is
completely efficient. In addition, if the VERY long run, a closed system will run
out of energy.
The Earth becomes an “open system” via interaction with the solar system, i.e. solar
energy. This “openness” enables the growth processes of the planet to be extended, but
still limited, to the availability of solar energy usage.
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Environmental Economics
Lecture 1
Dr. Bresnock
The creation of waste, or residuals, is an inevitable consequence of consumption and
production activities. Given the fundamental laws of thermodynamics, the generation of
waste leads to 3 fundamental questions that are addressed in environmental economics:
(1)
(2)
(3)
(1)
What is environmental degradation and why do we have it?
What level of environmental quality should we strive for?
How do we design institutions to improve and/or protect environmental
quality?
Environmental degradation results from:
(a)
Immoral or unethical behavior
(b)
Profit motive – but consumers, government agencies, and non-profit
organizations also pollute; also communist systems
(c)
Lack of information
Note: The role of “incentives” to address these three causes of environmental
degradation is an important element in designing appropriate
environmental policies. Such designs would attract, repel, or lead people
to modify their behavior in some way that would reduce environmental
degradation. Policies that create “perverse incentives” should be avoided.
(2)
Determining the “optimal, or efficient” level of pollution” depends on the type of
pollution, location of pollution and those affected by it, the “assimilative
capacity” of the environment, and many other factors. Chapters 4 and 5 examine
static optimality – when emissions in occur in one time period and are
independent of those in other time periods. Chapters 6 – 8 explain dynamic
optimality – when emissions occur over time.
(3)
The design of institutions and policies to improve and/or protect the environment
are taken up in Chapters 9 – 13. The key criteria used by economists to evaluate
these policies are:
(a)
(b)
(c)
(d)
(e)
Efficiency – maximizing the net benefits to society (total social benefits
minus total social costs) from the environmental policy.
Cost-Effectiveness – reaching an environmental objective at least cost, or
producing the maximum environmental improvement possible for the
resources used.
Fairness – aka “equity” concerns how the benefits and costs of
environmental improvements ought to be distributed among members of
society. Moral judgments involved.
Incentives for Innovation – how strong are the incentives for individuals
and groups to find new, innovative ways of reducing their impacts on the
environment.
Enforceability – policies that minimize the time and resources to achieve
compliance are preferred in general.
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Environmental Economics
Lecture 1
Dr. Bresnock
(1) – (3) primarily involve microeconomic analysis – decision making by individuals,
firms, and other small groups. Macroeconomic analysis looks at broader issues, and in
the context of environmental analysis, key areas of concern are the:
(1)
(2)
Relationship between environmental regulations and the rate of
unemployment and economic growth,
Impacts of economic growth on environmental quality
Studies of these macroeconomic issues have led to very different predictions regarding
future economic growth and environmental well-being. Pessimists and optimists offer
alternative visions of the environmental and resources future.
Pessimist Model – studies such as Limits to Growth (1972) and Beyond the Limits (1992)
developed by Jay Forester (MIT) rely on system dynamics. These studies included:
(1)
Use of a large scale computer simulation predicts future outcomes based on
underlying relationships of economic and environmental behavior.
(2)
Use of “feedback” loops to capture behavioral relationships. Some feedbacks
were “positive”, or self-reinforcing – a secondary effect reinforces the trend;
while others were “negative”, or “self-limiting” – a secondary effect goes
opposite to the first effect.
Examples: Positive Feedback – ↑ Income → ↑ Investment Expenditure → ↑
Capital Equipment → ↑ Output → ↑ Income. Another example would be: ↑
Shortage → ↑ Hoarding, or Stockpiling → ↑ Shortage. Negative Feedback -↑ Population → ↑ Industrial Growth → ↑ Pollution → ↑ Mortality Rates →
↓ Population. Best know planetary example of a negative feedback is the Gaia
hypothesis – this view suggest that deviations from the natural order trigger
natural, nonhuman response mechanisms that restore balance – the planetary
environment within limits is therefore self-regulating.
(3)
Exponential population growth couple with fixed resources.
Population
Growth
Time
(3) No technological change.
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Environmental Economics
Lecture 1
Dr. Bresnock
Main Conclusions of Pessimist Models
(1)
Within 100 years, assuming no major changes to physical, economic, and social
relationships, society will run out of nonrenewable resources → overshoot and
collapse of the system.
Piecemeal approaches to solving individual problems will not be successful. i.e.
doubling resources → ↑ industry output → ↑ pollution
Immediate limits on population and population growth are needed to prevent
overshoot and collapse of the system
(2)
(3)
Optimist Model -- studies such as The Ultimate Resource by Julian L. Simon (1981) and
The Skeptical Environmentalist: Measuring the Real State of the World by Bjorn
Lomberg (2001). Simon observed that:
Land used for agriculture is still increasing → food production not limited.
Natural resources have not been scarcer over time – more a problem of
economics than physical availability.
Pollution levels have ↓ as population and income have ↑. Population more
likely to be an S-shaped logistic curve – rapid growth for developing
countries, and approaching ZPG, or replacement rates, for developed
countries.
(1)
(2)
(3)
Population
Growth
Time
Main Conclusions of Optimist Models
(1)
(2)
(3)
Physical resources will not limit production. Scarcities will trigger price increases
which will stimulate resource discovery and innovation.
Expects trend in pollution decline to continue as ability to pay for cleanup
increases with income.
Increases in conventional food and energy demands will be met by
unconventional means, i.e. biotechnology, solar energy, wind power.
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Environmental Economics
Lecture 1
Dr. Bresnock
Comparison of the Pessimist and Optimist Viewpoints
The production possibility curve (PPC) can be used to illustrate the differences between
the pessimist and optimist viewpoints of the resource and environmental future.
Figure 3 Market Goods versus Environmental Quality
Market Goods
Environmental Quality
In Figure 3, PPC1 indicates that there may be a tradeoff between producing more market
goods and lowering environmental quality in the short run. In the long run, the
production possibility curve may shift out due to technological change, new resource
discoveries, innovations in production processes, etc., or shift in due to degradation of the
existing resource base.
Important Term Distinctions
(1)
Ambient Quality versus Environmental Quality -- “Ambient quality” refers to the
quality of the immediately surrounding environment whereas “environmental
quality” means a more genera, far-reaching state of the environment.
(2)
Residuals versus Emissions – “Residuals”, or “waste”, refers to what is “left over”
from production and consumption, some of these are recycled back into the
production process. “Emissions” are residuals placed into the environment.
(3)
Pollutant versus Effluent versus Emission – “Pollutant” is a more general term
that means any substance placed in the environment that degrades the ambient
quality. “Effluent” typically refers to a liquid pollutant, or pollutant emitted into a
water resource. “Emission” usually refers to a pollutant that enters the air
resources, but it may also be used generally to be any pollutant.
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Environmental Economics
Lecture 1
Dr. Bresnock
(4)
Damages versus Pollution -- “Damages” are negative impacts from pollution that
are typically measured in $, but may also be represented as just quantities.
“Pollution” is the result of emissions that exceed the “assimilative capacity”, or
“carrying capacity” of the environment.
(5)
Polluter versus Pollutee -- “Polluters”, aka “sources”, create the emissions that
become pollution. “Pollutees, aka “receptors”, receive the emissions created by
the polluters.
Consumers, firms, government entities, and non-profit
organizations can be either or both polluters and pollutees.
(6)
Environmental Medium -- broad dimensions of the natural world that constitute
the environment, i.e. air, water, and land.
(Insert Figure 4
Emissions, Ambient Quality, and Damages here)
Types of Pollutants
(1)
Uniformly Mixed Pollutants versus Non-Uniformly Mixed Pollutants – For
“uniformly mixed pollutants” the damage caused does not depend on the location
of the sources; damages depend only on the amount, or weight, of the emissions.
Ex. CFCs, ozone depletion, CO2, global climate change. “Non-uniformly mixed
pollutants” lead to damages that depend on location and the amount of damages
released. Sources may cause different amounts of damage at different
geographical locations. Ex. paper mills, chemical plants, industrial plants.
(2)
Cumulative versus Noncumulative Pollutants -- “Cumulative pollutants” build up
in the environment. Ex. radioactive waste, lead, DDT, plastics. “Noncumulative
pollutants tend to disperse, degrade, or dilute rather quickly. Ex. noise, nitrogen
and sulfur oxides, particulate matter, CO.
(3)
Local versus Regional versus Global Pollutants -- “Local” pollutants cause
damage to a confined area – they do not “travel” across political or geographical
boundaries. Ex. auto emissions, noise, cigarette smoke. “Regional” pollutants
cause damages that cross local and state boundaries. Ex. SO2, acid rain, oil spills.
“Global” pollutants cause damages that cross international boundaries. Ex.
CFCs, ozone depletion, global climate change, CO2.
(4)
Point versus Non-Point Source Pollutants -- “Point sources” are easy to identify
where a pollutant is released and the emissions leaving the point of discharge are
easy to ascertain. Ex. smokestack emissions, outfalls from municipal and
industrial sources. “Non-point sources” have emission release points that are hard
to identify. Ex. pesticides, fertilizer chemicals, urban runoff, mobile source
emissions.
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Environmental Economics
Lecture 1
Dr. Bresnock
Continuous versus Episodic Emissions – “Continuous emissions” occur on a
regular basis. Ex. emissions from power plants, automobiles, household wastes.
“Episodic Emissions” occur infrequently, and often by accident. Ex. oil or
chemical spills, industrial fires.
(5)
Damages Not Related to Emissions
(1)
(2)
(3)
Land Conversions – destroy environmental value of land. Ex. habitat or
species losses, destruction of wetlands, view impairment
Strip Mining – destroys ecosystem values, contaminates water supply.
Clear cutting – destroys ecosystem values, species losses, flooding leading to
lost topsoil
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