What is
Environmental
Economics?
Chapter 1 - BCF

What is Economics?

In any economy there are competing
objectives
 The important players could be
Gov’t
 Households
 Businesses
 Nonprofit Org

 Environ
Eco is the application of the
principles of economics to the study of
environmental resources, how are they
developed and managed.

It focuses primarily on how and why
people make decisions that have
environmental consequences. It is also
concerned with how economic institutions
and policies can be changed to bring
these environmental impacts more into
balance with human desires.

Derived more from microeconomics than
macroeconomics. Hence, the first lecture
is devoted to sketching out the kinds of
questions environmental economists ask
and the answers they seek

Economic Analysis


Environ Eco focuses on
 Society’s natural and environmental resources
 Examining the way people make decisions that
lead to either environmental destruction and
environmental improvements
People pollute because…
 It’s
easy and cheap (Waste Disposal)
 Decision-making dependent upon certain set of
economic and social institution
 Structure of incentives (monetary and non-monetary)

Distinction between normative and positive
economics
Pollution is a result of the profit motive?
 Entrepreneurs don’t pay any heed to
environmental impact because it doesn’t pay
 What would you do to reduce environmental
pollution?
 But..

 Individual
consumer pollutes as well (Cars, etc)
 Non profit government agencies pollute
 Commumist regimes v/s capital economy

Therefore, any system will produce
environmental damage if the incentives within
the system are not structured to avoid them
Environmental degradation is a result of
human behavior that is unethical and
immoral
 So, to get people stop polluting, one way is
to increase general level of environmental
morality in the society
 Problems to moral reawakening...?

 Is
it applicable for a problem with ethical
dimension
 Can we enforce certain policies?
 Are we targeting right environmental objectives?

So, it is the way the economic system has
been arranged!

INCENTIVES:
 An
economic incentive is something that leads
people to channel their efforts at economic
production and consumption in certain directions
 Household example…
 People charged on each trash bag they put on
the curb
 That reduced amount of solid waste and lead
to huge amount of recycling
 Illegal dumping and difficulties with applying
the plan to household apartments

Incentives In Industries
 Problems:
Profit motive
 Use environmental resources for waste disposal
 Such services have been virtually free

 Solutions:
Enforce laws making pollution illegal
 Charge firms for pollution-causing material they
emit into environment
 European industries (CO2 taxes)
 Possible Affects…?


Incentives in Transportation:
 Widespread
use of automobile and its
ownership
 Detrimental to human health and
environmental damage

Environmental Economists have termed
the word, External costs in order to
describe a certain set of costs
 Some
countries have proposed establishing
road charges on drivers to recognize the
external costs

Design of Environmental Policy
There is an enormous range and variety of
public programs and policies devoted to
environmental matters at all levels of
government
 Vary in terms of effectiveness and
efficiency
 Environmental Protection Agency (EPA)
 Director quoted as saying,“… at this level
of expenditure, there is a very large
obligation to get it right.”
 Clean Air Act (1990)


Revolved around three air pollution
problems:
 Urban
smog
 Emissions of SO2
 Other toxic chemical emissions

The law included things like:
 New
technologies
 Production of super clean cars
 New standards for toxic emissions

But is just composing a well written piece
of policy a cost-effective way of attacking
air pollution problems?

A major problem of environ policy:
Perverse Incentives – incentives that work
against the overall objectives of the policy

Environmental Economist is supposed to
measure a policy in terms of cost
effectiveness, getting the most pollution
reduction for the money spent, aptly
balancing costs and benefits

Macroeconomic questions: Environment and
Growth?
 Micro:
Individuals, small groups of consumers,
polluting firms etc
 Macro level aims?

Two main questions arise:
 Relationship
between environmental-pollution control
measures and the rate of growth and unemployment
 Impact of economic growth on environmental quality?
What way is the relationship?

Developed vs. Developing countries…?

Cost-effective analysis:
 This
is simply an analysis where we look for
the least expensive way of achieving a given
environmental quality or target
 Example,
reducing CO2. Studies of this sort
require close coordination of scientific and
engineering analysis to determine realistic
technical parameters and economic analysis
to determine the values associated with these
parameters

Benefit Cost Analysis:
 Main
analytical tool used by economists to
evaluate environmental decisions.
 Used widely in public sector
 An aid in selecting efficient policies, agency
uses it to justify it’s workings
 Used to try and stop new regulations or
weaken old ones

The approach implies consideration of
both benefits and costs – and this often
puts such studies in the middle of political
controversy on many issues

International Issues:
 Destruction
of Ozone layer
 Global Warming

Economics and Politics:
 How
to achieve effective environmental policy
in a highly political policy environment?
 Environmental policy decisions come out of
the political process where people and groups
come together and contend for influence and
control, where interests collide, coalitions
shift, and bias intrude

So where does it leave environmental
economist then?
 The
best way for scientists and economists to
serve is to produce studies that are as clear
and as objective as possible
 It is politician’s job to compromise or seek
advantage and it is scientist’s job to provide
the best information to policymakers on
alternative courses of action.
The Economy and
the Environment
Chapter 2 – BCF

Economy
 It
is a collection of technological, legal, and
social arrangement through which individuals
seek to increase their spiritual and economic
well-being
 The two elementary economic functions are:
Production
 Consumption


Economic System:
 Exists
within and is encompassed by natural
world
Raw Materials
(Inputs, Natural
Resource
Economics)
Economy
Residuals,
(Environmental
Economics)

Impact on environment is not specific to
discharge of pollutants; any scenic
degradation or habitat disruption also
worsens the environment

Natural Resource Economics:
 Application
of economic principles to the
study of activities like extraction and utilization
of natural resources

Mineral Economics: Apt rate at which ore shall be
extracted from mine, affect on mineral prices after
exploration and addition
 Forest
Economics: Government policies
affecting harvest rates and timber companies
 Marine Economics: Apt rate at which fisheries
should be managed, Affects on stocks of fish
 Land Economics: Role of private sector,
property laws and regulations
 Energy Economics: Relationship between
energy use and energy prices?
 Water Economics: Reallocation of water from
agriculture to urban areas? Use of water?
 Agriculture Economics: Support prices? Use
of subsidies on farmers and production of
crops?

Renewable and nonrenewable Resources:
 The
living resources such as fish and timber
are renewable as they grow according to
biological clocks and process
 Non-living classis example: Sun’s energy
 Nonrenewable resources have no processes
of replenishment—once gone, they are gone
forever such as petroleum reserves and some
minerals
 Low replenishment rates..?

Intertemporal trade-offs exist with
renewable and nonrenewable resources

Biological and ecological processes create
connections between present and future
generations.

Sustainability: choosing rates of use today
so that they don’t jeopardize future
generations
 How
can it be defined for renewable and
nonrenewable resources…?

Depletion of earth’s assimilative
capacity.
 Example:
CO2,, heavy metals
Biologists estimate that there are more
than 30 million species on earth making
genetic information very useful in the fields
of medicine, pesticides and so on
 Habitual conservation and species
preservation are contemporary resource
problems
 Blurring edges between natural resources
and environmental resources

 Resource
extraction directly affects
environmental quality.

The Fundamental Balance
Raw
Materials
(M)
Recycled (RPr)
Producers
Residuals (RP)
Discharged (RPd)
Goods
(G)
Residuals (RC)
Consumers
Discharged (RCd)
Recycled (Rcr)
Natural Environment

Model: The elements shown are parts of economic
system


Producers (Take inputs convert them to outputs)
Consumers (Receivers of final goods and services)

The Fundamental Balance
Raw
Materials
(M)
Recycled (RPr)
Producers
Residuals (RP)
Discharged (RPd)
Goods
(G)
Residuals (RC)
Consumers
Discharged (RCd)
Recycled (Rcr)
Natural Environment

Producers and consumers create residuals (leftovers) –
Waste energy, pesticides, animal manure, sulfur dioxide,
carbon dioxide, toxic solvents, the list goes on

In the long run, M = RPd + RCd
 When
system grows, it can retain some
proportion of natural inputs (such as capital
accumulation)
 Recycling delays disposal of residuals
The fundamental balance is achieved in
the long run only and to reduce the
residual amount, the M has to be reduced
 According to the flow diagram:

RCd = M = G + RP – RCr – RPr
 Reduce G, reduce RP and/or Increase RCr +
RPr
 RPd +

Reduce G
 Reduce
output or at least stopping its rate of
growth, for example, ZPG
Stationary population can increase economically
 Even stationary population can gradually degrade
the environment in which it finds itself


Reduce RP
 For
a given output produced, reduce the
residuals
Shift the intensity of production in every sector by
adopting new environment friendly technologies
and practices
 Shift composition of output sector wise
 Step towards Services sector, or Information
sector..?


Increase RCr + RPr
 Substituting
recycled material for virgin materials
 However,





It is difficult to recycle every residual
Process of energy conversion changes the chemical
structure of energy materials
Recycling still will create residuals
Role of materials research
The environment as an economic and social
asset
 The
productivity of natural environment lies in its
ability to support and enrich human life and to
assimilate and assemble less harmful the waste
products of economic system. The environment
quality is directly affected by the types and amounts
of residuals

PPC:
A
curve simply showing the different combinations of
two things a society may produce at any time, given
its resources and technological capabilities
Market
Goods
Environmental Quality (Index, derived from data
on different dimensions of ambient environment
– such as SO2, noise levels, etc

Terminology:
 Ambient
Quality
 Environmental Quality (includes visual and aesthetic
quality of the environment)
 Residuals (production and consumption)
 Emissions (portion of residuals placed in the
environment)
 Recycling (residuals that could be used again in the
production process)
 Pollutant (A substance lowering ambient quality level)
 Effluent (Water Pollutant)
 Pollution (Lower ambient quality to the extent that
causes damages to the environment)
 Damages (Negative impact produced by pollution)
 Environmental Medium (classified as land, air, water)
 Source (location at which emissions occur)

Emissions, Ambient Quality and Damages
Source n
Production
Residuals
Residual handling
Emissions
Land
Water
Air
Environmental
Media
Physical, chemical and hydrological processes
Ambient quality
and nonhuman exposure
Human and ecosystem damages
Human

Types of pollutants
 Cumulative
and Noncumulative Pollutants
Cumulative (Radioactive waste (cosmic rays),
plastic waste)
 Noncumulative (Noise)
 Organic matter emitted into water bodies,
noncumulative (water has assimilative capacity
rendering effluents as much more benign) and
cumulative if rate of breaking down into less
harmful chemicals is low

 Basic
problem is figuring out environmental
damage and lessening the emissions
 Cause-and-effect relationship between
current emissions, current ambient quality and
current damages

Local vs. Regional and Global Pollutants
 Local:
Visual degradation, noise pollution
 Look at how widespread the effects are from any
particular pollution source
 Regional: Acid Rain and Global: Ozone layer
depletion
 Solutions… (emissions and impacts)?

Point Source vs. Nonpoint Source Pollutants
 Point:
SO2 from a large power plant are easier to
locate
 Non point: Agriculture chemicals (and storm water)
usually run off land in a diffused pattern
 Emissions and impact easier to judge for…?

Continuous vs. Episodic Emissions
 Continuous:
Emissions from electric power
plant.
 Policy focus on rates of discharges
 Does continuous emissions mean continuous
damage to environmental quality?
 Episodic: Accidental chemical spills.
 Could be dangerous or could be ignored

Environmental damages not related to
emissions!
 Apt
policies still needed

Short Run and Long Run Choices
 PPC
Analysis
Due to depletion of
resources…
Market
Goods
Market
Goods
Environmental Quality
 Therefore,
Environmental Quality
sustainability is an important issue.