Environmental
Economics
Sedef Akgüngör
Lecture 1
Course Introduction and
Objectives
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The aim of the course is to explore the economic
basis of environmental issues and policies. The
course content covers the sustainability issues
with emphasis on current generation efficiency
and intergenerational efficiency.
Economic principles underlying environmental
problems and policy remedies will be discussed.
The class examines property rights, externalities
and the common-property basis of environmental
problems.
Alternative policies are studied, involving such
issues as air and water pollution, solid-waste
disposal, hazardous substances, wilderness
preservation and the protection of endangered
species.
Reading Materials
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Selected chapters from the following
textbooks will be your reading package. A
sample copy will be available for
photocopying. The textbooks from which
chapters will be selected are:
- Tietenberg, T., Environmental Economics
and Policy, Fourth Edition, Pearson, 2005.
- Goodstein, E.. Economics and the
Environment, Prentice Hall, 1995.
Term Paper
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Subject: The paper should provide a
critical evaluation of an environmental
problem, policy, or proposal, with
particular attention to its economic
aspects. The paper should illustrate that
you can apply some of the concepts and
methods developed in class to a real world
problem. It should not be limited to a
simple description of the issue, but should
include your own economic analysis.
Outline of the term paper
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3.
Introduction of the Environmental
Problem
Economic Reason behind the
Environmental Problem (what are the
economic reasons behind such a
problem; what is the economic
explanation) (hint: externality, public
good, asymmetric information, etc; see,
Goodstein, Ch. 3)
Policy implications (what is being done;
examples from anywhere in the world)
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Topics may be one of the following headings
(please note that this list is give to give you an
idea and it is not a complete list).
Energy
Water
Agriculture
Biodiversity
Air pollution
Acid rain
Transportation
Solid waste
Weekly Schedule
Week
Course Content
Required Reading
1
Visions of the Future ;
Market Failures as an Explanation to Pollution Problem
Tietenberg, Ch 1
Goodstein, Ch. 3
2
The Efficiency Standard
Goodstein, Ch. 4
3
Sustainability
Goodstein, Ch. 5
Tietenberg, Ch.5
4
Measuring Benefits
Goodstein, Ch. 6
Tietenberg, Ch.3
5
Measuring Costs
Goodstein, Ch. 7
6
The Efficiency Standard
Goodstein, Ch. 8
7
Efficient Allocation of Pollution
Tietenberg, Ch.13
8
Incentive Based Regulation
Goodstein, Ch. 14
9
Promoting Clean Technology
Goodstein, Ch.16
10
Development and Poverty
Tietenberg, Ch. 20 and 21
11 and 12
Term paper presentations
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Iguazú National Park, located in
Argentina near its borders with Brazil
and Paraguay, contains remnants of
the highly endangered Paranaense
Rain Forest.
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Iran’s Lake Hamoun is fed primarily
by water catchments in neighboring
Afghanistan. In 1976, when rivers in
Afghanistan were flowing regularly,
the amount of water in the lake was
relatively high. Between 1999 and
2001, however, the lake all but dried
up and disappeared, as can be seen
in the 2001 satellite image.
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Las Vegas is the fastest growing
metropolitan area in the United
States. Its growth was fairly slow
during the first half of the 20th
century, but as the gaming and
tourism industry blossomed the
population increased more rapidly. In
1950, Las Vegas was home to 24 624
people.
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This pair of satellite images shows
the impact of massive and rapid
agricultural development in Almeria
Province along Spain’s southern
coast. In the earlier image, the
landscape reflects rather typical rural
agricultural land use.
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The Huang He (Yellow River) is the muddiest river
on Earth and is China’s second longest river,
running 5 475 km (3 395 miles) from eastern
Tibet to the Bohai Sea.
The Huang He’s yellow color is caused by its
tremen-dous load of sediment, composed
primarily of mica, quartz, and feldspar particles.
The sediment enters the water as the river carves
its way through the highly erodable loess plateau
in north-central China. (Loessial soil is called
huang tu, or “yellow earth,” in Chinese.)
Centuries of sediment deposition and dike
building along the river’s course has caused it to
flow above the surrounding farmland in some
places, making flooding a critically dangerous
Environmental Economics
Some Concepts for Policy
Analysis
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Efficiency (static and dynamic);
Sustainability;
Equity (fairness);
Non-conflict with other objectives.
Some “Environmental” Problems
Global climate change
Greenhouse gases
Ozone depletion
International air pollution
Acid rain
Local air pollution
Traffic pollution
Factory emissions
Smogs
Water pollution and water scarcity
Nitrate spillovers
Intensive agriculture
Population conglomeration
Others
Loss of biodiversity
Irreversible eco-system change
Soil fertility losses
Accumulation of toxins in various media
Economy-Environment Interactions
Economic activity has a material basis.
It draws resources from the environment, and provides
flows back into the environment.
These flows must satisfy the laws of thermodynamics:
•First law: Conservation of mass/energy (materials
balance principle)
•Second law: Entropy is non-increasing
Environment - Economy Interactions
We are interested in:
•Reproducibility of each system over time (sustainability)
•Interactions between the two systems
•Predictability or uncertainty in the operations of these subsystems
Environment and Ethics
How do ethical matters come into our studies?
•Much of the literature is about “economic efficiency”. But this
is built upon a utilitarian ethical framework.
•What do we mean by an “optimal” allocation of resources?
This implies the existence of some social welfare function.
•Discussions of sustainability inevitably have an ethical
component to them (our obligations to the future)
•We live in a world in which income and wealth are very
unequally distributed. Meanwhile, many environmental
problems need cooperative international behaviour. Issues of
fairness and equity arise here.
1987 report of the World Commission on Environment and
Development (WCED).
Sustainable development is development that meets the needs of the
present without compromising the ability of future generations to
meet their own needs.
Far from requiring the cessation of economic
growth, (sustainable development) recognises that the
problems of poverty and underdevelopment cannot be solved
unless we have a new era of growth in which developing
countries play a large role and reap large benefits. [p 40]
And the most well-known phrase from this report:
“Sustainable development is development that meets the
needs of the present without compromising the ability of
future generations to meet their own needs.”
Visions of the Future
THE BASIC PESSIMIST MODEL
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1972 The Limits to Growth.
Based on a technique known as systems
dynamics, developed by Professor Jay Forrester
at MIT, a large-scale computer model was
constructed to simulate likely future outcomes of
the world economy.
The most prominent feature of systems dynamics
is the use of feedback loops to explain behavior.
The feedback loop is a closed path that connects
an action to its effect on the surrounding
conditions which, in turn, can influence further
action.
First Conclusion of the Study
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Within a time span of less than 100 years
with no major change in the physical,
economic, or social relationships that have
traditionally governed world development,
society will run out of the nonrenewable
resources on which the industrial base
depends.
When the resources have been depleted, a
precipitous collapse of the economic
system will result, manifested in massive
unemployment, decreased food
production, and a decline in population as
the death rate soars.
Overshoot and collapse.
Second Conclusion of the Study
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Piecemeal approaches to solving the
individual problems will not be successful.
To demonstrate this point, the authors
arbitrarily double their estimates of the
resource base and allow the model to
trace out an alternative vision based on
this new higher level of resources. In this
alternative vision the collapse still occurs,
but this time it is caused by excessive
pollution generated by the increased pace
of industrialization permitted by the
greater availability of resources.
Third Conclusion of the Study
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Overshoot and collapse can be avoided
only by an immediate limit on population
and pollution, as well as a cessation of
economic growth.
The portrait painted shows only two
possible outcomes: the termination of
growth by self-restraint and conscious
policy—an approach that avoids the
collapse—or the termination of growth by
a collision with the natural limits, resulting
in societal collapse.
Beyond the Limits (Meadows)
THE BASIC OPTIMIST MODEL
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Is the portrait of the fate of the world
economy painted by the Limits to Growth
model an accurate one?
Because Herman Kahn and his associates
did not think so, they presented an
alternative vision in a book titled The Next
200 Years: A Scenario for America and the
World.
This vision is an optimistic one based in
large part on the continuing evolution of a
form of technological progress that serves
to push back the natural limits until they
are no longer limiting.
This model concludes that standards of living
have been rising with population for as long as
records have been kept and as such there is no
reason to believe the trends will not continue.
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The observations that lead to this conclusion
include:
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The amount of land committed to agriculture is
increasing and agricultural production is increasing.
Natural resources have not become more scarce over
time.
Pollution levels have declined with increases in
populations and incomes.
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As incomes rise, the demand for
better environmental quality also
rises. Thus rising incomes can be
linked to declines in pollution.
A continuation of these trends is
expected because the “ultimate
resource” on which future activity
depends is not limited. This
resource is people.
The Road Ahead
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This section suggests that these very
different worldviews can result in
different policy choices and
ultimately in costly errors if one view
is correct and policies are based on
the other.
Issues to Explore
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Does the earth have a finite carrying
capacity?
How does the economic system respond
to scarcity?
What is the role of the government in
solving these problems? When is
government intervention necessary and
appropriate?
Do our economic and political systems
deal well with the uncertainty associated
with many environmental problems?
What is our obligation to future
generations?
Is sustainable development feasible?
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200 years ago almost everywhere
human beings were comparatively
few, poor and at the mercy of the
forces of nature, and 200 years from
now, we expect, almost everywhere
they will be numerous, rich and in
control of the forces of nature