Environmental and Resource Economics, lecture 1

Environmental and Resource
Dr. Katrin Rehdanz
Depts GeoSciences & Economics
Environmental and Resource
Economics, lecture 1
• Course aims and set-up
• Efficiency, optimality, sustainability
• The emergence of environmental and
resource economics
• Economy-environment interdependence
Bundesstrasse 55, Room 027
Tel: 42838-7047
Email: katrin.rehdanz@zmaw.de
The Course
• A comprehensive introduction to the
economic theory of environment and
• Further courses: valuation, international
environmental problems
• Prior knowledge: micro, macro, calculus
• Book: R. Perman, Y. Ma, J. McGilvray, M.
Common (2003), Natural Resource and
Environmental Economics (3nd ed.),
Longman, Harlow, ISBN 0 273 65559 0
The Lectures, before Xmas
31.10.: Sustainability
7.11: Ethics and the environment
14.11: Efficiency and optimality; Market
failure and public policy
21.11: Use of environmental resources
28.11: Extraction of non-renewable resources
5.12: Extraction of renewable resources
12.12: Forestry; resource policy
19.12: Valuing the environment
The Lectures, after Xmas
9.1: Pollution control: targets
15.1: Pollution control: instruments
23.1: International environmental problems
30.1: National accounting
Exam: 6.2. or 13.2.?
Wahlpflichtfach Umweltökonomie
ERE1 Environmental & Resource Economics
ERE4 Valuation Theory
ERE1 Environmental & Resource Economics
ERE3 Agriculture and the Environment
Sem Issues in Environmental Economics
ERE2 Global Environmental Problems
Three Themes
• Efficiency: The allocation of goods and
services by the market to rational agents
is efficient only if there are no
• Optimality: Efficiency is a necessary but
not a sufficient condition for optimality;
optimality includes equity
• Sustainability: Taking care of posterity
The Emergence of Environmental
and Resource Economics
Classical economics
Neo-classical economics
Welfare economics
Recent developments
An alternative approach
Towards interdisciplinary
Classical Economics
• Adam Smith: invisible hand of general
equilibrium, social good by individual action
• Thomas Malthus: growing population,
diminishing returns to scale in agriculture
• David Ricardo: diminishing returns to scale
(intensive margin), diminishing quality
(extensive margin)
• John Stuart Mill: innovation, input
substitution; amenity value „it is only in
backward countries of the world that
increased production is still an important
object[ive]“ (1857)
Classical Economics -2
John Stuart Mill (1857)
There is room in world, no doubt, for a great
increase in population, supposing the arts of
life to go on improving, and capital to increase.
[...] The density of population necessary to
obtain all of the advantages both of
cooperation and of social intercourse [...] has
been attained. A population may be too
crowded, though all be amply supplied with
food and raiment. [...] Nor is there much
satisfaction in contemplating the world with
nothing left to the spontaneous activity of
Neo-Classical Economics
• Value is relative, determined in exchange,
reflecting preferences, production costs
and scarcity
• Demand and supply, partial and general
• Absolute scarcity no longer seen as a
problem, a reflection of the times
• Keynes‘ macro-economics indirectly
reinvoked interest in economic growth
• Earlier growth models: no resource limits
Welfare Economics
• Rigorous theory of social good
• Utilitarianism: Social good is the weighted
sum of individual good
• Pareto optimality: At least as good for all,
better for one (actual and potential)
• Marshall and Pigou: Externalities and taxes
– if there are unintended and
uncompensated consequences of one agent
to the next, the market transactions need
not be Pareto improving – Pigou taxes can
counteract this
Environmental and Resource
• In the 1960s and 70s, things changed:
Limits to Growth, Silent Spring, oil crisis,
pollution, congestion, space travel
• First, natural resources are scarce
• Second, environmental services are
• Third, there are significant environmental
Spaceship Earth
Kenneth Boulding (1966)
The shadow of the future spaceship, indeed, is
already falling over our spendthrift
merriment. Oddly enough, it seems to be in
pollution rather than exhaustion, that the
problem is first becoming salient. Los Angeles
has run out of air, Lake Erie has become a
cesspool, the oceans are getting full of lead
and DDT, and the atmosphere may become
man‘s major problem in another generation, at
the rate at which it is filling up with junk.
• Economic activity depends upon and
affects the natural environment
• Services that the environment
Resource base
Amenity service base
Waste sink
Life-support system
The Circular Economy
• First Law of Thermodynamics:
• Boulding: Waste feeds back into resources,
production and consumption
• Capital stock only adds delays, does not
change matters
• Recycling: R+rW; (1-r)W is real waste
• Georgescu-Roegen: Second Law of
Thermodynamics: r<1
Environmental and
Resource Economics
• Environmental and resource economics has
now become a respectable field
• All US & UK universities offer an education
• There are specialised journals, including
JEEM, REE, ERE, EPA, LA while general
journals and conferences have regular
sessions on env. & res. econ.
• Leading economists like Arrow, Bradford,
Jorgenson, Nordhaus, Sachs, Solow
Recent Developments
• (Evolutionary) game theory for resource
management, international agreements
• Imperfect competition and endogenous
technological development and diffusion
for limits to growth, other long term issues
• Overlapping generations
• International trade and investment
• Behavioural economics for valuation
An Alternative Approach
• Ecological economics:
– Legitimate concerns, particularly about
the application of outdated economic
theory to environmental issues
– Lot of critique, little alternatives
– Half-baked ideas, but influential
Towards Interdisciplinarity
• Environmental problems violate disciplinary
• Some economics models violate basic facts
of physics, chemistry or ecology
• Increasing emphasis on multi-disciplinary
• Towards new disciplines, interdisciplines
and transdisciplines
Three Fundamental Features
• This course: Little attention to recent
developments, alternative theories
• Focus on basic economic theory as applied
to environmental and resource issues
• Property rights, externalities, efficiency
and government intervention
• Central theme: If we treat the
environment as an economic good, a lot of
environmental problems would be solved