Economics 313: Intermediate Micro II


Topic 1(d): Intro to Environmental Economics

• Environmental economics: what are we doing here?

– We are interested in analyzing the interactions between the natural system (the environment) and the economic system.

• Primary questions throughout:

– Under what circumstances do the operations of markets lead to environmental outcomes that are in some sense desirable?

– If markets outcomes are


desirable in terms of their effects on the environment, what is the correct policy response?


Topic 1(d): Intro to Environmental Economics

• Terms desirable and undesirable imply that we are interested normative analysis, as well as positive analysis.

• Positive analysis involves asking what an outcome


under certain circumstances: be

– Ex: under perfect competition, how much of a good


get produced.

• Normative analysis involves asking questions about what outcomes we would


to see.

– Ex: under perfect competition, is the


quantity of goods produced? Is it too little? Is it too much?

• Points to the need for a normative criterion by which to judge outcomes.


Topic 1(d): Intro to Environmental Economics

• Normative criterion we use in Econ381/ES312 is that of economic efficiency.

• Important to keep in mind that economic efficiency

– is anthropocentric in its approach

– has utilitarianism as its philosophical base

– says nothing (much) about fairness or equity

– is only one of many criteria that we can (should?) use to judge environmental outcomes.

• With these caveats in mind, in this class we will judge outcomes in terms of whether or not they are economically efficient.

– Normative statements like “outcome X should happen” should be read as shorthand for “outcome X should happen if we are using economic efficiency as the sole criterion for decisionmaking.”


Topic 1(d): Intro to Environmental Economics

Economic efficiency defined:

An outcome is efficient if it

maximizes net benefits

, where net benefits are equal to total benefits minus total costs.

Tells us that, at its core, the analysis of economic efficiency is simply cost-benefit analysis.


We will be analyzing efficiency in a variety of contexts, such as:

What is the efficient level of an economic activity?

Ex: what is the efficient level of production of a good?



Should we undertake a particular project (binary decisionmaking)?

Ex: should we build a dam on a particular river?

How should we allocate a scarce resource across competing uses?

Ex: how much land should be used for logging rather than

(say) conservation?


Topic 1(d): Intro to Environmental Economics

We will focus on answering questions such as these by using costbenefit analysis to identify the outcomes that make net benefits as large as possible.

Important point: we need to make sure we have correctly identified and measured all of the costs and benefits associated with a given activity/outcome.

An alternative characterization of efficiency (that we will pick up on at various points throughout the term):

An outcome is efficient is it is impossible to come up with an alternative outcome in which

at least

better off without

any one

one person can be made person being made worse off.

Although it may not be immediately obvious, we will see that this characterization of efficiency will be satisfied if net benefits are maximized.


Topic 1(d): Intro to Environmental Economics

In order to answer normative questions such as those posed above, we first need to understand how to answer positive questions.

For instance, we need to understand what market outcomes look like, in order to work out whether they are desirable


This means we need to recall some basic ideas we learned in principles of microeconomics.

Specifically, we want to understand:

How consumers decide what goods to buy (demand).

How producers decide what goods to produce (supply).

How markets bring producers and consumers together


Once we understand this, we can assess whether the interactions among consumers and producers result in economically efficient outcomes.


Topic 1(d): Intro to Environmental Economics


questions of interest are:



Which consumers


get to consume these goods?

We know that in equilibrium each consumer chooses Q such that P=MB.

Under what circumstances is the “right” Q for each consumer

(the one that maximizes aggregate benefits from consumption)?

What quantity of goods


be produced?

We know that in equilibrium Q is where S=D.

Under what circumstances is this the “right” Q in total (the one that maximizes NB)?


Which firms


produce these goods?

We know that in equilibrium each firm produces until P=MC.

Under what circumstances is the the “right” Q for each firm (the one that minimizes aggregate production costs)?


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