Bài giảng Environmental economics

Environmental Economics
1. Overview
2. Economics of pollution
3. Economics of Natural Resources


1. Overview
From Wikipedia:



Environmental economics is a subfield of economics concerned with environmental issues.



Environmental economics is distinguished from Ecological economics that emphasizes the

economy as a subsystem of the ecosystem with its focus upon preserving natural capital.[2] One survey
of German economists found that ecological and environmental economics are different
schools of economic thought, with ecological economists emphasizing "strong" sustainability and
rejecting the proposition that natural capital can be substituted by human-made capital.[3] For an
overview of international policy relating to environmental economics, see Runnals (2011)


1. Overview
Environmental economics is the subset of economics that is concerned with the efficient
allocation of environmental resources. The environment provides both a direct value as well as raw
material intended for economic activity, thus making the environment and the economy
interdependent. For that reason, the way in which the economy is managed has an impact on the
environment which, in turn, affects both welfare and the performance of the economy.

1. Overview
One of the best known critics of traditional economic thinking about the environment is Herman Daly. In his first
book, Steady-State Economics, Daly suggested that “enough is best,” arguing that economic growth leads to
environmental degradation and inequalities in wealth. He asserted that the economy is a subset of our
environment, which is finite. Therefore his notion of a steady-state economy is one in which there is an optimal
level of population and economic activity which leads to sustainability. Daly calls for a qualitative improvement in
people's lives – development – without perpetual growth. Today, many of his ideas are associated with the
concept of sustainable development.


1. Overview
Environmental economics takes into consideration issues such as the conservation
and valuation of natural resources, pollution control, waste management and
recycling, and the efficient creation of emission standards.
Economics is an important tool for making decisions about the use,
conservation, and protection of natural resources because it provides information
about choices people make, the costs and benefits of various proposed measures,
and the likely outcome of environmental and other policies


1. Overview
•

Central to environmental economics is the concept of market failure. Market failure means that markets fail to

allocate resources efficiently.

•

As stated by Hanley, Shogren, and White (2007) in their textbook Environmental Economics:[5] "A market failure

occurs when the market does not allocate scarce resources to generate the greatest social welfare. A wedge exists
between what a private person does given market prices and what society might want him or her to do to protect the
environment. Such a wedge implies wastefulness or economic inefficiency; resources can be reallocated to make at
least one person better off without making anyone else worse off."

•

Common forms of market failure include externalities, non-excludability and non-rivalry.





1. Overview
•

Externality: the basic idea is that an externality exists when a person makes a choice that affects other people that are

not accounted for in the market price.

•

For instance, a firm emitting pollution will typically not take into account the costs that its pollution imposes on others. As

a result, pollution in excess of the 'socially efficient' level may occur.

•

A classic definition influenced by Kenneth Arrow and James Meade is provided by Heller and Starrett (1976), who define

an externality as “a situation in which the private economy lacks sufficient incentives to create a potential market in some
good and the nonexistence of this market results in losses of Pareto efficiency.”[6]

•

In economic terminology, externalities are examples of market failures, in which the unfettered market does not lead to an

efficient outcome.



Externality
When one person’s actions
imposes a cost or benefit on the
well-being of a bystander.
Externalities usually result in
market failure.


Externalities can be:
1) Positive: an external benefit is
imposed on someone. (examples:

gardens, restored historic buildings,
research)
2) Negative: an external cost is imposed
on someone. (examples: exhaust

from autos, barking dogs, noise
from airplanes)


Externalities cause markets to
allocate resources inefficiently.


This happens through:
1) CONSUMPTION: consuming a good results in externality.
2) PRODUCTION: producing a good results in externality.

In general, an external cost means the market
overproduces the good (ie, paint). An external
benefit means the market underproduces the
good (ie, gardens)


Are there benefits for other people in the parking lot
when someone puts their car alarm on?


ANSWER:

Yes, because thieves don’t
know which cars have alarms.

What about the club?
Are there benefits for other people in the
parking lot when someone puts the club

on their car?


ANSWER:

No . . .because the thief
can SEE the club.



1. Overview
•

Common property and non-exclusion: When it is too costly to exclude people from access to an environmental

resource for which there is rivalry, market allocation is likely to be inefficient. The challenges related with common
property and non-exclusion have long been recognized.

•

Hardin's (1968) concept of the tragedy of the commons popularized the challenges involved in non-exclusion

and common property. "commons" refers to the environmental asset itself, "common property resource" or
"common pool resource" refers to a property right regime that allows for some collective body to devise schemes to
exclude others, thereby allowing the capture of future benefit streams; and "open-access" implies no ownership in
the sense that property everyone owns nobody owns.[7]


1. Overview
The basic problem is that if people ignore the scarcity value of the commons, they can end up

expending too much effort, over harvesting a resource (e.g., a fishery). Hardin theorizes that in
the absence of restrictions, users of an open-access resource will use it more than if they had to
pay for it and had exclusive rights, leading to environmental degradation. See, however, Ostrom's
(1990) work on how people using real common property resources have worked to establish selfgoverning rules to reduce the risk of the tragedy of the commons.[7]


1. Overview
•

Public goods and non-rivalry: Public goods are another type of market failure, in which the market price does not

capture the social benefits of its provision. For example, efforts to mitigate climate change would be a public good since
the risks of climate change are both non-rival and non-excludable. Such efforts are non-rival since climate mitigation
provided to one does not reduce the level of mitigation that anyone else enjoys. They are non-excludable actions by one
will have global consequences from which no one can be excluded.

•

A country's incentive to invest in carbon abatement is reduced because it can "free ride" off the efforts of other

countries. Over a century ago, Swedish economist Knut Wicksell (1896) first discussed how public goods can be underprovided by the market because people might conceal their preferences for the good, but still enjoy the benefits without
paying for them


Public Goods
• Non-rival
• Nonexcludable
• e.g., air,
water, climate

What is the difference between a public good and a private good?

Exclusion vs. non-exclusion
and
Shared consumption (rival good)
vs.
non-shared consumption (non-rival good)