What is

Environmental
Economics?
Chapter 1 - BCF
 What is Economics?
In any economy there are competing
objectives
The important players could be
Govt
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
Societys natural and environmental resources

Examining the way people make decisions that

lead to either environmental destruction and
environmental improvements
People pollute because
Its
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 dont pay any heed to
environmental impact because it doesnt 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...?
Isit 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 its 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 politicians job to compromise or seek
advantage and it is scientists job to provide
the best information to policymakers on
alternative courses of action.
The Economy and
the Environment
Chapter 2 BCF
 Economy
Itis 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 Residuals,
(Inputs, Natural
Resource
Economy (Environmental
Economics) 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: Suns energy
Nonrenewable resources have no processes
of replenishmentonce 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 dont jeopardize future
generations
How can it be defined for renewable and
nonrenewable resources?

Depletion of earths 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
Resourceextraction directly affects
environmental quality.
 The Fundamental Balance

Raw Recycled (RPr)

Materials Residuals (RP) Discharged (RPd)
(M) Producers
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 Recycled (RPr)
Materials Residuals (RP) Discharged (RPd)
(M) Producers
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
RPd +
Reduce G, reduce RP and/or Increase RCr +
RPr
 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
Fora 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

Environmental
Land Water Air Media

Physical, chemical and hydrological processes Ambient quality Human

and nonhuman exposure Human and ecosystem damages
 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
Market Goods
Goods

Environmental Quality Environmental Quality

Therefore, sustainability is an important issue.