Environmental Economics

1. Environmental Economics Sedef Akgüngör Lecture 1

2. Course Introduction and Objectives • 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.

3. Reading Materials • 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.

4. Term Paper • 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.

5. Outline of the term paper • 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)

6. 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

8. Iguazú National Park, located in Argentina near its borders with Brazil and Paraguay, contains remnants of the highly endangered Paranaense Rain Forest.

10. 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.

12. 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.

14. 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.

16. 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 problem.

17. Environmental Economics Some Concepts for Policy Analysis • Efficiency (static and dynamic); • Sustainability; • Equity (fairness); • Non-conflict with other objectives.

18. 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

19. 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

20. 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 sub-systems

21. 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.

22. 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]

23. 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.”

24. Visions of the Future

25. THE BASIC PESSIMIST MODEL • 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.

26. First Conclusion of the Study • 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.

27. Second Conclusion of the Study • 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.

28. Third Conclusion of the Study • 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.

29. Beyond the Limits (Meadows)

30. THE BASIC OPTIMIST MODEL • 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.

31. 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. • The observations that lead to this conclusion include: • 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.

32. 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.

33. The Road Ahead • 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.

34. Issues to Explore • 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?

35. 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