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Environmental Economics Lecture 2. Hendrik Wolff [email protected]. Should I eat fish? (Snickers). Let’s eat Fish (Snickers). Rules: Each harvested fish is potentially one ‘participation point’ towards final grade No Communication No winks or nods No violence - PowerPoint PPT Presentation
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Should I eat fish? (Snickers)
Let’s eat Fish (Snickers)
• Rules: – Each harvested fish is potentially one
‘participation point’ towards final grade– No Communication– No winks or nods– No violence– 10 Second to harvest the ocean – What ever is left on the table after 10 seconds, I
will double in second round of fishing.
Introduction
• What is Environmental Econ (EE)? • Def. Kolstad, Chapter. 1:
– EE is concerned with • the impact of the economy on the environment• the significance of the environment to the economy• The appropriate way of regulating the economic
activity so that balance is achieved among environmental, economic and other social goals.
Def. of EE (continued)• “Economics not about profit max. or ‘capitalism’, but
‘how to make best of things’!
• ‘Things’ includes – Environment (Air, Water, landscape, forests) as well as – ‘capital’– ‘human capital’ – ‘time’– ‘music in the pedestrian zone’
• Max Welfare s.t. constraints. (virtually all econ models have this set-up)
Def. EE (cont.)EE Problem? Environment Econ
No Air Scarce ?
Def. EE (cont.)EE Problem? Environment Econ
No Air Scarce ?
Yes Clean Air Scarce! Clean Air has $ value
Def. EE (cont.)EE Problem? Environment Econ
No Air Scarce ?
Yes Clean Air Scarce! Clean Air has $ valueYes Scenic Rhine
Valley or a DomScarce value of Cologne
Def. EE “Externality”
• Definition of non-pecuniary externality:– Action by one agent effect utility or production
function of another agent without that others agent appropriate compensation
– If u2’ (u1) < 0 negative externality (smoker)
– If u2’ (u1) > 0 positive externality (beekeeper)
Def. EE “Externality”
• Definition of non-pecuniary externality:– Action by one agent effect utility or production
function of another agent without that others agent appropriate compensation
– If u2’ (u1) < 0 negative externality (smoker)
– If u2’ (u1) > 0 positive externality (beekeeper)
• EE not concerned with pecuniary externality
Difference between EE and Resource Econ?
Difference between EE and Resource Econ?
• M = Material• P = Producer• C = Consumer• R = Residual (not pollution!)• d = discharge • r = recycling
Fundamental Material Balance Equations
• (Rdi ) = M
• First (FMBE) and Second Law (Entropy increases) of Thermodynamics govern the closed system– See Nick Hanley et al. Chapter 1 for discussion on ‘limits of growth’
• 4 Approaches to manage Environment• M = (Rd
i ) = G + RP - (Rri )
– Traditional Approach: (Rdi )
– Moral Approach / Zero Population Growth: G– Technology Innovation: RP
– Recycling (Rri )
Fundamental Material Balance Equations
• (Rdi ) = M
• First (FMBE) and Second Law (Entropy increases) of Thermodynamics govern the closed system– See Nick Hanley et al. Chapter 1 for discussion on ‘limits of growth’
• 4 Approaches to manage EnvironmentM = (Rd
i ) = G + RP - (Rri )
– Traditional Approach: (Rdi )
– Moral Approach / Zero Population Growth: G– Technology Innovation: RP
– Recycling (Rri )
Definitions
• 4 Categorisations of Types of Pollutants
Categorization Dimension Same Pollutant?
Global vs. Local Space No
Definitions
• 4 Categorisations of Types of Pollutants
Categorization Dimension Same Pollutant?
Global vs. Local Space No
Point source vs. nonpoint source Space Yes
Definitions
• 4 Categorisations of Types of Pollutants
Categorization Dimension Same Pollutant?
Global vs. Local Space No
Point source vs. nonpoint source Space Yes
Cumulative vs. noncumulative Time No
Definitions
• 4 Categorisations of Types of Pollutants
Categorization Dimension Same Pollutant?
Global vs. Local Space No
Point source vs. nonpoint source Space Yes
Cumulative vs. noncumulative Time No
Continuous vs. Sporadic Time Yes
Definitions
• 4 Categorisations of Types of PollutantsCategorization Dimension Same
Pollutant?Free Riding on...
Global vs. Local Space No State, country
Point source vs. nonpoint source
Space Yes Neighbor, community, society
Cumulative vs. noncumulative
Time No Future generation
Continuous vs. Sporadic Time Yes Limited liability
Chapter 3 of Kolstad
Social Choice: How Much Environmental Protection? • There are two basic questions in Environmental Policy
(a) What is the right Balance between Environmental Protection and Environmental Use?(b) Given we determined optimal level of Environmental Protection of question (a): how do we achieve this level?
• Chapter 3 concerned with question (a) • Social Choice: What should be the thresholds? More
generally, where should we end up on PPC?
Figure: Where should we end up on Production Possibility Frontier (PPC) in GDP – E-Quality space
Individual Preferences Regarding Environmental Protection
• Biocentrism
• Anthropocentrism
Individual Preferences Regarding Environmental Protection
• Biocentrism- Pure Biocentrist has Utility function that does NOT allow to substitute x for existing e
• Anthropocentrism- Pure Anthropocentrist has Utility function that does NOT allow to substitute e for potential x
Individual Preferences Regarding Environmental Protection
• Biocentrism- Pure Biocentrist has Utility function that does NOT allow to substitute x for existing e- Values ‘intrinsic’ value of nature• Anthropocentrism- Pure Anthropocentrist has Utility function that
does NOT allow to substitute e for potential x- Values ‘instrumental’ value of nature
Sustainability
• Strict/Strong Def.: Mj = ∑Rij
d for all elements of j • Following this FMBE short term has the
advantage: – guarantees that future generation enjoys same
environmental amenities & resources as we have today
– no extinction of species– little extraction of oil
Sustainability
• Strict/Strong Def.: Mj = ∑Rij
d for all elements of j • Following this FMBE short term has the
advantage: – guarantees that future generation enjoys same
environmental amenities & resources as we have today
– no extinction of species– little extraction of oil
Solow / Weak Sustainability
• Definition by Brundtland Commission 1987: • “Development that meets the needs of present
generation without compromising the ability of future generations to meet their own needs”
• Figure of Solow model using PPC
Solow / Weak Sustainability
– Allows for Substitutions between Capital Types• Material/Infrastructure Capital• Human Capital• Natural Capital
– Non-renewable resources are allowed to become depleted if sufficient HC & RD develops such that future generation can make use of renewable resources.
Quotes from Solow Article! “UNESCO Def. of Sustainability ‘sounds good’ but is impractical and ‘fundamentally wrong’
“We do not owe the future any particular ‘thing’”, but well being.
“I doubt that I would feel myself better off if I had found the world exactly as the Iroquois left it.”
Instead what we should do:Invest the harvest of non-renewables in education, infrastructure
Read Solow Article! “UNESCO Def. of Sustainability ‘sounds good’ but is impractical and ‘fundamentally wrong’
“We do not owe the future any particular ‘thing’”, but well being.
“I doubt that I would feel myself better off if I had found the world exactly as the Iroquois left it.”
Instead what we should do:Invest the harvest of non-renewables in education, infrastructure
How to implement Solow Sustainability Growth?
• Government serves as trustee (representative of future interests) – Pollution Taxes, Subsidies for R&D etc.
• Hartwick Rule– Norway versus UK in using profits from North Sea Oil Field
• Green National Accounting
• We have to solve the “Sustainability Paradox”: – What weights more ?
• Concern about future vs. concern about present poor? • If concerned about current poor, then we should consume (pollute) more
today (instead of investing more today)
Social Choice from Individual Values
Three Social Choice Mechanisms
• Pareto Criterion
• Compensation Principle (Kaldor Hicks)
• Voting
Social Welfare Functions
Benthamite
Rawlsian
Egalitarian
i 1 2 3 4 SWFB SWFE SWFR
10 10 10 10
1 10 10 19
10 10 10 1
Arrows Impossibility Theorem
6 Axiom: Completeness UnanomityNondictatorshipUniversality TransivityIndependence of Irrelevant Alternatives
Arrows Impossibility Theorem: There is no rule satisfying the 6 Axioms for converting individual preferences into a social preference ordering
This is troubling: No “optimal” SWF can be constructed. No nice neat theory of social decision making, yet decisions must be made.