Chapter 1
What is
Environmental
Economics?
Created by Dr. Charles Krusekopf
© 2015 McGraw-Hill Ryerson Ltd.
1
Learning Objectives
1.
2.
3.
4.
5.
6.
Distinguish between efficiency and equity concepts and why they are
central to environmental economics.
Describe the incentives that contribute to pollution arising from
people and firms.
Define and distinguish between open access, private, and common
property rights and explain why the assignment of property rights
can help reduce pollution.
Explain why people do not take into account the air pollution their
vehicle emits when they drive.
Describe the anthropogenic sources of greenhouse gas emissions and
what changes are needed in the economy to reduce these emissions.
Explain the tradeoffs between economic growth and the
environment.
© 2015 McGraw-Hill Ryerson Ltd.
2
What is Environmental Economics?
• Economics is the study of how and why people
make decisions about the use of valuable
resources.
• Environmental Economics focuses on how
economic activities affect our natural
environment, with a goal of helping society
reduce its degradation of the environment.
LO1
© 2015 McGraw-Hill Ryerson Ltd.
3
Important Questions
• Why don’t people take into account the effect
of their economic activity on the natural
environment?
• What inhibits economic systems from using its
resources wisely and efficiently to protect the
sustainability of the planet and people’s
livelihoods over time?
LO1
© 2015 McGraw-Hill Ryerson Ltd.
4
Efficiency vs. Equity
• An outcome is economically efficient if all
resources are put to their highest valued use,
or alternatively if a desired outcome is
reached using the fewest resources.
• Equity relates to how resources are divided
among different people or groups.
LO1
© 2015 McGraw-Hill Ryerson Ltd.
5
Evaluating outcomes and policies
• Environmental economics uses efficiency as a
central criteria for evaluating outcomes and
policies. An attempt is made to find policies that
that provide a maximum amount of protection
for the environment at a minimum cost of
resources.
• Equity is also an important consideration in the
evaluation of outcomes and policies, because it is
important for policies to be both fair and
efficient.
LO1
© 2015 McGraw-Hill Ryerson Ltd.
6
Why do people pollute?
The economic approach
• Why do people behave in ways that cause
environmental destruction?
– Is it because people are unethical or immoral?
– Or is it because people have incorrect incentives?
• A challenge with a moral approach is that people
have different moral values, and it is hard to
motivate people to change behavior based on
morality
LO2
© 2015 McGraw-Hill Ryerson Ltd.
7
Why people pollute
• People pollute because it is the cheapest way to
dispose of the waste products remaining after the
production and consumption of a good
• In many situations, people have an incentive to
pollute.
– An incentive is something that attracts or repels
people and leads them to modify their behavior in
some way.
– Economic incentives relate to production and
consumption decisions
LO2
© 2015 McGraw-Hill Ryerson Ltd.
8
Externalities and Property Rights
• Many environmental resources do not have
clearly defined property rights – no one “owns”
the atmosphere or ocean
• An open access resource does not have one clear
owner, and anyone can use it without paying
– For example you do not have to ask permission or pay
when your car emits pollution into the atmosphere
– This is in contrast to goods with private property
ownership – no one can use your car without your
permission and you have to pay to rent a car
LO3
Common Property
• Common property is a resource shared among
a group of people
– Common property can be open access if no one
controls the resource – such as the ocean or
atmosphere
– However some common property resources are
not open access because the set of users is well
defined and access can be controlled. For example
a group house kitchen is shared common
property, but is not open access.
LO3
Smog and Motor Vehicles
• When you drive your car, you receive a personal
benefit, but also impose costs on other people
due to the air pollution, noise pollution and
congestion you create. However you do not have
to compensate other people for the costs you
impose on them.
• These costs are known as an externality or
external costs or effects, because you impose the
costs on others, but do not have to pay
compensation.
LO4
Incentives to address external costs
Incentives might be used to address the problems created by external
costs
• What are examples of incentives that might be introduced to force
drivers to account for the external costs created when they drive
cars?
• What are examples of incentives that might be introduced to
influence companies such as car makers and gasoline producers to
address the pollution problems associated with cars?
Looking ahead: Section 4 of the textbook offers more details on policy
approaches to address the problems created by negative externalities.
LO4
Greenhouse Gas Emissions
• The emissions of carbon dioxide (CO2) and
other Greenhouse Gases (GHG) have been
rising over time due primarily to our growing
use of carbon fuels, such as gasoline, coal and
oil.
Figure 1-1 Total Annual Anthropogenic GHG
Emissions by Groups of Gases, 1970-2010
LO5
GHG Accumulations
• GHG accumulate in the atmosphere, therefore
the concentration of GHG in the atmosphere
has been rising with the increases in
emissions.
LO5
GHG Accumulations
LO5
Costs of Global Climate Change
• GHG trap heat in the earth’s atmosphere,
creating an effect known as global warming or
global climate change.
• As the global climate changes, people, plants
and animals must adapt to the new climate
• Costs of global climate change are estimated
to be $70- 100 billion per year, and represent
the loss of crops, health impacts, the loss of
species and ecosystems and other effects
LO5
Unequal Costs
• The costs will not be equal around the world
or among species, for example some species
are more adaptable than others, coastal areas
may be harder hit due to rising sea levels and
the Arctic and Antarctic are warming much
faster than tropical areas of the globe
LO5
GHG and Climate
• Over time, scientists have shown that the earth has
been getting warmer as the concentrations of GHG
have risen.
• This global warming has changed weather patterns,
creating more variability and extreme weather events.
• Global climate change is expected to increase in the
future, due to the increasing levels of GHG in the
atmosphere.
• Lowering GHG emissions today will help lower the
impact of global climate change in the future, but the
climate is still expected to change due to the
accumulation of GHG emissions over time.
LO5
Global Anthropogenic Sources of GHG
Emissions
LO5
Global Anthropogenic Sources of GHG
Emissions
• The largest source of GHG emissions is
electricity generation and heat, especially
from coal fired power plants. Transportation is
also a major contributor.
LO5
Costs of Mitigation
• In order to slow global climate change, we must find
ways to burn fewer carbon fuels such as gasoline, coal
and oil
• However we use these energy sources due to their low
cost and ease of use
• Alternative energy sources, such as wind and solar
power, generally cost more and may be unreliable.
• Therefore we face a trade off between the costs
associated with changing energy sources, and the costs
associated with not changing energy sources
LO5
Precautionary Principle
• The precautionary principle says that society
should weigh the trade offs between the costs
we face today to switch to lower carbon
sources of energy, versus the benefits we will
receive in the future due to a lower level of
global climate change and lower risk.
LO5
GHG Reduction Policies
• What policies would you support to reduce
GHG emissions today?
• How high a cost should we be willing to pay
today, to reduce the risk of global climate
change in the future?
LO5
Sustainability
• A sustainable economy is one that allows
people’s well being to rise (or at least stay the
same) over time (but not fall).
• Some people argue that we are “using up”
natural resources, and will not be able to sustain
our economy in the future.
• A counter argument is that “human ingenuity”
will allow us to find ways to overcome resource
scarcity – to find new resources or new ways to
do things when certain natural resources run low.
LO6
Sustainability and Food
For example, there were many fears in the
1960s that a rising global human population
would mean that the world would run short of
food.
However the “Green Revolution” increased food
production, and today the world has more food
per person than ever before in history, even as
global population continues to rise
LO6
Social Capital
• Social capital refers to a broad definition of economic
capital – including human capital (labor and
knowledge), natural capital (natural resources) and
produced capital (machines and tools).
• A sustainable economy would be one where overall
social capital continues to grow, and ecological
integrity is maintained
– As natural resources are “used up”, human capital must
increase to find new ways produce goods and limit
pollution
LO6
Trade-offs and Sustainability
• A production possibilities frontier (PPF)
demonstrates the trade off between the
output of goods and services and
environmental quality
LO6
Trade-offs and Sustainability
LO6
Trade-offs between the environment and
output
• As the output of goods and services grows,
environmental quality is diminished.
– Imagine that producing more goods and services
means more emissions of GHG, therefore an increase
in global climate change.
– More goods and services means lower environmental
quality
– Based on our community preferences (community
indifference curves), society will decide what quantity
of goods and services it wants and the corresponding
level of environmental quality
LO6
Trade-offs over time
• Over time, society’s choices will influence the
position of the PPF.
– Pessimistic - High use of natural resources today might
lower the PPF over time, leading to an unsustainable
economy with lower consumption in the future
– Optimistic - Investments in research and efficiency
today may yield technological improvements, shifting
the PPF outward, leading to a sustainable economy
that allows consumption to grow in the future while
also improving the environment
LO6
Future PPF Scenarios
LO6
Future PPF Scenarios
LO6
Pessimism or Optimism for the Future
• Do you feel that the current Canadian
economy is sustainable? Are you pessimistic
or optimistic?
– What arguments can you build to support your
position?
– What evidence can you cite to support your
arguments?
LO6
Chapter Overview
• This chapter provided an overview of environmental economics
• Many of the concepts developed here will be explored throughout
this textbook
– How to address the issues raised by external costs
– The importance of incentives in influencing choices and behavior
– The trade-offs we face between the production of goods and services
and environmental quality
– The challenges of developing effective policies to address major issues
such as global climate change
• Our overall objective is to finds ways to use economics to achieve a
cleaner, healthier environment that can be sustained over time