Environmental Environmental EconomicsEconomics

Sedef AkgüngörSedef Akgüngör

Lecture 1Lecture 1

Course Introduction and Course Introduction and ObjectivesObjectives

The aim of the course is to explore the economic The aim of the course is to explore the economic basis of environmental issues and policies. The basis of environmental issues and policies. The course content covers the sustainability issues course content covers the sustainability issues with emphasis on current generation efficiency with emphasis on current generation efficiency and intergenerational efficiency. and intergenerational efficiency.

Economic principles underlying environmental Economic principles underlying environmental problems and policy remedies will be discussed. problems and policy remedies will be discussed. The class examines property rights, externalities The class examines property rights, externalities and the common-property basis of environmental and the common-property basis of environmental problems. problems.

Alternative policies are studied, involving such Alternative policies are studied, involving such issues as air and water pollution, solid-waste issues as air and water pollution, solid-waste disposal, hazardous substances, wilderness disposal, hazardous substances, wilderness preservation and the protection of endangered preservation and the protection of endangered species. species.

Reading MaterialsReading Materials

Selected chapters from the following Selected chapters from the following textbooks will be your reading package. A textbooks will be your reading package. A sample copy will be available for sample copy will be available for photocopying. The textbooks from which photocopying. The textbooks from which chapters will be selected are:chapters will be selected are:

- Tietenberg, T., - Tietenberg, T., Environmental Economics Environmental Economics and Policyand Policy, Fourth Edition, Pearson, 2005. , Fourth Edition, Pearson, 2005.

- Goodstein, E.. Economics and the - Goodstein, E.. Economics and the Environment, Prentice Hall, 1995.Environment, Prentice Hall, 1995.

Term PaperTerm Paper

Subject: The paper should provide a Subject: The paper should provide a critical evaluation of an environmental critical evaluation of an environmental problem, policy, or proposal, with problem, policy, or proposal, with particular attention to its particular attention to its economic economic aspects. The paper should illustrate that aspects. The paper should illustrate that you can apply some of the concepts and you can apply some of the concepts and methods developed in class to a real world methods developed in class to a real world problem. It should not be limited to a problem. It should not be limited to a simple simple description description of the issue, but should of the issue, but should include your own include your own economic analysis.economic analysis.

Outline of the term paperOutline of the term paper

1.1. Introduction of the Environmental Introduction of the Environmental ProblemProblem

2.2. Economic Reason behind the Economic Reason behind the Environmental Problem (what are the Environmental Problem (what are the economic reasons behind such a economic reasons behind such a problem; what is the economic problem; what is the economic explanation) (hint: externality, public explanation) (hint: externality, public good, asymmetric information, etc; see, good, asymmetric information, etc; see, Goodstein, Ch. 3)Goodstein, Ch. 3)

3.3. Policy implications (what is being done; Policy implications (what is being done; examples from anywhere in the world)examples from anywhere in the world)

Topics Topics may may be one of the following headings be one of the following headings (please note that this list is give to give you an (please note that this list is give to give you an idea and it is not a complete list).idea and it is not a complete list).

EnergyEnergy WaterWater AgricultureAgriculture BiodiversityBiodiversity Air pollutionAir pollution Acid rainAcid rain TransportationTransportation Solid wasteSolid waste

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

Iran’s Lake Hamoun is fed primarily by Iran’s Lake Hamoun is fed primarily by water catchments in neighboring water catchments in neighboring Afghanistan. In 1976, when rivers in Afghanistan. In 1976, when rivers in Afghanistan were flowing regularly, the Afghanistan were flowing regularly, the amount of water in the lake was amount of water in the lake was relatively high. Between 1999 and relatively high. Between 1999 and 2001, however, the lake all but dried up 2001, however, the lake all but dried up and disappeared, as can be seen in the and disappeared, as can be seen in the 2001 satellite image.2001 satellite image.

Las Vegas is the fastest growing Las Vegas is the fastest growing metropolitan area in the United metropolitan area in the United States. Its growth was fairly slow States. Its growth was fairly slow during the first half of the 20th during the first half of the 20th century, but as the gaming and century, but as the gaming and tourism industry blossomed the tourism industry blossomed the population increased more rapidly. In population increased more rapidly. In 1950, Las Vegas was home to 24 624 1950, Las Vegas was home to 24 624 people. people.

This pair of satellite images shows This pair of satellite images shows the impact of massive and rapid the impact of massive and rapid agricultural development in Almeria agricultural development in Almeria Province along Spain’s southern Province along Spain’s southern coast. In the earlier image, the coast. In the earlier image, the landscape reflects rather typical rural landscape reflects rather typical rural agricultural land use.agricultural land use.

The Huang He (Yellow River) is the muddiest river on The Huang He (Yellow River) is the muddiest river on Earth and is China’s second longest river, running 5 Earth and is China’s second longest river, running 5 475 km (3 395 miles) from eastern Tibet to the Bohai 475 km (3 395 miles) from eastern Tibet to the Bohai Sea. Sea.

The Huang He’s yellow color is caused by its tremen-The Huang He’s yellow color is caused by its tremen-dous load of sediment, composed primarily of mica, dous load of sediment, composed primarily of mica, quartz, and feldspar particles. The sediment enters the quartz, and feldspar particles. The sediment enters the water as the river carves its way through the highly water as the river carves its way through the highly erodable loess plateau in north-central China. (Loessial erodable loess plateau in north-central China. (Loessial soil is called huang tu, or “yellow earth,” in Chinese.)soil is called huang tu, or “yellow earth,” in Chinese.)Centuries of sediment deposition and dike building Centuries of sediment deposition and dike building along the river’s course has caused it to flow above the along the river’s course has caused it to flow above the surrounding farmland in some places, making flooding surrounding farmland in some places, making flooding a critically dangerous problem. a critically dangerous problem.

Environmental Environmental Economics Economics Some Concepts for Policy Some Concepts for Policy AnalysisAnalysis

Efficiency (static and dynamic);Efficiency (static and dynamic); Sustainability; Sustainability; Equity (fairness); Equity (fairness); Non-conflict with other objectives. Non-conflict with other objectives.

Some “Environmental” ProblemsSome “Environmental” Problems

Global climate changeGreenhouse gasesOzone depletion

International air pollutionAcid rain

Local air pollutionTraffic pollutionFactory emissionsSmogs

Water pollution and water scarcityNitrate spilloversIntensive agriculturePopulation conglomeration

OthersLoss of biodiversityIrreversible eco-system changeSoil fertility lossesAccumulation of toxins in various media

Economy-Environment InteractionsEconomy-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

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

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.

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]

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.”

Visions of the FutureVisions of the Future

THE BASIC PESSIMIST MODEL THE BASIC PESSIMIST MODEL

1972 1972 The Limits to Growth.The Limits to Growth. Based on a technique known as Based on a technique known as systems systems

dynamics,dynamics, developed by Professor Jay Forrester at developed by Professor Jay Forrester at MIT, a large-scale computer model was MIT, a large-scale computer model was constructed to simulate likely future outcomes of constructed to simulate likely future outcomes of the world economy. the world economy.

The most prominent feature of systems dynamics The most prominent feature of systems dynamics is the use of feedback loops to explain behavior. is the use of feedback loops to explain behavior.

The The feedback loopfeedback loop is a closed path that connects is a closed path that connects an action to its effect on the surrounding an action to its effect on the surrounding conditions which, in turn, can influence further conditions which, in turn, can influence further action. action.

First Conclusion of the StudyFirst Conclusion of the Study Within a time span of less than 100 years with Within a time span of less than 100 years with

no major change in the physical, economic, or no major change in the physical, economic, or social relationships that have traditionally social relationships that have traditionally governed world development, society will run governed world development, society will run out of the nonrenewable resources on which out of the nonrenewable resources on which the industrial base depends. the industrial base depends.

When the resources have been depleted, a When the resources have been depleted, a precipitous collapse of the economic system precipitous collapse of the economic system will result, manifested in massive will result, manifested in massive unemployment, decreased food production, unemployment, decreased food production, and a decline in population as the death rate and a decline in population as the death rate soars. soars.

Overshoot and collapse.Overshoot and collapse.

Second Conclusion of the StudySecond Conclusion of the Study

Piecemeal approaches to solving the Piecemeal approaches to solving the individual problems will not be successful. individual problems will not be successful.

To demonstrate this point, the authors To demonstrate this point, the authors arbitrarily double their estimates of the arbitrarily double their estimates of the resource base and allow the model to trace resource base and allow the model to trace out an alternative vision based on this new out an alternative vision based on this new higher level of resources. In this alternative higher level of resources. In this alternative vision the collapse still occurs, but this time vision the collapse still occurs, but this time it is caused by excessive pollution it is caused by excessive pollution generated by the increased pace of generated by the increased pace of industrialization permitted by the greater industrialization permitted by the greater availability of resources.availability of resources.

Third Conclusion of the StudyThird Conclusion of the Study

Overshoot and collapse can be avoided only Overshoot and collapse can be avoided only by an immediate limit on population and by an immediate limit on population and pollution, as well as a cessation of economic pollution, as well as a cessation of economic growth. growth.

The portrait painted shows only two possible The portrait painted shows only two possible outcomes: the termination of growth by self-outcomes: the termination of growth by self-restraint and conscious policy—an approach restraint and conscious policy—an approach that avoids the collapse—or the termination that avoids the collapse—or the termination of growth by a collision with the natural of growth by a collision with the natural limits, resulting in societal collapse. limits, resulting in societal collapse.

Beyond the Limits (Meadows)Beyond the Limits (Meadows)

THE BASIC OPTIMIST MODELTHE BASIC OPTIMIST MODEL

Is the portrait of the fate of the world Is the portrait of the fate of the world economy painted by the Limits to Growth economy painted by the Limits to Growth model an accurate one? model an accurate one?

Because Herman Kahn and his associates did Because Herman Kahn and his associates did not think so, they presented an alternative not think so, they presented an alternative vision in a book titled The Next 200 Years: A vision in a book titled The Next 200 Years: A Scenario for America and the World. Scenario for America and the World.

This vision is an optimistic one based in large This vision is an optimistic one based in large part on the continuing evolution of a form of part on the continuing evolution of a form of technological progress that serves to push technological progress that serves to push back the natural limits until they are no longer back the natural limits until they are no longer limiting.limiting.

This model concludes that standards of living This model concludes that standards of living have been rising with population for as long as have been rising with population for as long as records have been kept and as such there is no records have been kept and as such there is no reason to believe the trends will not continue.reason to believe the trends will not continue.

The observations that lead to this conclusion The observations that lead to this conclusion include:include:

• The amount of land committed to agriculture is The amount of land committed to agriculture is increasing and agricultural production is increasing.increasing and agricultural production is increasing.

• Natural resources have not become more scarce over Natural resources have not become more scarce over time. time.

• Pollution levels have declined with increases in Pollution levels have declined with increases in populations and incomes. populations and incomes.

As incomes rise, the demand for As incomes rise, the demand for better environmental quality also better environmental quality also rises. Thus rising incomes can be rises. Thus rising incomes can be linked to declines in pollution.linked to declines in pollution.

A continuation of these trends is A continuation of these trends is expected because the “ultimate expected because the “ultimate resource” on which future activity resource” on which future activity depends is not limited. This depends is not limited. This resource is people. resource is people.

The Road AheadThe Road Ahead

This section suggests that these very This section suggests that these very different worldviews can result in different worldviews can result in different policy choices and different policy choices and ultimately in costly errors if one view ultimately in costly errors if one view is correct and policies are based on is correct and policies are based on the other. the other.

Issues to ExploreIssues to Explore Does the earth have a finite carrying Does the earth have a finite carrying

capacity?capacity? How does the economic system respond to How does the economic system respond to

scarcity? scarcity? What is the role of the government in solving What is the role of the government in solving

these problems? When is government these problems? When is government intervention necessary and appropriate?intervention necessary and appropriate?

Do our economic and political systems deal Do our economic and political systems deal well with the uncertainty associated with well with the uncertainty associated with many environmental problems?many environmental problems?

What is our obligation to future generations?What is our obligation to future generations? Is sustainable development feasible?Is sustainable development feasible?

200 years ago almost everywhere 200 years ago almost everywhere human beings were comparatively human beings were comparatively few, poor and at the mercy of the few, poor and at the mercy of the forces of nature, and 200 years from forces of nature, and 200 years from now, we expect, almost everywhere now, we expect, almost everywhere they will be numerous, rich and in they will be numerous, rich and in control of the forces of nature control of the forces of nature