Environmental EconomicsEcon 260What is Environmental EconomicsCh.01

IntroductionEnvironmental Economics is the study of environmental problems with the perspective and analytical ideas of economics. In this field, we mostly use tools learned in microeconomics to investigate and analyze environmental problems.

Recall the difference between microeconomics and macroeconomics. Microeconomics is the study of the behaviors of individuals or small groups (households, firms, a particular industry or market). Macroeconomics is the study of performance of economies as a whole. In economics, we are generally concerned with allocation of scarce resources among competing uses.

The concepts of scarcity, opportunity costs, trade-offs, incentives, marginal benefits and marginal costs are key ingredients to understanding environmental problems and what can be done about them.

Two concepts efficiency and equity are often important parts of economic analyses. Efficiency is about using resources in the best way possible while equity is about being fair. Economists are generally more comfortable talking about efficiency than equity.

IntroductionLet us now touch upon some general ideas about why environmental problems arise and how we might be able to deal with them?

It is cheap to pollute. People pollute because it is the cheapest way to dispose of the waste products remaining after production and consumption of a good. This idea suggests that pollution can be controlled by making disposal of waste products more expensive.

Pollution is an externality problem. The cost of polluting environment is paid or borne not only by polluter ( private costs) but also the rest of the society (external cost). However, the polluter does not think about the cost to others while making consumption or production decisions. Therefore, the idea of making the polluter pay more ( private costs+ external cost) than his/her private costs could be useful in dealing with pollution problem.

Environment is a public good. A public good can be shared by many people at the same time without diminishing the share for an individual. This leads to free riding problem.

Lack of property rights. As most of the natural resources lack strong property rights, they tend to get overused (hence more pollution). Therefore, creating property rights might provide a solution in many circumstances.

Although each of these ideas is a good way to explain cause of pollution, they are related ideas.

A Practical Illustration: Smog and Motor VehiclesMotor vehicle emissions are considered major source of air pollution in urban areas. In Canada, automobiles discharge approximately 11% of total carbon dioxide emissions, 17% of nitrogen oxides, 20% of volatile organic compounds, and 47 % of carbon monoxide. These compounds contribute to urban smog, acid precipitation, and global warming. In turn, these environmental conditions adversely affect health of people and our ecosystem.

We hardly think about the adverse impact of our driving on the rest of the society. When we make decisions to drive, they are based on our private benefits and costs of driving. As a result, we are more likely to drive and pollute more than what is beneficial to the society.

Let us now quickly look at the concept of incentives to see what can be done to reduce air pollution from automobiles. To begin , consider the following.Total Quantity of emissions = Number of vehicles X Average kilometres travelled X Emissions per kilometre.

A Practical Illustration: Smog and Motor VehiclesThe relationship shown before tells us that we can influence the air pollution from automobile emissions by targeting one or more of the three variables number of vehicles, average kilometres travelled and emissions per kilometre.

To reduce number of vehicles : increase costs of owning and maintaining vehicles (high sales tax, frequent costly inspection, high annual tax ), encourage people to use public transportation by making it cheap and easily available To reduce average kilometres travelled : increase costs of travelling through higher gasoline taxes ( or annual tax based on kilometres travelled)To reduce emissions per kilometre: mandate regular servicing and emission tests, make rules and regulations targeting firms to produce vehicles with higher fuel efficiency ( went from 15L/100km in 1965 to 7.4L/100km in 2003)

As older vehicles are more polluting, programs designed to retire them can help reduce emissions effectively. Awareness programs and appropriate incentive provided to the pollution-control industry can also be helpful in reducing emissions over time.

Economic output and Environmental QualityIn the next several slides, we will link economic output and environmental quality at a given time or over time, using the concept of production possibility frontier (PPF).

Economic output and Environmental Quality

Economic output and Environmental Quality

Environmental Kuznets Curve (EKC)It is a statistical relationship between an indicator of environmental quality and income level for economies. This relationship can be estimated for a country over time or for a sample of countries at one point in time.

In the next few slides, we will look at several estimates for EKC. Note that EKCs vary significantly over time and across environmental quality indicators.

Environmental Kuznets Curve

Environmental Kuznets Curve

Environmental Kuznets Curve

Pollution Havens and HalosA pollution haven is a region or country where regulators deliberately have lax environmental policies to try to attract industry to their region.

A pollution halo is a region or country where environmental rules and regulations are relatively stricter , which makes it attractive to environmentally friendly industries or environmentally conscious people.

People have pointed out that developing countries may be turning into pollution havens based on relocation of many manufacturing industries to these countries. But conclusive empirical evidence has not been found for this.

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