EEP 101/ECON 125EEP 101/ECON 125Lecture 16: Environmental Lecture 16: Environmental

and International and International EconomicsEconomics

Professor David ZilbermanProfessor David Zilberman

UC BerkeleyUC Berkeley

Trade and transfer of speciesTrade and transfer of species

Environmental considerations Environmental considerations expand the range of issues affecting expand the range of issues affecting economic relationships between economic relationships between nations. nations.

International considerations expand International considerations expand the economics of the environment.the economics of the environment.

Basic or trade economicsBasic or trade economics

Gain from tradeGain from trade Relative advantageRelative advantage Stolper SamulesonStolper Samuleson Gains from transfer of speciesGains from transfer of species Gains from Trade barriers Gains from Trade barriers

Relative advantage and tradeRelative advantage and tradeCountry A Country A a worker produces 2 shirts or 3 breadsa worker produces 2 shirts or 3 breadsCountry BCountry Ba worker produces 4 shirts or 2 breadsa worker produces 4 shirts or 2 breads10 workers in each country10 workers in each countryCountry A has relative advantage in breadCountry A has relative advantage in breadCountry B has relative advantage shirtsCountry B has relative advantage shirtsPrice of bread before tradePrice of bread before trade2/3 shirts in A2/3 shirts in A2 shirts in B2 shirts in BAfter trade it is 70/55After trade it is 70/55

Gains from tradeGains from trade Suppose before trade each country Suppose before trade each country

allocated resources among activitiesallocated resources among activities• Country A produces 10 shirts and 15 breadsCountry A produces 10 shirts and 15 breads• Country B produces 20 shirts and 10 breadsCountry B produces 20 shirts and 10 breads

Total 30 shirts and 25 breadsTotal 30 shirts and 25 breads After trade there is specializationAfter trade there is specialization

• Country a produces breads- 30 of themCountry a produces breads- 30 of them• Country B produces 40 shirtsCountry B produces 40 shirts

The exact equilibrium and trade pattern The exact equilibrium and trade pattern depends on tastes, technology and depends on tastes, technology and endowmentsendowments

Exporting Environmental quality Exporting Environmental quality when it is abundantwhen it is abundant

Environmental quality

food

A

B

InternationalPrice ration

A outcome without tradeB with tradeAC export of EQCB import of foodDB utility gain from trade

c

D

Patterns of tradePatterns of trade The Heckscher-Ohlin Theorem:The Heckscher-Ohlin Theorem:A country A country

will export goods that are intensive in will export goods that are intensive in input abundant in the countryinput abundant in the country• A capital-abundant country will export the A capital-abundant country will export the

capital-intensive goods capital-intensive goods • The labor-abundant country will export the The labor-abundant country will export the

labor-intensive good.labor-intensive good. Countries with abundance of natural Countries with abundance of natural

resources and environmental amenities resources and environmental amenities will export them -will export them -

Stolper SamuelsonStolper Samuelson A movement to free trade will cause the A movement to free trade will cause the

real return of a country's relatively real return of a country's relatively abundant factor to rise, while the real abundant factor to rise, while the real return of the country's relatively scarce return of the country's relatively scarce factor will fall.factor will fall.

The labor in a labor intensive country The labor in a labor intensive country will benefits from trade, but the capital will benefits from trade, but the capital may losemay lose

In the US which is relative to the rest of In the US which is relative to the rest of the world is capital intensive, labor the world is capital intensive, labor loses from tree trade but capital gainsloses from tree trade but capital gains

Gainers and losers from tradeGainers and losers from trade

Consumers - gainConsumers - gain Specialized Workers and owners in Specialized Workers and owners in

exporting industries-winexporting industries-win Specialized Workers and owners of assets Specialized Workers and owners of assets

in export sectorin export sector Labor moves among section- gains if Labor moves among section- gains if

labor intensive product is exportedlabor intensive product is exported Environment and future generation may Environment and future generation may

lose if Natural resources are exportedlose if Natural resources are exported

Sad truth about tradeSad truth about trade Trade may have bad effects, but Trade may have bad effects, but

sometimes the alternative is worstsometimes the alternative is worst Poor countries will sell their resources, Poor countries will sell their resources,

their people may engage in the least their people may engage in the least desirable jobs producing export productdesirable jobs producing export product

Trade polices do not follow text books- Trade polices do not follow text books- some governments may gain from trade some governments may gain from trade in natural resources and enhance itin natural resources and enhance it

Dictatorships may lead poor countries to sell Dictatorships may lead poor countries to sell their citizens health and resourcestheir citizens health and resources

Exporting the environmentExporting the environment Trade model assume competition- Trade model assume competition-

ignore dynamics and the fact that ignore dynamics and the fact that government may control extraction government may control extraction

International price of environment

MC of extraction

MC extraction plus future

A B

B actual mining ofEnvironmentA Optimal level

Poverty lead to taking more risksPoverty lead to taking more risks "Value of life" is the cost saving of a "Value of life" is the cost saving of a

"statistical" life as implied by safety "statistical" life as implied by safety regulations. "Value of life" in poorer countries regulations. "Value of life" in poorer countries is likely to be smaller than richer countries. is likely to be smaller than richer countries.

As countries become richer, environmental As countries become richer, environmental and safety regulations become stricter. and safety regulations become stricter. Production activities are less pollution Production activities are less pollution intensiveintensive

International trade may lead to the International trade may lead to the concentration of waste material, lower concentration of waste material, lower environmental quality, and lower human environmental quality, and lower human health in poorer nations.health in poorer nations.

Trade and waste disposalTrade and waste disposal Environmental quality may be viewed as consumption Environmental quality may be viewed as consumption

goods that are empirically found to have high-income goods that are empirically found to have high-income elasticity. They will be consumed more intensively in elasticity. They will be consumed more intensively in richer countries.richer countries.

Environmental quality characteristics and human health Environmental quality characteristics and human health may be viewed as inputs in the production process. may be viewed as inputs in the production process. Poorer countries have relatively more of these inputs Poorer countries have relatively more of these inputs (relative to, say, capital); therefore, they should:(relative to, say, capital); therefore, they should:

• • Specialize in pollution-intensive products.Specialize in pollution-intensive products.• • Adopt technologies that are intensive in Adopt technologies that are intensive in

pollution.pollution.• • Provide waste disposal services.Provide waste disposal services.• • Have more unrestricted worker safety and Have more unrestricted worker safety and

human health regulations.human health regulations.

..

Ownership politics and tradeOwnership politics and trade

Demand forWaste disposal

PrivateMarginal cost

Private+Externality costPrivate+external

lity+future costIF the owner Of waste disposal facility does not Pay for the Externality costAnd is myopictrade is bad

The race to the bottomThe race to the bottom Does trade lead to deterioration of Does trade lead to deterioration of

environmental quality?environmental quality? Less regulation may provide an edgeLess regulation may provide an edge But greener technology may lead to But greener technology may lead to

tougher regulationstougher regulations Evidence of races to the top and bottomEvidence of races to the top and bottom Always higher income lead to greener Always higher income lead to greener

emphasisemphasis Barriers to trade and reduce opportunityBarriers to trade and reduce opportunity

May lead to neglect and deerioration May lead to neglect and deerioration

Trade and waste disposal Trade and waste disposal continuedcontinued

Laws and safety standards in developing countries may Laws and safety standards in developing countries may cause loss of jobs in developed nations, which will lead cause loss of jobs in developed nations, which will lead to a call for "harmonization" of regulations. to a call for "harmonization" of regulations.

Some waste accumulation activities in poorer nations Some waste accumulation activities in poorer nations may be objectionable because of their irreversible may be objectionable because of their irreversible outcomes and impacts on future generation.outcomes and impacts on future generation.

Income distribution considerations also affect safety Income distribution considerations also affect safety regulation and environmental regulations. Comparing regulation and environmental regulations. Comparing countries with equal average income, the countries with countries with equal average income, the countries with more uneven income distribution are likely to export more uneven income distribution are likely to export worker safety, and some aspects of environmental worker safety, and some aspects of environmental quality may import other aspects (for the very rich).quality may import other aspects (for the very rich).

““Gains” from trade barriersGains” from trade barriers Because of the gains from trade, trade limits Because of the gains from trade, trade limits

provide lucrative opportunitiesprovide lucrative opportunities Barriers of movement of commodities and labor Barriers of movement of commodities and labor

may lead to illegal smuggling may lead to illegal smuggling Crime will rise near border townsCrime will rise near border towns Crime includes smuggling of illicit drugs, migrant Crime includes smuggling of illicit drugs, migrant

and natural resourcesand natural resources Restriction of natural resources & wild life exportRestriction of natural resources & wild life export

• may induce illicit activities-poachingmay induce illicit activities-poaching• Require sufficient enforcement to fight crime Require sufficient enforcement to fight crime

Barriers of trade may make some better off but Barriers of trade may make some better off but society worse offsociety worse off

Trade and transfer of species Trade and transfer of species International exchanges include transfer of species (biodiversity) and International exchanges include transfer of species (biodiversity) and

technologies.technologies.• • The discovery of America introduced Europeans to tomatoes, potatoes, corn, etc.The discovery of America introduced Europeans to tomatoes, potatoes, corn, etc.• • Australia expanded the range of tree species available for forestry.Australia expanded the range of tree species available for forestry.

There are gains from transfer of biodiversity but also losses.There are gains from transfer of biodiversity but also losses.• • Exotic species may dominate native species.Exotic species may dominate native species.

Transfer of species may lead to diseases and destruction if unchecked.Transfer of species may lead to diseases and destruction if unchecked.• • Rabbits in Australia.Rabbits in Australia.• • Syphilis was brought to Europe from America.Syphilis was brought to Europe from America.

Design of Institutional and policy Design of Institutional and policy solution for species movementsolution for species movement

Policy mechanisms to optimally transfer species and to Policy mechanisms to optimally transfer species and to protect against undesired transfers of bio matters. protect against undesired transfers of bio matters. Some mechanisms include:Some mechanisms include:• • QuarantinesQuarantines• • Ban on transfers of certain materials.Ban on transfers of certain materials.

Compensation for the use of genetic materials are Compensation for the use of genetic materials are issues of policy concern.issues of policy concern.• • How much should developing nations be paid for the How much should developing nations be paid for the use of their species in developing medicines, new crop use of their species in developing medicines, new crop varieties, and other products?varieties, and other products?• • How should the royalties for genetic materials within How should the royalties for genetic materials within nations be distributed?nations be distributed?

Shadow pricing and gain from Shadow pricing and gain from smugglingsmuggling

USLabor market

Extra wageFor illegal worker

Mexico labor market

Global interdependencyGlobal interdependency Environmental consideration leads to interdependency between Environmental consideration leads to interdependency between

nations. There may be externalities between nations:nations. There may be externalities between nations:• • Production externalities as in the case of acid rain.Production externalities as in the case of acid rain.• • Consumption externalities--people are concerned about human Consumption externalities--people are concerned about human conditions and other countries, hunger, genocide, etc. People are conditions and other countries, hunger, genocide, etc. People are concerned with environmental conditions in other countries.concerned with environmental conditions in other countries.

Correction of externality situations may require policies besides Correction of externality situations may require policies besides trade.trade.

• • Transfer payments to reduce pollution activities.Transfer payments to reduce pollution activities.• • Aid to address undesirable situations (hunger, deforestation, Aid to address undesirable situations (hunger, deforestation,

etc.)etc.)

..

Possible global common Possible global common problemsproblems

Humans share some resources globally. Humans share some resources globally. Without intervention to address free-rider Without intervention to address free-rider problems, there may be nonoptimal uses of problems, there may be nonoptimal uses of global common resources.global common resources.

• • Destruction of fisheries demonstrate the Destruction of fisheries demonstrate the failure of laisse-faire failure of laisse-faire approaches for global approaches for global common resources.common resources.

• • Addressing problems of ozone depletion Addressing problems of ozone depletion and global warming and global warming require collective action require collective action between nations.between nations.

• • Example: The gradual use of bans on Example: The gradual use of bans on methyl bromide, ban on methyl bromide, ban on aerosols, and othersaerosols, and others

Global interdependencyGlobal interdependency Humans share some resources globally. Without intervention to Humans share some resources globally. Without intervention to

address free-rider problems, there may be nonoptimal uses of address free-rider problems, there may be nonoptimal uses of global common resources.global common resources.

• • Destruction of fisheries demonstrate the failure of laisse-faire Destruction of fisheries demonstrate the failure of laisse-faire approaches for global common resources.approaches for global common resources.

• • Addressing problems of ozone depletion and global warming require Addressing problems of ozone depletion and global warming require collective action between nations.collective action between nations.

• • Example: The gradual use of bans on methyl bromide, ban on aerosols, Example: The gradual use of bans on methyl bromide, ban on aerosols, and others.and others.

Because of shared benefits of biodiversity, developed nations are Because of shared benefits of biodiversity, developed nations are interested in the presentation of resources in developing nations. interested in the presentation of resources in developing nations. Transfer mechanization (forest for debt) is needed to assure such Transfer mechanization (forest for debt) is needed to assure such conservation activities. conservation activities.

Gains from trade may include Gains from trade may include improvement in environmental improvement in environmental

quality quality Trade may reduce the need to use toxic chemicals or Trade may reduce the need to use toxic chemicals or

pesticides.pesticides.• Example: Export of grapes and apples from southern countries Example: Export of grapes and apples from southern countries

(Chile) leads to the use of less storage in the northern (Chile) leads to the use of less storage in the northern countries.countries.

Trade may lead to export of less polluting inputs. India Trade may lead to export of less polluting inputs. India will benefit from exporting. Cleaner coal for energy will benefit from exporting. Cleaner coal for energy generation to reduce air pollution increases energy generation to reduce air pollution increases energy production.production.

Trade enables the production of trees and food in Trade enables the production of trees and food in locations (warm climate zones) where the growth rates locations (warm climate zones) where the growth rates are much higher and preserves trees in areas with low are much higher and preserves trees in areas with low growth rates.growth rates.

Environmental barriers to trade Environmental barriers to trade Environmental policy may be used as barriers Environmental policy may be used as barriers

to trade as international trade agreement leads to trade as international trade agreement leads to freer trade and reduces trade barriers. to freer trade and reduces trade barriers. Environmental policy may be used as a means Environmental policy may be used as a means for protection.for protection.

• • Food safety regulation may be used for Food safety regulation may be used for protective purposes. protective purposes. • • Agricultural policies are replaced with Agricultural policies are replaced with

policies to protect "rural life styles."policies to protect "rural life styles."

Mechanisms are needed to identify where Mechanisms are needed to identify where policies are genuinely developed for policies are genuinely developed for environmental protection and when they are environmental protection and when they are used for protection of domestic industries.used for protection of domestic industries.

Income and environmental Income and environmental protectionprotection

Environmental regulation may not exist or may not be enforced, Environmental regulation may not exist or may not be enforced, particularly in poor countries. Water-borne diseases are major particularly in poor countries. Water-borne diseases are major problems.problems.

Developing countries with medium levels of income per capita (say, Developing countries with medium levels of income per capita (say, above $2,000/year) address severe pollution problems:above $2,000/year) address severe pollution problems:

Air pollutionAir pollution

Water pollution.Water pollution.

Protection against overutilization of natural resources occurs mostly Protection against overutilization of natural resources occurs mostly in richer countries with GNP/capita of, say, above $5,000/year.in richer countries with GNP/capita of, say, above $5,000/year.

Rich countries will develop policies to protect resources that provide Rich countries will develop policies to protect resources that provide mainly aesthetic or consumptive benefits.mainly aesthetic or consumptive benefits.

Economic development leads to increased demand for Economic development leads to increased demand for environmental protection but also increased use of energy and other environmental protection but also increased use of energy and other resources.resources.

Environmental and Environmental and human well-beinghuman well-being

GNP is a traditional measure of economic well-being GNP is a traditional measure of economic well-being of an economy, but it may overestimate economic of an economy, but it may overestimate economic well-being because it does not consider resource well-being because it does not consider resource degradation and environmental quality problems. degradation and environmental quality problems.

A partial answer is introduced by a new measure.A partial answer is introduced by a new measure.

ANNPANNP -= Adjusted net national product.-= Adjusted net national product.

ANNPANNP == GNP GNP - - DDMM - - DDNN..

GNPGNP = Gross national product = consumption + saving= Gross national product = consumption + savingDDMM = Depreciation of physical capital= Depreciation of physical capitalDDNN = Depreciation of neutral capital.= Depreciation of neutral capital.

Environmental and Environmental and human well-being continuedhuman well-being continued

The correctionThe correction of a national product will be greater in of a national product will be greater in countries with a high rate of resource depletion countries with a high rate of resource depletion (Mexico, Indonesia) than countries with lower rates of (Mexico, Indonesia) than countries with lower rates of depletion (Costa Rica).depletion (Costa Rica).

Other measures of well-being explicitly introduce Other measures of well-being explicitly introduce measures of environmental and other aspects of measures of environmental and other aspects of quality of life. It is difficult to quality of life. It is difficult to monetizemonetize environmental environmental benefits or quality of life.benefits or quality of life.

One approach is to weigh indexes of well-being (life One approach is to weigh indexes of well-being (life expectancy, air pollution, water quality, population expectancy, air pollution, water quality, population density) by “monetizing” coefficients. However, this density) by “monetizing” coefficients. However, this approach is arbitrary.approach is arbitrary.

SustainabilitySustainability

A key issue is depletion of natural resources A key issue is depletion of natural resources (NR).(NR).

NR can be classified as renewable (fish, forest) NR can be classified as renewable (fish, forest) or nonrenewable (minerals).or nonrenewable (minerals).

A continuous extraction of nonrenewable A continuous extraction of nonrenewable resources will lead to their depletion in the resources will lead to their depletion in the future.future.

Renewable resources can be sustained if use Renewable resources can be sustained if use does not permanently exceed the growth rate.does not permanently exceed the growth rate.

Sustainability continuedSustainability continued For many fisheries, wildlife, or forests, excessive extraction For many fisheries, wildlife, or forests, excessive extraction

leads to reduction of stock and in some cases to extinction.leads to reduction of stock and in some cases to extinction.

Sustainability is aimed to stabilize resource stocks at a Sustainability is aimed to stabilize resource stocks at a socially desirable level. Many development processes may socially desirable level. Many development processes may be fueled by excessive extraction--sustainable development be fueled by excessive extraction--sustainable development aims to combine development and long-run survival.aims to combine development and long-run survival.

It, therefore, leads to restoration policies of depleted It, therefore, leads to restoration policies of depleted resource stocks and thus temporary (or permanent) resource stocks and thus temporary (or permanent) slowness in growth.slowness in growth.

It requires monitoring of a natural system to account for It requires monitoring of a natural system to account for natural capital stocks and leads to more ecological, sound natural capital stocks and leads to more ecological, sound management techniques.management techniques.

DefinitionsDefinitions

IrreversibilityIrreversibility: Situations where future effort : Situations where future effort cannot correct for current or past damage. cannot correct for current or past damage. Death is irreversible.Death is irreversible.

UncertaintyUncertainty: Lack of knowledge about the : Lack of knowledge about the performance of economic and ecological performance of economic and ecological system. Uncertainty requires (1) learning and system. Uncertainty requires (1) learning and (2) caution in action.(2) caution in action.

Adaptive managementAdaptive management: Resource utilization : Resource utilization approach that entails constant learning and approach that entails constant learning and reassessment.reassessment.

Modern approach to Modern approach to development projectsdevelopment projects

““Feedback” is a key in adaptive management Feedback” is a key in adaptive management strategies. Actions are taken (new technologies are strategies. Actions are taken (new technologies are tried and new incentives are introduced) to observe tried and new incentives are introduced) to observe response which will lend to improving future response which will lend to improving future policies.policies.

Traditional management policies devise “open loop” Traditional management policies devise “open loop” systems that are designed to produce the best systems that are designed to produce the best policies under average future conditions.policies under average future conditions.

New management techniques (adaptive New management techniques (adaptive management) are close loop strategies that management) are close loop strategies that experiment identifying states and natures and then experiment identifying states and natures and then make adjustments.make adjustments.

Modern approach to Modern approach to development projects continueddevelopment projects continued

In the past many resource management In the past many resource management projects emphasized “structural solution.” The projects emphasized “structural solution.” The best solution to a perceived water shortage was best solution to a perceived water shortage was a water diversion project. a water diversion project.

Now the emphasis is on nonstructural solution--Now the emphasis is on nonstructural solution--introduction of an institution or incentive to introduction of an institution or incentive to modify behavior (for example, water markets). modify behavior (for example, water markets). While “market failure” may be the cause for While “market failure” may be the cause for many pollution problems, lack of markets and many pollution problems, lack of markets and property rights may be the source for other property rights may be the source for other concerns.concerns.

Modern approach to Modern approach to development projects continueddevelopment projects continued

Water is mainly allocated by queues Water is mainly allocated by queues (water rights), and water right holders (water rights), and water right holders are not allowed to trade them. Water are not allowed to trade them. Water markets may solve this problem.markets may solve this problem.

Lack of landownership leads to Lack of landownership leads to overgrazing and depletion of land overgrazing and depletion of land quality. Land rights and trading may quality. Land rights and trading may reduce this problem.reduce this problem.

Technology and the environmentTechnology and the environment

PerceptionPerception: Modern technology is a major cause of : Modern technology is a major cause of environmental degradation:environmental degradation:

PesticidesPesticides FertilizersFertilizers

RealityReality: Technology impacts depend on policy. : Technology impacts depend on policy. Technologies have had strong, positive environmental Technologies have had strong, positive environmental effects.effects.(1) Higher yields prevented the need to expand land (1) Higher yields prevented the need to expand land bases, thus, further reducing wildland and damaging bases, thus, further reducing wildland and damaging biodiversity. biodiversity. (2) Knowledge and technology are useful for:(2) Knowledge and technology are useful for:

Detecting environmental problemsDetecting environmental problems RestorationRestoration

Incentives may lead to pollution and contamination.Incentives may lead to pollution and contamination.

Kuznets CurveKuznets Curve Pollution per capita increases with incme Pollution per capita increases with incme

and then declinesand then declines Environmental quality luxury goodEnvironmental quality luxury good Rich select cleaner industriesRich select cleaner industries

• Have higher regulatory standardsHave higher regulatory standards• Export their wasteExport their waste

MiniaturationMiniaturation

Global environmental problemsGlobal environmental problems

Climate changeClimate change

Acid rainAcid rain

BiodiversityBiodiversity

Ozone depletionOzone depletion

Fish stockFish stock depletiondepletion

Global environmental problems Global environmental problems continuedcontinued

Global resource problems are in most cases a bigger concern Global resource problems are in most cases a bigger concern for developed nations.for developed nations.

There is a need for cooperation.There is a need for cooperation.

Developed countries demand to be paid to cooperate.Developed countries demand to be paid to cooperate.

Schemes like “debt for nature” require monitoring and Schemes like “debt for nature” require monitoring and enforcement to be effective. enforcement to be effective.

A major issue is protection for the hardest-hit victims of A major issue is protection for the hardest-hit victims of problems (Bangladesh in case of global warming).problems (Bangladesh in case of global warming).

Solutions to global problems erode the power of states and Solutions to global problems erode the power of states and lead to the emergence of powerful international institutions.lead to the emergence of powerful international institutions.