........................................................................................................................

Contents

List of tables ixList of figures xList of boxes xiiiIntroduction and acknowledgements xv

1 Economy–environment interactions 1

2 The economics of sustainable development 14

3 Market failure 42

4 Incentive design 82

5 Pollution taxes and tradable emission permits: Theoryinto practice 131

6 Transboundary pollution and global public goods 174

7 Nonrenewable resources: Market structure and policy 214

8 Nonrenewable resources: Scarcity, costs andexternalities 243

9 Renewable natural resources: The fishery 266

10 Forestry economics 303

11 Theory and methods for environmental valuation 322

vii

....................viii Contents

12 Risk and the environment 368

13 Trade and the environment 421

Author index 449Subject index 454

C H A P T E R........................................................................................................................

Economy–environmentinteractions

1

1.1 Introduction.....................................................................................

Economic choices shape nature just as nature can shape our choices. Economists and

environmental scientists have long argued that better linkage and integration of the

social and natural science disciplines would improve both science and policymaking.

The inspiration behind integration is that explicitly accounting for economic and biolo-

gical circumstances and the key feedback loops between the systems yields more precise

information about the risks faced by humans and the environment. An integrated

approach accounts for the ability of humans to respond to changes in their surroundings,

and vice versa. When an ecosystem changes, humans adapt by altering their beha-

viour, which then affects the ecosystem. When human systems change, the ecosystem

responds to this change, and humans respond in turn. Capturing the outcome of this

economic system–environment interaction requires one to account for both adaptation

and feedbacks within and between the systems.

The risk to biodiversity provides a good example. Biologists maintain that thresholds

of species endangerments are functions of the present sizes, trends and distributions

of species’ populations and their likely interactions with habitats – strictly a biological

question. But this perspective is too narrow. Economic circumstances affect the quality

of habitat. The circumstances that matter include the relative returns to human users

from alternative sites, the relative returns from alternative uses on a particular site and

human welfare. Sites with low relative returns in their ‘highest and best’ use are more

likely to be left undisturbed. Moreover the rich can better afford to set aside quality

habitat to protect biodiversity. Species survival is thus determined by both economic

and biological parameters.

This chapter gives a brief overview of the ways in which the economy and the

natural environment are interlinked. To an extent, these interlinkages are all-embracing;

every economic action can have some effect on the environment, and every environ-

mental change can have an impact on the economy. By ‘the economy’ we refer to the

1

.......................................2 Environmental economics

population of economic agents, the institutions they form (which include firms and

governments) and the interlinkages between agents and institutions, such as markets. By

‘environment’ we mean the biosphere, the ‘� � � thin skin on the earth’s surface on which

life exists’ (Nisbet, 1991), the atmosphere, the geosphere (that part of the earth lying

below the biosphere) and all flora and fauna. Our definition of the environment thus

includes life forms, energy and material resources, the stratosphere (high atmosphere)

and troposphere (low atmosphere). These constituent parts of the environment interact

with each other: an example is the effect of changes in biosphere composition on the

composition of the atmosphere. More important from our perspective are the effects of

human activity on the environment, and the consequences of these effects on human

well-being.

As an example, consider the generation of electricity. In extracting fossil fuels to use

as an energy source, we deplete the stock of such fuels in the geosphere. In burning

these fuels to release their energy, we also release carbon dioxide �CO2�, sulphur dioxide

�SO2� and particulates, all of which may produce undesirable environmental impacts that

reduce human well-being. Higher carbon dioxide emissions mean greater global climate

change, with consequent predicted costs for people in many parts of the developing

world (Markandya and Halnaes, 2004). Climate change also threatens global biodiversity:

for instance, endangering the winter habitat of the North American monarch butterfly

in Mexico (Oberhauser and Peterson, 2003) and leading to the predicted loss of 24–65%

of suitable habitats for Northern European butterflies over the next 100 years (Hill et al.,

2002). Higher sulphur dioxide emissions mean more acid rain, impacting on fisheries in

sensitive locations (Flower and Batterbee, 1983; MacMillan and Ferrier, 1994). Increased

particulate emissions can mean health problems for older and more vulnerable citizens

in both developed (COMEAP, 1998) and developing countries (Pearce, 1996).

As another example, agricultural support policies may have environmentally

damaging effects which in turn rebound on human welfare. Thus, subsidising cereal

production in the European Community (EC) led to higher prices for such cereals, which

are important inputs to the livestock sector. Two effects amongst many may be remarked

on: higher output prices encouraged farming practices which contributed to soil erosion

in Europe (Colombo et al., 2003), while livestock farmers’ demand for cheaper substitutes

for feed resulted in the loss of rainforest in Thailand, as producers in Thailand sought to

increase cassava production for export to EC livestock farmers.

1.2 Interlinkages between the economy and theenvironment.....................................................................................

Figure 1.1 summarises the interlinkages between the economy and the environment.

We simplify the economy into two sectors: production and consumption. Exchanges

of goods, services and factors of production take place between these two sectors. The

environment is shown here as the three interlinked circles E1, E2 and E3, and the

all-encompassing system boundary labelled E4. The production sector extracts energy

...................................................Economy–environment interactions 3

Figure 1.1 Economy–environment interactions

resources such as oil and material resources such as iron ore from the environment. These

are transformed into outputs: some useful – goods and services supplied to consumers –

and some which are waste products, such as effluent water and air pollutants. There is

some recycling of resources within the production sector, shown by the loop R1, and

within the consumption sector, as shown by the loop R2. The environment’s first role,

then, is as a supplier of resources.

The second role is as a sink for waste products. These wastes may result directly from

production, as already mentioned, or from consumption: when an individual puts out

their garbage, or when they drive to work, they are contributing to this form of waste.

In some cases, wastes are biologically or chemically processed by the environment, or

both. For example, organic emissions to an estuary from a distillery are broken down

by natural processes – the action of micro-organisms – into their chemical component

parts. Whether this will have a harmful effect on the estuary depends on a number of

factors, including the volume of waste relative to the volume of the receiving water, the

temperature of the water and its rate of replacement. That is to say the estuary has a

limited ‘assimilative capacity’ for the waste. As the level of organic input increases, the

.......................................4 Environmental economics

process of breaking it down will use up more and more of the oxygen dissolved in water,

reducing the ability of the estuary to support fish.

The notion of assimilative capacity has been criticised (see, for example, Nisbet, 1991),

implying as it does that up to a fixed point emissions can occur with no deleterious

impact. This is not strictly true in most cases, since what we have is a gradually increasing

impact – although the rate of increase may exhibit abrupt changes due to ‘threshold’

effects. This is illustrated in Figure 1.2. However, the notion is useful in that it suggests

that, up to a point, effects are not deemed important: only once the oxygen in the

river drops below a critical level so that, for example, fish are no longer present, does

Figure 1.2 Possible damage functions

...................................................Economy–environment interactions 5

the effect become ‘significant’ on some criteria. In some types of waterbody, however,

the nature of the ecosystem dynamics, as they respond to human impacts, may be so

complex that they cause us to re-think how we construct our economic models. One

example is pollution impacts on shallow lakes, and the hysteresis which describes this

process (Scheffer et al., 2001). Chaotic dynamics in ecology–economic relationships are

also of interest, since they mean the system can ‘flip’ from one state to another rather

than evolving in a linear fashion (Brock et al., 2000).

For some inputs to the environment, there are no natural processes to transform

them into harmless, or less harmful, substances. Such inputs, which are variously termed

‘cumulative’ and ‘conservative’ pollutants, include metals such as lead and cadmium, and

man-made substances such as polychlorinated biphenyls (PCBs) and dichloro-diphenyl-

trichloroethane (DDT). If, in our estuary example, PCBs are discharged into the water,

then they will not be broken down either by chemical processes (oxidation) or through

biological processes by micro-organisms (McLusky, 1989). Instead, they will build up

either in the mud at the bottom of the estuary, or in fish or invertebrates. This latter

process is known as bioaccumulation. For conservative pollutants a positive flow in a

year Ft adds to the stock St . This is not true for degradable, assimilative wastes, where

the stock in any time period St depends on current flows less that amount removed

by biodegradation, or by chemical reactions in the case of gases such as methane. For

degradable pollutants, such as organic effluents from brewing or paper production, and

methane, the stock in any time period t is given by:

Sat = Ft −At (1.1)

where A is the amount assimilated in any period. For cumulative pollutants, the stock

in any period t∗ is

Sct∗ =

t=t∗∑

t0

Ft (1.2)

(where t0 is the historical date when emissions began) since assimilation is zero. For

a given location, Equation (1.2) may not accurately predict the stock of cumulative

pollutants, since some transport of the pollutants to another location is possible, while

sediments may build up over the stock pollutant and put it ‘out of harm’s reach’.

With regard to Equation (1.1), we should note that the amount assimilated in any

period �At � may depend on the level of emissions in previous periods: emissions of

either the pollutant whose stock is being modelled or another pollutant. As an example

of the latter case, the hydroxyl radical in the atmosphere is responsible for breaking

down methane, an important greenhouse gas. Methane �CH4� is broken down in the

atmosphere by the hydroxyl radical (OH) in the presence of nitrous oxides (NO) into

water vapour, hydrogen and carbon monoxide. However, the amount of OH in the upper

atmosphere is a function of the level of other pollutants, such as carbon monoxide (CO),

and of hydroxyl production (which in turn depends partly on ozone levels in the lower

atmosphere). The higher the CO levels are, the lower, ceteris paribus, will be OH levels,

and thus the less CH4 will be broken down.

.......................................6 Environmental economics

So far we have seen that the environment acts as a waste sink and as a source of energy

and material resources. The next role to be considered is that marked E3 in Figure 1.1.

The environment acts as a supplier of amenity, and educational and spiritual values to

society. For example, people living in Europe may derive pleasure from the existence

of wilderness areas in Northern Canada or in tropical rainforests, while native peoples

living in these areas attach spiritual and cultural values to them, and the flora and fauna

therein. We need to make precise the sense in which such values count for economists.

The theory of environmental valuation is set out in detail in Chapter 11. For present

purposes, however, the question can be addressed by asking what constitutes economic

value within the currently dominant economic paradigm of neoclassical economics.

Neoclassical economics judges economic value as being dependent on social well-being,

measured in a particular way. Social well-being is seen as depending on the (possibly

weighted) sum of individuals’ levels of well-being. Individual well-being is measured by

utility, and social welfare is the sum of individual utilities. There is thus no separate

collective good. The weighting of individual utilities is implicit in the social welfare

function, see Johansson (1991) for a discussion.

Individuals derive utility from consuming goods and services (meals, holidays) and

from the state of the natural environment. This is because individuals use the natural

environment for recreation, as an input to the production of goods/services, and because

they are made happier by the mere existence of environmental assets such as wilderness

areas and blue whales. A representative individual j may have preferences which could

be represented in the following generalised way:

Uj = U �X1�X2� � � � �Xn �Q1�Q2� � � � �Qm� (1.3)

where Uj is utility for person j, X1� � � � �Xn are goods and services produced in the produc-

tion sector and consumed by person j and Q1� � � � �Qm are environmental assets. For

instance, Q1 could be local air quality, Q2 local water quality and Qm the stock of blue

whales. The environment thus supplies utility directly to individual j via the vector of

environmental assets Q, and indirectly via its roles in the production of the vector of

goods and services X. Clearly one result of an increase in the output of any element

of the X vector could be a decrease in the quantity or quality of an element in the Q

vector. For example, suppose X1 is consumption of services provided by owning a car,

but driving a car causes decreases in air quality, Q1. An increase in the consumption of

‘car services’ increases utility (�Uj/�X1 is positive), but this increase in car use decreases

air quality. This fall in air quality reduces utility in an amount ��Uj/�Q1 · �Q1/�X1�. The

net effect is thus ambiguous, depending on the relative strengths of these positive and

negative changes. Note also that the level of Q1 will actually depend on the choices and

therefore actions of many individuals, not just person j: for instance, it may depend on

the travel-to-work choices of everyone in the city where j lives. We can also think of

pollution impacting on people’s health, and thus on the productivity of the economy

(sick workers being less productive than healthy workers).

...................................................Economy–environment interactions 7

What this example shows is that using the environment for one purpose (as a supplier

of material resources) can reduce its ability to supply us with other services, such as the

ability to breathe clean air. This is why in Figure 1.1, the three circles E1, E2 and E3 are

shown as overlapping: potential conflicts in resource use arise. Some examples of these

conflicts are the following:

� using a mountain region as a source of minerals means its amenity value as a

recreation destination is reduced;

� using a river as a waste-disposal unit means its amenity value to fishermen and

riverside walkers is reduced and that we can no longer extract so many material

resources (fish to eat) from it;

� felling a forest for its timber reduces the electricity-generating capacity of a dam,

owing to soil erosion, and reduces amenity values since the forest’s inhabitants

(animal and human) are displaced or destroyed;

� preserving a wetland for its aesthetic qualities forgoes the use of drained land for

agriculture.

The environment is thus a scarce resource, with many conflicting demands placed on it.

The scarcity problem resulting from these conflicting demands, relative scarcity, could in

principle be resolved by a correct set of (shadow) prices. This we distinguish from absolute

scarcity, whereby all demands on environmental services are simultaneously increasing

(Daly, 1991). The major cause of absolute scarcity is economic growth: this implies an

increasing demand for materials and energy, and an increase in waste outputs (by the

first law of thermodynamics (Daly, 1987). Yet if the amounts of environmental resources

are fixed (limited assimilative capacity, limited supplies of minerals and so on) then

absolute scarcity will increase as world economic growth occurs (see Box 1.1).

BOX 1.1

Does rising output mean rising energy use?

As economic growth occurs, energy and material demands per real dollar of output have tended

to fall. For example, energy required per unit of real GDP in Denmark fell by 27% between

1979 and 1989 (World Resources Institute, 1992). In the UK, the ratio of primary energy use

to GDP fell dramatically over the period 1950–90 (DTI, 1992), whilst the ratio of the value of

manufacturing output to total energy use fell over the period 1990–2001 (DEFRA, 2003). This

type of trend is now known as decoupling. However, rising world population and an increased

scale of economic activity would seem likely to produce a net increase in absolute scarcity over

time. Moreover, work on energy saving and GDP growth by Robert Kaufman (1992) suggests

that previous estimates of energy saving may be too high.

.......................................8 Environmental economics

Figure B1.1 Energy use to GDP ratios in four countriesNote: Actual value for the energy real/GDP ratio (circles) and the value predicted by Kaufman’s regressionmodel (solid line).Source: R.K. Kaufman (1992). ‘A biophysical analysis of energy/real GDP ratios’, Ecological Economics, 6(1),35–56.

In Figure B1.1, energy use per unit of real GDP can be seen to have fallen for France,

Germany, Japan and the UK over the last 40 years. This fall has traditionally been attributed to

two factors: technological progress, which reduces the amounts of all inputs, energy inclusive,

needed to produce one unit of output and a real price effect, whereby rising real energy prices

cause producers and consumers to substitute capital or labour for energy.

Kaufman notes, however, that there are other reasons why the energy/real GNP ratio

may fall. First is a change in the composition of energy use. Different forms of energy (oil,

coal, nuclear) are aggregated by converting them into heat units (kilocalories). However,

the amount of work per unit of heat equivalent is not constant across energy sources, with

some energy sources (higher quality) being able to do more work per kilocalorie than others

(lower quality). Thus if, over time, there is a transition from lower to higher quality energy

sources – say from coal to natural gas – then the energy/GDP ratio will fall. Second, a change

...................................................Economy–environment interactions 9

in the mix of final demand can also change energy use per unit of GDP if energy-intensive

commodities are replaced by less energy-intensive ones (where energy intensity is measured

as kilocalories per dollar of output). Kaufman also argues that traditional measures of energy

substitution due to real price effects overestimate energy savings, since they ignore the energy

component of the capital and labour used instead of energy. Evidence on this point has been

gathered by other authors: for example, Pimental et al. (1973) calculated that, while the amount

of direct energy used to produce a bushel of corn in the US fell by 15% between 1959 and

1970, total energy use per bushel actually rose by 3% once the energy content of other inputs

(tractors, pesticides) was accounted for.

Using econometric analysis, Kaufman shows that most of the reduction in the energy/real

GDP ratios in France, Japan, Germany and the UK over the study period is accounted for by

changes in the composition of energy use (away from coal and towards petroleum and nuclear

sources) and changes in the composition of output. Future substitution possibilities towards

high quality energy sources are limited owing to an indication of diminishing returns. Real

prices still have a significant effect, although the price elasticity of energy demand is much

lower than previous studies at −0�045 to −0�389, since Kaufman allows for the indirect energy

costs of labour and capital, which are considerable.

It is apparent, therefore, that economics has a role to play in understanding how

best to manage our global environment, since economics is a discipline concerned with

allocating scarce resources to conflicting demands. But it will also become clear that a

free market system can fail to allocate environmental resources efficiently. The reasons

for this failure are largely addressed in Chapter 3, but we can preview the more important

ones by saying that an imperfect specification of property rights results in a set of

prices which send the wrong signals to producers, consumers and governments and that

individual benefits of preserving our environment understate the collective benefits of

preservation.

Returning to Figure 1.1, the boundary marked E4 represents the global life-support

services provided by the environment. These include

� maintenance of an atmospheric composition suitable for life. The earth’s atmo-

sphere is made up largely of nitrogen (78%), oxygen (21%), argon (0.93%), water

vapour (variable) and carbon dioxide (0.035%), with numerous trace gases. The limits

of variability in this mixture, from the point of view of continued existence, are

small.

� maintenance of temperature and climate. The naturally occurring greenhouse effect

warms the earth from its ‘effective’ mean temperature of −18 �C to the current global

average of 16 �C. Changes in the composition of the upper atmosphere can change

this warming, and produce a wide range of impacts on the economy both directly

........................................10 Environmental economics

(e.g. by changing agricultural productivity) and indirectly (e.g. through effects on

biodiversity).

� recycling of water and nutrients. Examples are the hydrological and carbon cycles.

Economic activity operates within this environment, and thus is shown as being encap-

sulated by it. The dashed line between E2 and E4 indicates that emissions can affect

these global support services; whilst the dashed lines between E4 and production and

consumption shows the direct and indirect feedback effects from changes in these global

services on the economy.

1.3 The rest of this book.....................................................................................

This book is intended for graduate-level courses in Environmental Economics, although

parts of it will certainly be suitable for honours undergraduate teaching. We have tried to

achieve a balance of formal theoretical explanation, intuition and empirical examples –

the last of these often contained in ‘box sections’ in the text. A reasonable background

in undergraduate-level mathematics for economists is assumed.

In what follows, we set out the main aspects of economic theory concerning how

these links between the economy and the environment operate, how markets allocate

environmental resources and how this allocation can differ from what society views as

optimal. In Chapter 2, the economics of sustainable development are set out, in terms

of what sustainability means, how it might be achieved and how it can be measured.

Chapter 3 explains under what circumstances markets allocate resources efficiently and

when they fail to do so. Market failure seems endemic where many environmental

resources are concerned. Chapter 4 thus asks how the power of the market can be made

to work to correct environmental market failures, whilst Chapter 5 goes into some of the

instruments which arise in more practical detail. Chapter 6 moves on to consider what

economics has to say about the difficulties of managing global environmental problems

(such as climate change) where international co-operation is required for effective and

socially efficient responses.

Chapters 7–10 are concerned with the issue of how natural resource stocks should

best be managed, for both non-renewable (Chapters 7 and 8) and renewable (Chapters 9

and 10) resources. Issues of property rights and market structure turn out to be crucial.

In Chapter 11, focus turns to the valuation of non-market environmental resources,

such as clean air and biodiversity. Both the theory underlying these values and the

empirical methods for estimating them are explained. Environmental risk is investigated

in Chapter 12, with the focus being on people’s decision-making under risk and on the

value of reducing environmental risks. Finally, Chapter 13 considers some of the issues

underlying the impacts of trade on the environment.

Whether you are using this book to help you teach a course, or whether you are a

student, the authors encourage your comments – contact details can be found on the

back cover.

.....................................................Economy–environment interactions 11

BOX 1.2

Uncertainty and the precautionary principle

In many, if not all, cases of environmental management, there is some uncertainty over the

effects of actions on the environment and of the impact on humans of subsequent environ-

mental changes. In some cases, the extent of this uncertainty is considerable. For example,

while we know that carbon dioxide causes global warming, there is uncertainty as to the extent

of warming caused by, say, a doubling of current CO2 levels, and even more uncertainty about

the physical effects this warming will have. Environmentalists will often argue that society should

take action before such uncertainty is resolved, since the costs of not taking action may well

be greater than the costs of preventative or anticipatory action taken now, especially when the

absence of action today leads to irreversible undesirable environmental consequences (Taylor,

1991).

The policy stance of taking action before uncertainty about possible environmental damages

is resolved has been referred to as the precautionary principle. This was defined in the Declar-

ation of the Third Ministerial Conference on the North Sea as, ‘� � � action to avoid potentially

damaging impacts of substances that are persistent, toxic and liable to bioaccumulate even

where there is no scientific evidence to prove a causal link between effects and emissions’

(quoted in Haigh, 1993). Many international environmental agreements might be seen as

taking action before we are sure about the precise nature and effects of environmental damages,

including the Montreal Protocol on substances likely to damage the ozone layer and the Kyoto

Protocol on greenhouse gas emission reductions. Indeed, the 1874 Alkali Act, often cited as

one of the first pieces of environmental legislation in the UK, did not insist on proof that

gases discharged from factories actually caused deleterious health effects before they could be

subject to control. The Precautionary Principle (PP), which can be extended to other areas of

environmental management such as the conservation of fish stocks, would thus seem to be a

widely accepted principle for wise environmental management.

However, two qualifications have emerged. First, the 1992 UN environment summit adopted

the PP to be applied by all countries, but only ‘according to their capabilities’, implying that the

costs of actions under the PP should be considered, and might be deemed too great for some

(poorer) countries. Second, the UK government, in its 1990 White Paper on the environment

stated that the PP should be applied only ‘if the balance of likely costs and benefits justifies it’.

This second restriction is rather more severe, since to apply it would involve some estimates

of the probabilities of different possible outcomes being known, that these outcomes could

be physically described and that they could be valued in monetary terms. But if this were so,

then a more formal application of cost-benefit analysis could guide policy analysis: the PP

would be incorporated in the treatment of risk (e.g. by giving greater weight to the worst

possible outcomes). However, it should be noted that some have taken acceptance of the PP

to mean that society should have as a firm objective the total elimination of activities where

uncertain environmental damages are involved. Examples of such bans do exist: for example,

........................................12 Environmental economics

the banning of the disposal of radioactive wastes in the deep ocean and the incineration of

toxic wastes at sea. Alternatively, the PP could be taken to mean the minimisation of inputs of

any effluents to any ecosystem. However, the economist might worry that the costs of either

banning the disposal or minimising the input of effluents would be disproportionately large,

and incur unnecessarily high opportunity costs for society.

R E F E R E N C E S........................................................................................................................

Brock, W.A., Maler, K.-G. and Perrings, C. (2000) ‘Resilience and sustainability: The economic

analysis of non-linear dynamic systems’, Discussion paper 133, Beijer Institute of Ecological

Economics.

Colombo, S., Calatrava-Requena, J. and Hanley, N. (2003) ‘The economic benefits of soil

erosion control’, Journal of Soil and Water Conservation, 58(6), 367–372.

COMEAP (1998) ‘The quantification of the effects of air pollution on health in the United

Kingdom’, Committee on the Medical Effects of Air Pollutants. London: HMSO.

Daly, H.E. (1987) ‘The economic growth debate. What some economists have learned but

many have not’, Journal of Environmental Economics and Management, 14(4), 323–337.

Daly, H.E. (1991) ‘Towards an environmental macroeconomics’, Land Economics, 67, 255–259.

DEFRA (2003) Sustainable Consumption and Production Indicators. London: Department of the

Environment, Food and Rural Affairs.

DTI (Department of Trade and Industry) (1992) Digest of UK Energy Statistics. London: HMSO.

Flower, R.J. and Batterbee, R.W. (1983) ‘Diatom evidence of recent acidification in two Scottish

lochs’, Nature, 305, 130–132.

Haigh, N. (1993) ‘The precautionary principle in British environmental policy’. London: Insti-

tute of Environmental Policy.

Hill, J.K., Thomas, C.D., Fox, R., Telfer, M., Willis, S., Asher, J. and Huntley, B. (2002) ‘Response

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Society of London, 269, 2163–2171.

Johansson, P.O. (1991) An Introduction to Modern Welfare Economics. Cambridge: Cambridge

University Press.

Kaufman, R.K. (1992) ‘A biological analysis of energy/real GDP ratio: implications for substi-

tution and technical change’, Ecological Economics, 6(1), 35–57.

MacMillan, D. and Ferrier, R. (1994) ‘A bioeconomic model for estimating the benefits of acid

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McLusky, D. (1989) The Estuarine Ecosystem. Glasgow: Blackie.

Markandya A. and Halnaes K. (2004) ‘Developing countries and climate change’, in A. Owen

and N. Hanley (eds), The Economics of Climate Change. London: Routledge.

.....................................................Economy–environment interactions 13

Nisbet, E.G. (1991) Leaving Eden – To protect and Manage the Earth. Cambridge: Cambridge

University Press.

Oberhauser, K. and Peterson A.T. (2003) ‘Modeling current and future potential wintering

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Pimental, D., Hurd, L., Belotti, A., Foster, M., Okra, I., Scholes, O. and Whitman, R. (1973)

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Press.

........................................................................................................................

Author index

Ackerman, F. 110Adamowicz, W. 344, 352Adriano, D.C. 177Agrawal, A. 61Akerlof, G. 73Akhurst, M. 168Albers, H. 386Allais, M. 387, 388Alston, L.J. 314Alvarez-Farizo, B. 349Anderson, T. 45Andreoni, J. 426Antweiler, W. 434, 439Arnason, R. 275, 283Aronnson, T. 26Arrow, K.E. 24, 44, 384Asheim, G.B. 14, 20, 25, 28, 30,

31, 34Atkinson, G. 14, 16, 30, 31, 32, 36Atkinson, S. 156, 159, 160, 161Austin, D. 433Ayres, R. 35

Baland, J.-M. 61Baliga, S. 117Barbier, E. 356, 421, 425Barrett, S. 184, 422, 440Barthold, T.A. 167Bateman, I.J. 329, 332, 334, 336, 340Batterbee, R.W. 2Baumol, W. 48, 51, 84, 134, 135Becker, G.S. 70, 399, 407Beckerman, W. 167Beltratti, A. 18Bennett, J. 343, 344Bergland, O. 340Bergman, L. 132Bhat 343Binmove, K. 428

Bird, J. 54Bishop, R.C. 22Bjorndal, T. 268Bjorner, T. 353Blamey, R. 344Blanchflower, D.G. 16Bluffstone, R. 116Boemare, C. 155Bohm, P. 95, 110, 396Boxall, P. 344Braden, J.B. 159Brewer, D. 346Brock, W.A. 5, 24, 257Brookshire, D.S. 332, 354Brouwer, R. 359, 360Bulte, E.H. 19, 340, 423, 425, 431Burgess, J. 421Burt, O. 346Burtraw, D. 157

Camerer, C. 195Cameron, T.A. 335, 352Campbell, H.F. 281Canan, P. 207Carlsson, F. 344Carson, R.T. 330, 332, 334, 340, 341Cason, T. 95, 152, 153, 154, 158, 159Cesar, H.S.J. 189Chambers, R. 369Cherry, T. 397Chevas, P. 351Chew, S.H. 389Chichilnisky, G. 431Cho, I.K. 209Chu, R.-L. 396Chu, V.-P. 396Ciborowski, P. 176Ciriacy-Wantrup, S. 22Clark, C.W. 268, 271, 276, 279

449

...........................450 Author index

Clemens 33Coase, R. 45, 48, 87Cole, A. 74Colombo, S. 2Common, M. 20, 24, 34Comolli, P.M. 311Conrad, K. 422Copeland, B. 422, 434Cornes, R. 49, 59, 62Costello, C. 443Cox, J. 396Crabbe, P.J. 306Crampton, P. 153, 158Crocker, T. 51, 52, 57, 112, 141Crocker, T.D. 399Cuddington, J.T. 250Cumberland, J. 45, 167

Dales, J.H. 112, 141Daly, H.E. 7, 15, 23Dasgupta, P.S. 17, 30, 216, 426Debreu, G. 44Desvouges, W. 351Dickie, M. 179Dixit, A.K. 257, 297, 298, 369, 384Dockner, E. 191Drèze, J. 369Dunn, J. 84

Edwards, S.F. 331Eheart, J. 153Ehrlich, I. 70, 399Ehui, S.K. 311Eisworth, M. 352Ekins, P. 34El Ashry, M. 177Elder, H. 152, 153Ellerman, A.D. 148, 157Ellsberg, D. 387Englin, J. 352Ermoliev, Y. 161Eskeland, G. 432

Fankhauser, S. 209Farman, J. 179Farmer, M. 22Farzin, Y.H. 246, 249, 251Feather, P. 351Ferrier, R. 2de Finetti, B. 374Finus, M. 182, 189Fisher, A.C. 135, 384Flower, R.J. 2Folmer, H. 182, 187Fox, J.A. 338, 394Freeman, A.M. 346, 408Fudenberg, D. 175, 285

Gangadharan, L. 154Garrod, G. 351Gayer, T. 370

Gibbons, R. 175Gibson, C. 61Gilbert, C.L. 239Godby, R. 126, 152Gode, D. 398Goh, B.S. 268Gollier, C. 369, 386Gordon, H.S. 272Gordon, S. 57Goulder, L. 158Govindasamy, R. 107Grafton, Q. 17Grant, I.F. 76Green, C. 341Gregory, R. 331Grether, D. 395, 396Grijalva, T. 352Groot, F. 235, 237, 238Grossman, G. 426, 443Gylfason, T. 424, 425

Haab, T. 346Hahn, R. 112, 113, 152, 153, 167Hall, D. 244Hall, J. 244Halnaes, K. 2Halvorsen, R. 246Hamilton, J. 398Hamilton, K. 30, 31, 32, 33, 36Hanemann, M. 327, 334, 336Hanley, N.D. 16, 25, 30, 31, 32, 133,

149, 167, 182, 330, 331, 340, 344, 345,348, 349

Harris, J. 74Harrison, A. 432Harrison, G. 75, 338Hartman, R. 304, 307Hartwick, J. 18, 19–20Hayes, D. 381Heal, G.M. 17, 216Hellerstein, D. 346Helpman, E. 443Hensher, D. 341Herriges, J. 106Hill, J.K. 2Hirshleifer, J. 369Hoffman, E. 75Holling, C.S. 23Holmström, B. 90, 105Horan, R.D. 84, 94, 423Hotelling, H. 215, 260Howarth, R.B. 24Huang, J.C. 356Hueting, R. 34Hurley, T.M. 207

Imhoff, M. 34

Jaffe, A. 432Johansson, P.O. 6Johnson, A.H. 177

...........................Author index 451

Joskow, P.L. 157Jung, C. 163

Kahneman, D. 329, 341, 387Kaitala, V. 287Kamien, M.I. 274, 287Kanninen, B. 334, 336Kask, S. 355Kaufman, R. 7Keefer, P. 17Kelman, S. 167Keohane, N. 167Kerr, S. 153, 158Khanna, M. 84King, D. 125Klaasen, G. 161Klarer, J. 112Knack, S. 17Kneese, A.V. 164Knetsch, J. 329, 341Kniesner, T.W. 409Krautkraemer, J.A. 246Kreps, D.M. 209Kroll, S. 187, 188Krueger, A. 426Kruger, J.A. 155Krupnick, A. 156Kunce, M. 254Kverndokk, S. 209

Laffont, J.-J. 84, 102, 104, 117, 369Lancaster, K. 352Lange, G.-M. 21, 33Lasserre, P. 246Leal, D. 45Ledyard, J. 44Leonard, D. 274Levin, S. 23, 24Levinson, A. 426Lewis, T.R. 84, 100, 117Lichtenstein, S. 387Lind, H. 396Long, N.V. 306Loomes, G. 330Loomis, J.B. 359, 360López, R. 432Lotka, A.J. 268Louviere, J. 341, 344Luce 342Ludwig, D. 23Lyon, R. 158

Maani, S. 355McAusland, C. 443McCardle, K. 396McConnell, K.E. 346McFadden, D. 343McGartland, A. 156Machina, M. 374Mckee, M. 75Mackenzie, J. 177

Mcleod, D.M. 340MacMillan, D. 2, 177, 340McPherson, M. 426Mäler, K.-G. 190Malliaris, A.G. 257Maloney, M. 153March, J. 395Margolis, M. 432, 442, 443Markandya, A. 2Marschak, J. 375Martimor, D. 84, 102Martinsson, P. 344Mas-Colell, A. 374Maskin, E. 117Mason, C. 74Massey, D.M. 348May, R.M. 271Meade, J.E. 50Meadows, D. 15, 17Mee, L. 58Mendelsohn, R. 255, 256Mesterton-Gibbons, M. 283–4,

286Michaelis, P. 149Mintzis, M. 179Misiolek, W. 152, 153Moffat, I. 34, 133Mohr, E. 189Montero, J.-P. 154, 165Montgomery, W. 144, 147Morey, E.R. 346Morgenstern, O. 374Moss, D.L. 250Mourato, S. 344Mrozek, J. 384Munro, A. 340Myers, N. 62

Nash, J.F. 428Nau, R. 396Naysnerski, W. 207Nelson, R. 167Netusil, N.R. 159Neuman, J. 383Newberry, D.M.G. 235Nieswiadomy, M. 426Nisbet, E.G. 4, 178Noll, R. 113Nordhaus, W. 178Norgaard, R.B. 24Norton, B.G. 15, 18Nostbakken, L. 277

Oates, W. 84, 134, 135, 156Oberhauser, K. 2O’Connor, D. 116Oikonomou, V. 433O’Neil, W. 138, 154Opschoor, J.B. 165Osborne, M. 121, 175Ostrom, E. 61

...........................452 Author index

Oswald, A.J. 16Othman, J. 344Ouellette, P. 246Owen, A. 149

Palmer, K. 432Palmquist, R. 354, 355, 356Parkhurst, G. 104, 105Parks, P.J. 307Parry, I.W.H. 90Parsons, G.R. 348, 351Payne, J. 331Pearce, D.W. 2, 14, 22, 30, 408Pearse, P. 299Perrings, C. 20, 24, 34, 111Pesaran, M.H. 246, 261Peterson, A.T. 2Pethig, R. 431Pezzey, J.C.V. 15, 16, 18, 25, 26, 29, 30, 31,

34, 151, 159Pfaff, A.S.P. 312Pimentel, D. 9Pindyck, R.S. 239, 254, 256, 257, 297, 298,

369, 384Pizer, W.A. 155, 164Platteau, J.P. 61Plott, C. 330, 395Poe, G. 341Pohjola, M. 287Pouta, E. 315Pratt, J.W. 406Pring, G.W. 207Proops, J. 31, 36Putnam, R.D. 16, 197

Quiggin, J. 369Quirion, P. 155

Randall, A. 22, 345Rauscher, M. 421Ready, R. 359Rees, W. 34, 35Rekola, M. 331Repetto, R. 27, 433Requate, T. 162, 164Ribaudo, M. 148Ricker, W.E. 270Riley, J.G. 369Roberts, M. 115Ropee, J. 310Rosen, S. 352, 382Rowley, C. 133Rozan, A. 358, 359Rubinstein 315Rudel, T. 310Ruitenbeek, H. 182Russell, C. 110Rutström, E. 338

Sachs, J. 424Salant, S.W. 234

Samuelson, P.A. 304Sandler, T. 49, 314Sandlund, O.T. 442Savage, L. 369, 374Schaefer, M.B. 271Scheffer, M. 5Schelling, T. 197Schlapfer, F. 338Schmalensee, R. 157, 158Schultze, C.L. 164Schwartz, N.I. 274, 287Segerson, K. 90Seskin, E.P. 139Settle, C. 404Shapira, Z. 395Shaw, W.D. 349, 351Shogren, J.F. 57, 76, 78, 112, 119, 207,

327, 328, 329, 330, 399, 406, 425,432

Shortle, J. 84Shrestha, R.K. 359, 360Simon, S. 34Skinner, B. 244, 245Slovic, P. 331, 387Smith, R. 119Smith, T.R. 246Smith, V.I. 396Smith, V.K. 351, 356Solow, R.M. 17, 18, 255Spash, C. 331Spence, M. 115Spitzer, M. 75Starmer, C. 389Stavins, R. 112, 164, 167, 168Stevens, T. 331, 338Stigler, G.J. 407Storey, D. 148Strand, I. 356Summers, L. 432Sunder, S. 398Sunstein, C. 369, 378Svendson, G. 155, 158Swait, J. 341Swierzbinski, J.E. 254, 255

Tahvonen, O. 186–7Taylor, I. 384Taylor, M. 422, 434Taylor, R.E. 11Thaler, R. 382Tietenberg, T.H. 138, 144, 146, 154, 156,

159, 160, 207Tirole, J. 175, 285Toman, M.A. 18, 22, 25, 26, 30, 31,

34, 78Train, K. 350Treich, N. 386Tschirhart, J. 52Tu, P.N.V. 269Tunstall, S. 341Tversky, A. 329, 387

...........................Author index 453

Ulph, A. 422Unold, W. 163Unsworth, R. 383

Valle, I.D. 290van Kooten, G.C. 19, 306Van Long, N. 191, 274Van Pelt, M.J.F. 21van Soest, D. 61Varian, H. 120Vesterdal, M. 154Viscusi, W.K. 369, 370, 398Volterra, V. 268von Neumann, J. 374Vos, H.B. 165Vyrastekova, J. 61

Wackernagel, M. 34, 35Walker, B. 23Walker, M. 148Wan, F. 255Wang, S. 306Warner, A. 424

Wear, D.N. 307Webb, A.H. 177Weitzman, M. 26, 31Wellisch, D. 57Welsh, H. 177Wesseler, J. 369Whitehead 338Wier, M. 149Williams, M. 344Williamson, O. 48Willis, K.G. 332, 340, 351Wilman, E.A. 269Wilson 306Woodworth 341Wright, R.F. 177, 344

Xepapadeas, A. 105

Yandle, B. 153

de Zeeuw, A. 189Zeiler, K. 330Zylicz, T. 124

........................................................................................................................

Subject index

acid deposition 177adaptation 412–16adverse selection 73–4agglomeration bonus 104–5air quality 139–40Allais paradox 387–92ambient charge 90–6

drawbacks 93information problem 93–4multiple choice problem 94

ambient permits system (APS)131–2, 155

asymmetric information 68–74and incentive design 84–5, 95–6

auctions 158–9Australia 343–4axioms of preference 324

benefits transfer 323, 358–61in Costa Rica 360and meta analysis of existing valuation

studies 359tests of 359

biodiversity 1, 43Borlaug’s hypothesis 317–18Brazil 314Brundtland Commission (1987) 14

capital, human 16man-made/produced 16natural 16social 16–17and strong sustainability 21–5theory 215–16and weak sustainability 18–21

cartels 234–9rise/fall of 239stability 239

children’s risk 409–12

choice experiment (CE) 341–4wetlands conservation in Australia 343–4

climate change 176mitigation/adaptation in 412–16and public good 78–9

Coase theorem 42–9considered a tautology 48experimental evaluations of 75–6

common property, game theory analysis283–7

the commons 57–61definitions 57non-cooperative 58–60open-access 58Scottish example 76–77

competitioncomparative dynamics for

monopoly/competition 223–5numerical example for

competitive/monopoly extraction225–7

contingent behavior (CB) model 351–2contingent valuation method (CVM)

332–41aggregating data 336–7calibration factors 338carrying out validity checks 337–9design/research 340–1estimating WTP 334–6hypothetical model 333information provision 340linking with psychological

insights/economic rationality 341obtaining bids 333–4protest rates 338–9voluntary versus forced payments 341water quality in Costa Rica 339

continuous-time growth models 266–9,273–7

454

............................Subject index 455

Convention on International Trade inEndangered Species (CITES) 422

Costa Rica 339, 360

deforestation, Amazon 312–13Ivory Coast 310–11and land reform/implications in Brazil

314deposit–refund systems 109–10differential games 287discrete-time growth models 269–71,

276–9Dutch disease 424–5dynamic optimization 217–18, 219–21,

272–9

eco-labeling 74ecological footprint (EE) 35–6ecosystem externality 52–4ecosystem service valuation model 356–8

assessing indirect value of environment357–8

avoided cost approach 357mangrove-fishery link 356–7

ecosystems 62Ellsberg paradox 387, 392–4emission charges 85–90Emission Trading Scheme (ETS) (EU) 154–5emission trading 131, 154–5, 185endangered species protection 119–20endogenous risk 399–416

analytical framework 400–2and children’s risk/risk reduction

techniques 409–12and joint determination 404–5mitigation/adaptation in climate change

412–16and private risk reduction choice

399–400and protection premia 405–7and self-protection 399and valuation 407–9versus exogenous risk 402–5

endowment hypothesis 421environmental conflict 202–7environmental Kuznets curve (EKC)

425–31environmental lottery 372–3environmental shirking 83environmental valuation see Chapter 11exogenous risk 369–86

expected utility 372–8irreversibility 384–6and role of economics 371–2valuing risk reduction 378–84versus endogenous risk 402–5

expected utility (EU) theory 372–8breakdown in 387–99completeness 374continuity 375independence 375

Marschak-Machina triangle simplex375–6

mean-preserving increase in risk 376–7transitivity 375

externalitiescause–effect relationship 51ecosystem 52–4negative 49–51positive 49–51transferable 54–5, 251–3

extraction costs, model 228–30and nonrenewable resource firm with

costs 230–2

fisheries, bioeconomic model of EuropeanAnchovy fishery 290

continuous-time dynamic optimisation273–5

continuous-time optimal dynamic harvesteffort 275–7

differential games 287discrete-time model 276–9dynamic models 272–9gains from efficient management 281game-theoretic analysis of common

property resources 283–7and individual transferable quotas

289–90and market equilibrium 279–83monopoly 282–3New Zealand 299–300open-access/competitive 279–81optimal harvest 273–5policy 288–91repeated prisoner’s dilemma 285–6static economic model 271–2static harvesting game 284–5static profit maximisation 272and taxes on catch 288–9yield-effort curve 271

forestry economics 303–4and agricultural land tension 309–13and deforestation 310–11, 312–13global problem of rainforest destruction

313–15and Green Revolution 317–18multi-use/socially optimal rotation 307numerical example 308–9optimal rotation for timber 304–6optimal rotation under uncertainty

318–19policy 315–17social optimal forest area 311–12

free-riding 181–2, 187

game theory 175, 182–90and analysis of common property

resources 283–7and cooperative solutions 182–90,

209–10and cost-effective solutions 186

...........................456 Subject index

game theory (cont.)credible threats/reasonable beliefs 175examples 190–202and free riding 187and global public goods 189–90and interconnected games 187–9and self-enforcement 184and time 189and trade 440–2

general equilibrium model 433–40genuine savings 30–4global public good 189–90, 191–6grandfathering 158–9green net national product (GNNP) 25–30greenhouse gases 185

emission control 166gross national product (GNP) 25

Hartwick model 19–21hedonic pricing (HP) method 352–6

attitudes to risk 355–6choice of functional form 355expected versus actual characteristic levels

355housing market 354–5and implicit prices/marginal values 353market segmentation 355multi-collinearity 355omitted variable bias 355reliability of 356stages of 353water quality/property values in Maryland

354and welfare benefits 354–5

Hotelling’s model 214–15, 260with extraction costs 228–32and market structure 216–27

imperfect competition 232incentives 82–5

and asymmetric information 84–5compatibility 117–21competitive markets 126effectiveness of 85, 122efficiency of 122–3equity of 123–4evaluative criteria 122–4flexibility to achieve objectives 124information base/administrative capacity

125legal structure 125–6liability rules 84, 105–12political feasibility 126practical conditions 125–6price rationing 84, 85–105quantity rationing 84, 112–16and transition economies 116

independence axiom 387innovation 162–4interconnected games 188–9

international environmental agreements(IEAs) 10–11, 184–90

international externalities 179–82irreversibility 384–6Ivory Coast 310–11

joint determination 404–5

Kyoto protocol 184–5carbon sinks 185emission trading 185greenhouse gases 185joint action by nations to hit target 185joint implementation 185targets/timetables 185

leader–follower equilibrium 237–9liability rules 105–12

definition 105and deposit–refund systems 109–10and moral hazard 105and performance bonds 110–12and random penalty mechanism 105–9

Loury’s theory of oligopolistic oil extraction232–3

Madagascar 43market equilibrium 279–83

monopoly 282–3open-access/competitive 279–81

market failure 42–3apple–honey example 51–2and asymmetric information 68–74and the commons 57–61and externalities 49–57and non-exclusion 57–61and non-rivalry 61–5and nonconvexities 65–8and public goods 61–5successful (and otherwise) markets 44–9

market power 151–3market structure, comparative dynamics for

monopoly/competition 223–5model 216–18and monopoly 222–3numerical example of competitive/

monopoly extraction 225–7and perfect competition 218–21and socially optimal extraction 219–22

markets, definition 42efficient 44–9operation of 42–3

Marschak-Machina triangle simplex 375–6maximum principle 219–21mean-preserving increase in risk 376mitigation 412–16monopoly 222–3, 282–3

comparative dynamics formonopoly/competition 223–5

............................Subject index 457

numerical example forcompetitive/monopoly extraction225–7

moral hazard 68–72, 84–5, 105multi-nomial logit (MNL) model 347–50

Nash bargaining 438Nash equilibrium 183, 236–7natural resource accounting, Asia 26–7natural resources curse 424–5New Zealand 299–300NIMBY (Not In My Back Yard) problem 57non-exclusion 57–61non-rivalry 61–5non-uniform mixing 155–7nonconvexities 65–7nonrenewable resources 214–15, 243

application of theory 260–4cartels 234–9dynamic optimisation for 217–18and external costs 251–3extraction costs 228, 230–2government policy towards taxation

239–41Hotelling’s model 216–32and market structure 216–27and resource exploration 254–6and resource extraction under uncertainty

256–60and scarcity 244–51; see also renewable

resources; resources, and growth/tradeNorth–South issues 431–2

oil production, severance tax/environmentalregulations 253–4

UK 261–4open-access 279–81

Pareto efficiency (Pareto optimality) 44perfect competition 218–21performance bonds 110–12pesticide taxes (Denmark) 140–1Pigovian taxes 84, 288–9polluter pays principle 83pollution control 83–4

direct fees/taxes 166and government use of economic

instruments 165–8greenhouse gas emission control 166information use 166liability for harms 166permit trading regimes 166reduction in environmentally harmful

subsidies 166voluntary programs 166

pollution havens 425, 432–3pollution reduction targets 131–2pollution taxes 131–2

and air quality 139–40and basket of pollutants 149

and distributional effects of economicinstruments 150

efficiency properties 132–40and new entrants 149objections to 148–51problems with 148–51setting a rate 148–9

population growth models, continuous-time266–9

discrete-time 269–71precautionary principle 11–12preference reversals 387, 394–9preferences, construction 331–2

non-compensatory 331revealed 323, 344–52stated 322–3, 332–44

price rationing 85–105ambient charge 90–4emission charges 85–90product charges 95–7subsidies 97–105

prisoners’ dilemma 59–60, 285–6product charges 96–7property rights 44, 425

assignment of 45common 48comprehensively assigned 44and efficiency of resource use 76–7exclusive 44secure 44transferable 44

Prospect Theory 391–2protection premia 405–7Provision Point Mechanism 341public goods 61–5

global 189–90, 191–6

quantity rationing 112–16quotas 289–90

race to the bottom 200–2rainforests 313–15Random Parameters Logit (RPL) model

350–1random penalty schemes 105–9Random Utility Model (RUM) 346–52rational choice 386–99

Allais paradox 387–92Ellsberg paradox 387, 392–4preference reversals 394–9

rationality spillovers 397–8renewable resources

dynamic models of fishing 272–9fisheries policy 288–91and game-theoretic analysis of common

property resources 283–7and market equilibrium 279–83and population growth models 266–71stability analysis/technical option 291–6static economic model of fishery 271–2

...........................458 Subject index

stochastic models 297–8; see alsononrenewable resources; resources,and growth/trade

rent dissipation 431resilience 23–5resource exploration 254–6resource extraction, under uncertainty

256–60resources, and growth/trade 422–5

see also nonrenewable resourcesrevealed preference (RP) model 323,

344–52combined with stated preference methods

351–2risk 368–9

and behavior 369, 386–99endogenous 399–416exogenous 369–86

risk analysis 370dose-response estimation 370exposure assessment 370–1risk characterization 371risk management 371

risk aversion 374, 377risk reduction 378–84

empirical application on valuing health380–1

value of statistical life 382–4

safe minimum standards (SMS) approach22–3

St Petersburg paradox 373scarcity, background 244–51

and conservation mass 244definitions of 244and marginal extraction cost 246and price 246and technological change 249–51theoretical model 246–9

Schelling Conjecture 197–9second best theory 422, 432sequential trading 159–61SLAPP signalling game 207–9socially optimal extraction 219–22Stackelberg leader–follower equilibrium

237–9stated preference (SP) model 322–3, 332–44

combined with revealed preferencemethods 351–2

static renewable resource harvesting game284–5

stochastic models 297–8strategic environmental policy 440–2strategy games 179–82stratospheric ozone layer 178–9strong sustainability 21–5, 34

and maintaining system resilience 23–5operational principles 23

subsidies 97–105and agglomeration bonus 104–5definition 97

design of 104–5difference between charges–subsidies

97–100inefficiencies of 100–4

sulphur trading (USA) 157sustainability gap 34sustainable development, and capital stock

16–17, 18definitions 14–17economic indicators 25–36economics of 17–18and equity/efficiency 14–15and future generations 15and moral rights 15multiple goals 14and optimal consumption 17outcome approach 15–16and performance/development 15and resources 16–17strong indicators 34utilitarian approach 15weak versus strong 18–25and well-being 15–17

taxes versus permits, innovation/cost-savingover time 161–5

uncertainty 164–5technological change, and scarcity 249–51tradable permits 112–16

costs 113–16expropriation of 113as freely tradable 113level/number of 113limited/well-defined 113and profits 113storable/bankable 113and transaction costs 113and violation penalties 113

trade 421–2and environmental Kuznets curve

425–31general equilibrium model 433–40Neanderthals/early human society 423–4North–South issues 431–2political economics of 442–5pollution havens 432–3and resources/growth 422–5and strategic environmental policy

440–2and sustainability 36

tradeable emission permits 131–2tradeable pollution permits (TPPs), ambient

permits 131–2, 151–61efficiency properties of 141–8emission permits 131, 154–5and grandfathering/auctions dilemma

158–9and market power 151–3and non-uniform mixing 155–7problems with 151–61and sequential trading 159–61

............................Subject index 459

and trading rules 155–7and transaction costs 154versus taxes 161–5

trading rules 155–7transaction costs 154transboundary pollution 174–5

and acid rain 190–1basic game 182–90and environmental conflict 202–9and global public good 191–6and international externalities as games of

strategy 179–82and race to the bottom game 200–2two level games 196–200and uniformity of damage/uniformity of

mixing 175–9transferable externality 54–7transition economies 116travel cost (TC) models 345–51

uncertainty 164–5, 243, 318–19principle 11–12and resource extraction 256–60

uniformity of damages 175–9uniformity of mixing 175–9

valuation 407–9value of statistical life (VSL) 382–4von Neumann-Morgenstern index 374

water pollution 168weak sustainability 19–21World Trade Organization (WTO) 421

yield-effort curve 271–2

zero cost firm 274–5zero-cost oligopoly 232–4