Chapter 7: Dollars and Environmental Sense: Economics of Environmental Issues

Overview Overview of Environmental Economics Public Service Functions of Nature The Environment as a Commons Low Growth Rate and Therefore Low Profit as a Factor in Exploitation Externalities Valuing the Beauty of Nature How is the Future Valued? Risk-benefit Analysis

Overview of Environmental Economics Not simply about money Involves persuading people and organizations to act in a way that benefits the environment within a democratic framework Focuses on: Controlling pollution and environmental damage Sustaining renewable resources

Overview of Environmental Economics Environmental decision making involves Tangible factors - one you can touch, buy and sell Ex: house lost in a mudslide Intangible factors - one you cannot touch directly, but people value it Ex: Beauty of the slope before the landslide Harder to measure economically

Public Service Functions of Nature Services ecosystem provide to humans and the environment Ex: wetlands clean water Economists refers to systems that provide these functions as Natural Capital

Public Service Functions of Nature Example: Pollinators Pollinating animals pollinate $15 billion worth of crops grown on 2 million acres in the US In general, public service functions of living things are estimated at: $3 trillion to $33 trillion in benefits to humans and the environment

The Environment as a Commons Often people who use a natural resource do not act in a way that maintains that resource and its environment in a renewable state They do not seek sustainability Profit motive does not always lead a person to act in the best interest of the environment.

The Environment as a Commons “The tragedy of the commons.” When a resource is shared, an individual’s personal share of profit from exploitation of the resource is usually greater than that individual’s share of the resulting loss A commons is any resource owned publicly with public access for private uses Each user tries to maximize personal gain

The Environment as a Commons Example commonly used: Pastureland as a Commons English towns used to set aside land for townspeople to graze their cattle on Sharing the grazing area works as long as the number of cattle is low enough to prevent overgrazing Addition of one cow has both a positive and a negative value Positive value = the benefit when the herder sells the cow Negative value = the additional grazing by the cow

The Environment as a Commons The benefit to an individual of selling a cow for personal profit is greater than that individual’s share of the loss in the degradation of the commons The short-term successful game plan, therefore, is always to add another cow

The Environment as a Commons Eventually the common grazing land is so crowded with cattle that none can get adequate food and the pasture is destroyed In the short run, everyone seems to gain, but in the long run, everyone loses. Complete freedom of action in a commons inevitably brings ruin to all The implication seems clear: Without some management or control, all natural resources treated like a commons will inevitably be destroyed

The Environment as a Commons Examples of commons in nature US forest, 38% are on publicly owned lands Ocean fisheries away from coastlines Deep-ocean seabed, where valuable mineral deposits lie Antarctica and Arctic sea ice The atmosphere Great Chagos Bank in the Indian Ocean

The Environment as a Commons Recreation is a problem of the commons Overcrowding of national parks, wilderness areas, and other nature–recreation areas Ex: Making Voyageurs National Park in MN a wilderness area

Low Growth Rate and Therefore Low Profit as a Factor in Exploitation The second reason individuals tend to overexploit natural resources held in common is low growth rate of the resource Ex: whales and whale oil How can whalers get the best return on their capital? We will examine two approaches: resource sustainability and maximum profit

Low Growth Rate and Therefore Low Profit as a Factor in Exploitation Resource sustainability policy in whaling Harvest only the number of whales by which the population increased Maintain the abundance of whales at its current level Can stay in the whaling business indefinitely Maximum Profit in whaling Harvest all the whales now Sell the oil, get out of the whaling business, and invest the profits

Low Growth Rate and Therefore Low Profit as a Factor in Exploitation Economically speaking the second scenario is more profitable Whaling on the open seas can be also viewed as a problem of a commons, complicated by low growth rate

Externalities Externality = Indirect cost An effect not normally accounted for in the cost–revenue analysis of producers Not recognized as part of their costs and benefits Costs or benefits that don’t show up in the price tag Consumers must compare true costs or the price will be wrong

Externalities Good examples- Air and water pollution Production of nickel Direct costs include: Purchasing ore Energy to run the smelter Building the plant Paying employees Externalities include: Degradation of the environment from plant emissions

Externalities Problem #1 Need to get public to value clean air and other environmental benefits as greater than zero Possible solution- Quantitative evaluation of the tangible natural resources Air, water, forests, and minerals Prior to development or management of a particular area

Externalities Problem #2 Who should bare the burden of these environmental and ecological costs? Possible Solutions Include it in costs of production through taxation or fees Costs could be shared by the entire society and paid for by general taxation Economists generally agree that the “polluter pays” approach provides much stronger incentives for cost-effective pollution reduction

Valuing the Beauty of Nature Called landscape aesthetics One of the perplexing problems associated with aesthetic evaluation is personal preference Philosophers differ on what key elements are important to aesthetic quality Coherence, complexity, and mystery Unity, vividness, and variety

How is the Future Valued Humans value personal wealth and goods more if they are available now than if they are promised in the future But we have a debt to future generations Can we place an economic value on future existence of anything?

How is the Future Valued Economists observe that it is an open question whether something promised in the future will have more value then it does today So in terms of the future, the basic issues are: (1) We are so much richer and better off than our ancestors that their sacrificing for us might have been inappropriate. (2) Even if they had wanted to sacrifice, how would they have known what sacrifices would be important to us?

Risk-Benefit Analysis The riskiness of a present action in terms of its possible outcomes is weighed against the benefit, or value, of the action Some behaviors are far riskier than others Ultimate fate for everyone is death

Risk-Benefit Analysis Looking at Table 7.1 we can see that death from outdoor environmental pollution is comparatively low Lowering air pollution is an improvement in the quality of our lives, rather than an increase in the time we are alive Indoor air pollution is much more deadly than most outdoor air pollution

Risk-Benefit Analysis Generalizations about the acceptability of various risks: Number of people affected Novel risks appear to be less acceptable than long-established or natural risks People’s willingness to pay for reducing a risk also varies with how essential and desirable the activity associated with the risk is

Risk-Benefit Analysis Air pollution’s direct effect on human health Costs more to increase longevity by a reduction in air pollution than to through the addition of a coronary ambulance system Should we improve the quality of life for the living or extend life expectancy regardless of the quality of life?