Economics and the Environment Or: “How do you put a value on Nature?”

Where are we?

First, what is Economics? It is a way of measuring the value of something to an individual, a community etc., at a given time.” It is a measure of our values: it does not tell us what our values should be. E.g: what does it mean if someone says “It isn’t economic”

How does it work? Economics is the way that the demand for goods and services is linked to the supply at a price that is acceptable to a buyer and seller working in an efficient market.

How does it work? To make some sense of the infinite variety of goods and services, they all have to be reduced to a common denominator of value. Otherwise, we would be forever trying to barter (ie establish a value for everything against something else).

How does it work? Money. Not necessarily the American $. But money is our medium of exchange What is the “common denominator” of economics?

For economics to work there must be: Demand Supply A Functioning Market An open price mechanism But, we interfere with all of these in various ways? How?

Price tells us: How much we value this thing now Whether there is something we can substitute for it if price is too high How plentiful the supply is The cost of making or producing this good or service.

Look at Computers In the 1990s they were out-of-date in a couple of years and cost $3,000 So they were trashed even though they worked perfectly Now, competition has made them more long-lasting and much cheaper.

So, how do we value Nature? First of all, we value it as a resource. What is a resource? It is something that is useful to us. Which is a very distorted view of nature.

Wilderness: I like to see it in its "Natural State." Look at this landscape. In what ways is it “useful?” How does it have value? Wilderness: I like to see it in its "Natural State." And will pay to keep it that way. Maybe, we could raise cattle on those green areas? There could be minerals in those mountains worth mining And so on...

We usually recognize 2 type of resources Renewable Non-Renewable or “fossil” Nature makes no such distinction. We do because our lives are short and we live on a different time scale from Nature. "Non-Renewable 'resource'" Renewable "resource"

Further complications Some things in Nature we consider as “free goods,” i.e. they ‘don’t cost anything.’ Examples?

“Free Goods” Are free only as long as they are abundant, and at the quality we need: e.g. Fresh Water, Clean Air. If they are not, then we have to pay to make them so, and they are not free any more. In other words, clean air has become in short supply and has acquired a price.

Next problem This? “Economics” (ie our value system) tends to value PRODUCTION. That is, the natural item acquires a value when it becomes a useful thing—like when trees become lumber, or rock becomes ore. Or...

“Hidden Costs” When we produce pollution out of a smoke stack, the smoke goes away to damage someone else. That is called an externality When we grow crops and soil is lost through erosion, do we build in that cost? When a species is lost, where is the cost?

Green Economics. Take the case of air pollution. If I pump out SO2, and it damages some trees in upstate NY, who can prove that I am responsible? That is the problem with the Law of Torts How do we get round this?

An Answer You work out the quality standards for the air in an area, and the firms, utilities etc., may produce pollution only up to that point in total. So each is given an appropriate limit, that is certified, and there are penalties if you go over that.

Polluter Pays We call this the Polluter Pays principle, and it avoids the idea of proving specific damage to a specific property or person. But this ensures compliance within the overall standard—nothing more.

Tradable Permits But, if an area, like Indianapolis, has reached that limit, it means no new firms can come in. Unless the firms that are there can clean up further, get below the amount they are allowed to produce, and sell the difference. This is an incentive. However, regional pollution remains the same.

Further Incentives? So, we have mechanisms for staying in compliance, and still growing, but there are no incentives to go beyond this and make the air even cleaner. Why should we?