10/20/08ESPP-781 Outline Environment and economics –A particular way of looking at environmental problems –Model Of nature (externalities, ecosystem services) Of human behavior (incentives, information) Of institutions (government vs. market) Questions –How good is the model? –How should it be limited? –What implementation problems does the model raise?

10/20/08ESPP-782 Valuing Nature Why is it desirable or necessary? –Trade-offs Environment and development; clean air, water, and land; industrialization and health,etc.  Need to compare incommensurables –Limited resources  Need to allocate rationally –Policy demand  Need to justify choices in accessible language –Stakeholder interests  Need to represent disparate views at same table

10/20/08ESPP-783 Homo Economicus: the Economic Model of the Human Economics is a powerful model of human and institutional behavior Basic steps in applying the model –Behavioral theory: utility maximization –Normative assumption: efficiency is highest good –Analytic strategy: weigh everything relevant in economic terms –Decision rule: pick most cost-effective solution (regulation) or allow most cost-effective solution to be picked (market)

10/20/08ESPP-784 From Descriptive to Normative This is how people do behave this is how people should behave Rationale for deregulation Justification for creating new markets –Privatization (of water, for example) –Tradable permits (in carbon, for example) “Market failure” seen as framework for correcting problems in implementation –Reform efforts tend to remain inside the model

10/20/08ESPP-785 Arguments for Economic Models Means of making unseen environmental “costs” visible (“externalities”) Framework for comparison of disparate activities based on use and degradation of resources Instrument of globalization (world environmental market) Spin-off measures –Ecosystem services –Environmental “footprints”

10/20/08ESPP-786 So why the concerns? Does nature behave the way the models assume? Do human beings and institutions behave the way economics says they do? –Stern Review and its critics (from both sides) –Tragedy of the Commons and Common Pool Resources Does economic theory provide a way to deal with finiteness? –Limits in the era of sustainability Is economic theory consistent with expressed or implied political values?

10/20/08ESPP-787 Tracing Planetary Footprints

10/20/08ESPP-788 Modeling Limits to Growth 1972 warning dismissed as alarmist and inaccurate because commodity prices did not keep rising Revisiting Limits in era of sustainability, but with CPR theory rather than Tragedy of the Commons