Environmental Economics Honors C.A.D.

Objectives Define and explain the term “environmental economics.” Define and explain the term “environmental economics.” Explain why natural resources can be examined using the cost/benefit analysis. Explain why natural resources can be examined using the cost/benefit analysis.

Background We know that economics is about making decisions. We know that economics is about making decisions. “Allocation” is the buzzword  we just learned how this is done with prices. “Allocation” is the buzzword  we just learned how this is done with prices. But for natural resources, can we use the same system? But for natural resources, can we use the same system?

Factors of Production LandLaborCapital Human Capital

Background Ownership of land can easily be shown, but what about the intangible stuff, like air, water, soil? Thus is the paradox of environmental economics. The problem – the way owners use their land may affect others!

Definition Environmental economics is “the study of how the natural environment and its resources affect the economy, and vice-versa.” Environmental economics is “the study of how the natural environment and its resources affect the economy, and vice-versa.” How does our society affect nature? How does our society affect nature? How does nature and nature/natural resources shape our society? How does nature and nature/natural resources shape our society? These are the two questions environmental economics seeks to answer. These are the two questions environmental economics seeks to answer.

One Side… One aspect of environmental economics seeks to analyze natural resources: One aspect of environmental economics seeks to analyze natural resources: Coal Coal Natural Gas Natural Gas Oil Oil Minerals Minerals Plants and animals (fisheries, farms, agriculture, etc.) Plants and animals (fisheries, farms, agriculture, etc.) How can we sustain these resources, or use them in the best way? How can we sustain these resources, or use them in the best way?

…And The Other The other aspect of environmental economics deals with pollution. The other aspect of environmental economics deals with pollution. We understand that some economic activity causes pollution. We understand that some economic activity causes pollution. The question is: how “clean” is “clean enough” economically? The question is: how “clean” is “clean enough” economically?

The Dirty Room Example Cleaning your room can be done to varying degrees: Cleaning your room can be done to varying degrees: You can just pick up a few things off the floor in a few minutes. You can just pick up a few things off the floor in a few minutes. You spend a few more minutes (say a half hour) and vacuum and “straighten up” the room. You spend a few more minutes (say a half hour) and vacuum and “straighten up” the room. Our, you can spend a few hours and dust everything, shampoo the carpet, organize all your drawers, etc. Our, you can spend a few hours and dust everything, shampoo the carpet, organize all your drawers, etc. Which works best? Which makes the most sense? You have to analyze cost (time) vs. benefit (cleanliness of room). Which works best? Which makes the most sense? You have to analyze cost (time) vs. benefit (cleanliness of room).

Cost/Benefit Analysis Think back to marginal cost and marginal product. We kept hiring workers until cost and product were equal. Think back to marginal cost and marginal product. We kept hiring workers until cost and product were equal. Apply the same principle to the dirty room example. Apply the same principle to the dirty room example. You want to clean just enough so that the cost of time equals the benefit of a clean room. You want to clean just enough so that the cost of time equals the benefit of a clean room. The same applies to the environment – we want to clean up only until the cost equals the benefit. The same applies to the environment – we want to clean up only until the cost equals the benefit.

Cost/Benefit Analysis Environmental Quality Price Blue line = marginal cost Red Line = marginal benefit

Conclusions What is environmental economics? What is environmental economics? Resources – sustain them! Resources – sustain them! Pollution – clean it up! Pollution – clean it up! But wait…how clean is “clean enough?” But wait…how clean is “clean enough?” WHEN MARGINAL COST = MARGINAL BENEFIT! WHEN MARGINAL COST = MARGINAL BENEFIT!