Environmental Economics Sedef Akgüngör Lecture 3

Sustainability Stock pollutants Stock pollutants Flow pollutants Flow pollutants Sustainability: Providing our descedents with a standard of living, material and environmental welfare that is at least high as that which we enjoy today.

Net National Welfare Total output Total output LessLess Depreciation Depreciation LessLess Externality cost Externality cost Net National Welfare will increase as long as output grows faster han depreciation and externality costs. Net National Welfare will increase as long as output grows faster han depreciation and externality costs. Dynamic efficiency. Dynamic efficiency.

Discounting Would you prefer to have $100 in real purchasing power this year or next year or are you indifferent? Would you prefer to have $100 in real purchasing power this year or next year or are you indifferent? From an individual’s point of view, $100 today is worth more than $100 next year. From an individual’s point of view, $100 today is worth more than $100 next year. How does this relate to the environment? How does this relate to the environment?

Example: CO 2 Emissions? For $15 billion spent today, we could reduce our emissions or do nothing. For $15 billion spent today, we could reduce our emissions or do nothing. Should we spend $15 billion this year to prevent $15 billion of damage to our descendents? Should we spend $15 billion this year to prevent $15 billion of damage to our descendents? In economic terms, the answer is no. In economic terms, the answer is no. We could compensate future generations for the damage we are doing to them by setting aside money that would be available for dam construction. We could compensate future generations for the damage we are doing to them by setting aside money that would be available for dam construction. Environmental bond. Environmental bond.

Discount Rate The higher the discount rate: The higher the discount rate: The less important are benefits earned down the road.The less important are benefits earned down the road. The more important are the initial benefits.The more important are the initial benefits. Government policy makers would choose a discount rate for analyzing decisions about ow much stock pollutants to allow. Government policy makers would choose a discount rate for analyzing decisions about ow much stock pollutants to allow.

Choosing the Right Discount Rate Dynamic efficiency requires that future benefits be discounted at a rate close to that of the growth of NNW. Dynamic efficiency requires that future benefits be discounted at a rate close to that of the growth of NNW. Estimating NNW: Measure of sustainable economic development Estimating NNW: Measure of sustainable economic development Begin with GNP Begin with GNP The first step is to augment GNP with nonmarket consumption (value of leisure time, nonmarket work,owner occupied housing) The first step is to augment GNP with nonmarket consumption (value of leisure time, nonmarket work,owner occupied housing) From this, subtract a depriciation fund. i.e. The amount of money necessary to replace the capital used up in the creation of GNP and to provide for a growing population. From this, subtract a depriciation fund. i.e. The amount of money necessary to replace the capital used up in the creation of GNP and to provide for a growing population.

Adjusted net saving – a proxy for sustainability Adjusted net saving – a proxy for sustainability Adjusted net saving, (also known as genuine saving), is a sustainability indicator building on the concepts of green national accounts. Adjusted net savings measure the true rate of savings in an economy after taking into account investments in human capital, depletion of natural resources and damage caused by pollution. Adjusted net saving, (also known as genuine saving), is a sustainability indicator building on the concepts of green national accounts. Adjusted net savings measure the true rate of savings in an economy after taking into account investments in human capital, depletion of natural resources and damage caused by pollution.

A Two Period Model The objective is to balance the present and future uses of the resource by maximizing the present value of the net benefits derived from the use of resources. The objective is to balance the present and future uses of the resource by maximizing the present value of the net benefits derived from the use of resources. Allocation of resources. Allocation of resources. Assume that we have a fixed supply of depletable resource. Assume that we have a fixed supply of depletable resource. Demand is constant Demand is constant P=8-0.4 qP=8-0.4 q MC = $2/unitMC = $2/unit

Intertemporal efficiency (from your notes and reading package)…. (from your notes and reading package)….