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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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.

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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?

25. 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?

26. 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

28. 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

29. 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

30. 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?