1. Environmental Economics Lecture 2
Hendrik Wolff

2. Should I eat fish? (Snickers)

3. Let’s eat Fish (Snickers)
Rules:
Each harvested fish is potentially one ‘participation point’ towards final grade
No Communication
No winks or nods
No violence
10 Second to harvest the ocean
What ever is left on the table after 10 seconds, I will double in second round of fishing.

5. Introduction What is Environmental Econ (EE)?
Def. Kolstad, Chapter. 1:
EE is concerned with
the impact of the economy on the environment
the significance of the environment to the economy
The appropriate way of regulating the economic activity so that balance is achieved among environmental, economic and other social goals.

6. ‘how to make best of things’!
Def. of EE (continued)
“Economics not about profit max. or ‘capitalism’, but
‘how to make best of things’!
‘Things’ includes
Environment (Air, Water, landscape, forests) as well as
‘capital’
‘human capital’
‘time’
‘music in the pedestrian zone’
 Max Welfare s.t. constraints. (virtually all econ models have this set-up)

7. Def. EE (cont.)
EE Problem?
Environment
Econ No
Air
Scarce ?

8. Def. EE (cont.) EE Problem? Environment Econ No Air Scarce ? Yes
Clean Air
Scarce!  Clean Air has $ value

9. Def. EE (cont.) EE Problem? Environment Econ No Air Scarce ? Yes
Clean Air
Scarce!  Clean Air has $ value
Scenic Rhine Valley or a Dom
Scarce  value of Cologne 

10. Def. EE  “Externality” Definition of non-pecuniary externality:
Action by one agent effect utility or production function of another agent without that others agent appropriate compensation
If u2’ (u1) < 0  negative externality (smoker)
If u2’ (u1) > 0  positive externality (beekeeper)

11. Def. EE  “Externality” Definition of non-pecuniary externality:
Action by one agent effect utility or production function of another agent without that others agent appropriate compensation
If u2’ (u1) < 0  negative externality (smoker)
If u2’ (u1) > 0  positive externality (beekeeper)
EE not concerned with pecuniary externality
Pecuniary externality: German beer drinker in the U.S. shifts demand function of beer  higher U.S. price of beer is not an non-pecuniary externality. (This would be a pecuniary externality).

12. Implications (why is EE important)?
Theory and Design of Policy Instruments:
GET THE PRICES RIGHT!!!
P= MC but P should equal Marginal Social Cost!!!
(B) Policy:
Next 30 years crucial decisions have to be made how we live, commute, produce energy (nuclear, coal, CO2)
Field of EE growing but mainly by “Birkenstocks”
Today EE conference 2000 participant with over 18 parallel sessions
“Wallmart’ vs. Govt.  ‘crowding out’ literature.

13. Implications (why is EE important)?
Theory:
GET THE PRICES RIGHT!!!
P= MC but P should equal Marginal Social Cost!!!
(B) Policy:
Next 30 years crucial decisions have to be made how we live, commute, produce energy (nuclear, coal, CO2)
Field of EE growing but mainly by “Birkenstocks”
Today EE conference 2000 participant with over 18 parallel sessions
“Wallmart’ vs. Govt.  ‘crowding out’ literature.
Nytimes.com

14. Difference between EE and Resource Econ?

15. Difference between EE and Resource Econ?
M = Material
P = Producer
C = Consumer
R = Residual (not pollution!)
d = discharge
r = recycling

16. Fundamental Material Balance Equations
(Rdi ) = M
First (FMBE) and Second Law (Entropy increases) of Thermodynamics govern the closed system
See Nick Hanley et al. Chapter 1 for discussion on ‘limits of growth’
4 Approaches to manage Environment
M = (Rdi ) = G + RP - (Rri )
Traditional Approach: (Rdi )
Moral Approach / Zero Population Growth: G
Technology Innovation: RP
Recycling (Rri )

17. Fundamental Material Balance Equations
(Rdi ) = M
First (FMBE) and Second Law (Entropy increases) of Thermodynamics govern the closed system
See Nick Hanley et al. Chapter 1 for discussion on ‘limits of growth’
4 Approaches to manage Environment
M = (Rdi ) = G + RP - (Rri )
Traditional Approach: (Rdi )
Moral Approach / Zero Population Growth: G
Technology Innovation: RP
Recycling (Rri )

18. Definitions 4 Categorisations of Types of Pollutants Categorization
Dimension
Same Pollutant?
Global vs. Local
Space No

19. Definitions 4 Categorisations of Types of Pollutants Categorization
Dimension
Same Pollutant?
Global vs. Local
Space No
Point source vs. nonpoint source
Yes

20. Definitions 4 Categorisations of Types of Pollutants Categorization
Dimension
Same Pollutant?
Global vs. Local
Space No
Point source vs. nonpoint source
Yes
Cumulative vs. noncumulative
Time

21. Definitions 4 Categorisations of Types of Pollutants Categorization
Dimension
Same Pollutant?
Global vs. Local
Space No
Point source vs. nonpoint source
Yes
Cumulative vs. noncumulative
Time
Continuous vs. Sporadic

22. Definitions 4 Categorisations of Types of Pollutants Categorization
Dimension
Same Pollutant?
Free Riding on...
Global vs. Local
Space No
State, country
Point source vs. nonpoint source
Yes
Neighbor, community, society
Cumulative vs. noncumulative
Time
Future generation
Continuous vs. Sporadic
Limited liability

23. Chapter 3 of Kolstad Social Choice: How Much Environmental Protection?
There are two basic questions in Environmental Policy
(a) What is the right Balance between Environmental Protection and Environmental Use?
(b) Given we determined optimal level of Environmental Protection of question (a): how do we achieve this level?
Chapter 3 concerned with question (a)
Social Choice: What should be the thresholds? More generally, where should we end up on PPC?

24. Figure: Where should we end up on Production Possibility Frontier (PPC) in GDP – E-Quality space

25. Individual Preferences Regarding Environmental Protection
Biocentrism
Anthropocentrism

26. Individual Preferences Regarding Environmental Protection
Biocentrism
- Pure Biocentrist has Utility function that does NOT allow to substitute x for existing e
Anthropocentrism
- Pure Anthropocentrist has Utility function that does NOT allow to substitute e for potential x

27. Individual Preferences Regarding Environmental Protection
Biocentrism
- Pure Biocentrist has Utility function that does NOT allow to substitute x for existing e
- Values ‘intrinsic’ value of nature
Anthropocentrism
Pure Anthropocentrist has Utility function that does NOT allow to substitute e for potential x
Values ‘instrumental’ value of nature

28. Sustainability Strict/Strong Def.: Mj = ∑Rijd for all elements of j
Following this FMBE short term has the advantage:
guarantees that future generation enjoys same environmental amenities & resources as we have today
no extinction of species
little extraction of oil

29. Sustainability Strict/Strong Def.: Mj = ∑Rijd for all elements of j
Following this FMBE short term has the advantage:
guarantees that future generation enjoys same environmental amenities & resources as we have today
no extinction of species
little extraction of oil

30. Solow / Weak Sustainability
Definition by Brundtland Commission 1987:
“Development that meets the needs of present generation without compromising the ability of future generations to meet their own needs”
Figure of Solow model using PPC

31. Solow / Weak Sustainability
Allows for Substitutions between Capital Types
Material/Infrastructure Capital
Human Capital
Natural Capital
Non-renewable resources are allowed to become depleted if sufficient HC & RD develops such that future generation can make use of renewable resources.

32. Quotes from Solow Article!
“UNESCO Def. of Sustainability ‘sounds good’ but is impractical and ‘fundamentally wrong’ “We do not owe the future any particular ‘thing’”, but well being. “I doubt that I would feel myself better off if I had found the world exactly as the Iroquois left it.” Instead what we should do: Invest the harvest of non-renewables in education, infrastructure

33. Read Solow Article!
“UNESCO Def. of Sustainability ‘sounds good’ but is impractical and ‘fundamentally wrong’ “We do not owe the future any particular ‘thing’”, but well being. “I doubt that I would feel myself better off if I had found the world exactly as the Iroquois left it.” Instead what we should do: Invest the harvest of non-renewables in education, infrastructure

34. How to implement Solow Sustainability Growth?
Government serves as trustee (representative of future interests)
Pollution Taxes, Subsidies for R&D etc.
Hartwick Rule
Norway versus UK in using profits from North Sea Oil Field
Green National Accounting
We have to solve the “Sustainability Paradox”:
What weights more ?
Concern about future vs. concern about present poor?
If concerned about current poor, then we should consume (pollute) more today (instead of investing more today)

35. Social Choice from Individual Values
Three Social Choice Mechanisms
Pareto Criterion
Compensation Principle (Kaldor Hicks)
Voting

36. Social Welfare Functions
Benthamite
Rawlsian
Egalitarian

37. i 1 2 3 4
SWFB
SWFE
SWFR 10 19

38. Arrows Impossibility Theorem
6 Axiom:
Completeness
Unanomity
Nondictatorship
Universality
Transivity
Independence of Irrelevant Alternatives
Arrows Impossibility Theorem:
There is no rule satisfying the 6 Axioms for converting individual preferences into a social preference ordering
This is troubling:
No “optimal” SWF can be constructed.
 No nice neat theory of social decision making, yet decisions must be made.