1. Lake Mead: 112 miles long; 759 miles of shoreline, 532 feet at greatest depth. Has 247 square miles of surface, and 28 million acre feet of water, when filled to capacity- which hasn’t happened since 1983.

2. Society and Environmental Issues Political systems determine who makes decisions –Centralized dictatorships Little or no input from public –Democracies Variable amounts of input from public Societal values determine basis for decisions –China in the cultural revolution and now –US: 19 th century robber barons vs 20 th century regulated commerce Digression: Laissez faire capitalism penalizes honest capitalists. Economic system determines how prices are set –Centralized planning –Free market

3. Free Market Most efficient way to transfer goods (commodities) –Only involves transfer of goods –Post-transactional taxes do not interfere with markets Income tax Excess profit tax –Labor is also a commodity Necessary conditions for a free market –Homogeneous commodity –Sufficiently many buyers and sellers No near monopolies –Many transactions Each transaction is a small part of the market –Buyers and sellers have perfect knowledge about prices –Buyers and sellers maximize their own advantage –Price is the only signal used to allocate goods Example –Tomatos at the Urbana Farmers’ Market

4. Reality of Markets Homogeneous commodity or various qualities? –Gasoline.... –Computers? –Cars? –Mobile phones? Price as the only signal for allocating goods? Perfect knowledge of prices among buyers? –Internet Many sellers or near monopolies? –~ 5 grain dealers control >90% of US grain sales –1970s: “Big 3” automobile manufacturers –until 1990: AT&T Regulated monopoly –Each transaction a minor part of the whole market? Car dealerships Labor –Knowledge of jobs at a distance? –Difficulty moving to take advantage of new opportunities?

5. Characteristics of Goods in a Free Market Rivalry –Purchase of an item reduces its supply for other people Excludability –Buyer is the only one with access to the product –If I pay, only I benefit All costs of production are included in the price –No externalities Water pollution from paper mills ---> cheaper paper Emergency room treatment of pesticide poisoning Acid rain from Midwest power plants

6. Environmental ‘Goods’ Tend to Lack…. Rivalry –My breathing does not diminish your air supply Excludability –If I pay to put scrubbers on my factory chimney, everyone benefits Including the competitor who doesn’t do so… Well-defined property rights –Who owns the air? –Fisheries? The Tragedy of the Commons –Garrett Hardin, Science, 162:1243-1248, 1968

7. Free Market Remedies Externalities can be eliminated in several ways –Tax on polluter –Quota for maximum pollution –Standard for quality of environmental asset Practically –Penalties must include shutting business down –Discounting of future expenses must be factored in Ford and the Pinto Design well-defined property rights –Pollution control credits

8. Limits of Markets in Policy Decisions Public Policy aims to increase the public good –Requires equitable treatment of various sectors of society Economics deals with the efficient transfer of goods –Equity is not an economic consideration Economists consider monetary value –Many human values are not monetary What is the $ value of a human life? What is the monetary value of my pleasure in being in wilderness? Incommensurables –Non-monetary values to which $ values can be assigned Intangibles –Nonmonetary values to which $ values can not be assigned Fear cannot be translated into $$

9. Summary of Environmental Economics Free market works well for simple transactions –Tangible goods –Easy comparisons of quality –Breaks down in much of modern commerce Near monopolies Incomplete information –Assumes a single public My good is your good Environmental problems involve –Incommensurables Allergies vs perma- press fabric –Intangibles Owning a new car

10. Summary of Environmental Economics Conflicting publics –Ranchers in Utah and ‘my’ national parks –Hoover Dam and Grand Canyon ecosystems –Cheap electricity and the Adirondacks