1. Environmental Economics1 ECON 4910 Spring 2007 Environmental Economics Lecture 1 Lecturer: Finn R. Førsund

2. Environmental Economics 2 Content of course Background Environmental policy International issues Dynamic issues Valuation

3. Environmental Economics 3 Necessary mathematical background Solid microeconomics course from Bachelor Be able to formulate and solve static optimisation problems  Be able to use the Lagrangian approach Be able to formulate and solve static non- linear optimisation problems with constraints  Be able to derive Kuhn – Tucker conditions Be able to formulate and solve dynamic optimisation problems  Be able to use optimal control theory

4. Environmental Economics 4 Background What is environmental economics? Environmental problems and policy solutions Social choice: how much environmental protection Efficiency and markets Market failure: public bads and externalities

5. Environmental Economics 5 Environmental policy Property rights  The Coase theorem Pigovian fees Regulating pollution  Regulation instruments: command and control, economic incentives Emission fees and marketable permits Regulation with unknown control costs Audits, enforcement and moral hazard

6. Environmental Economics 6 International issues Transboundary pollution Global warming Stratospheric ozone depletions Acid rain

7. Environmental Economics 7 Dynamic issues Stock pollution problems Environmental effects function of accumulated waste Models of waste accumulation and disposal Steady state outcomes

8. Environmental Economics 8 Valuing the environment Theory of environmental valuation Consumer demand for environmental goods Environmental valuation techniques Hedonic price theory The travel cost method Stated preferences: Contingent valuation

9. Environmental Economics 9 Building blocks of environmental economics Four building blocs: Production of man-made goods and generation of pollutants Production of environmental services Interaction economic activity and the environment Evaluation of man-made and environmental goods

10. Environmental Economics 10 Catalogue of environmental economics models The aggregate pedagogical model The environment-resource model The general equilibrium model, Pareto efficiency The external effect model The microeconomic policy oriented model Purification possibilities as cost functions.

11. Environmental Economics 11 Most aggregate pedagogical model Benefit from pollution and costs of pollution B = benefit, P = pollution, D = damage

12. Environmental Economics 12 Social choice How to choose P Social choice criterion: Maximisation of net benefits on the aggregate level Necessary first order condition Second order sufficient condition

13. Environmental Economics 13 The fundamental pedagogical marginal rule Optimal pollution where marginal benefit from pollution equals marginal damage of pollution Towards policy instruments: What is behind benefit of pollution? What is behind damage of pollution? Must disaggregate to formulate prescriptions for policy instruments.

14. Environmental Economics 14 The materials balance Pollution is generically a problem with joint outputs in economic activities of production and consumption The first law of thermodynamics tells us that matter cannot disappear A production activity using physical inputs must generate residuals General feature of residuals that they arise from use of inputs in a wide sense

15. Environmental Economics 15 Multiple output production theory Transformation function between outputs and inputs The trade-offs between outputs for given inputs may be termed factor isoquants Substitution possibilities between inputs for given outputs are product isoquants

16. Environmental Economics 16 Illustrations Factor isoquant Output isoquant

17. Environmental Economics 17 Factorially determined multi-output production (Frisch) z are pollutants generated in the production of y using inputs x