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Environmental Economics

Environmental Economics. Honors C.A.D. Objectives. Define and explain the term “environmental economics.” Explain why natural resources can be examined using the cost/benefit analysis. Background. We know that economics is about making decisions.

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Environmental Economics

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  1. Environmental Economics Honors C.A.D.

  2. Objectives • Define and explain the term “environmental economics.” • Explain why natural resources can be examined using the cost/benefit analysis.

  3. Background • We know that economics is about making decisions. • “Allocation” is the buzzword  we just learned how this is done with prices. • But for natural resources, can we use the same system?

  4. Background • Ownership of land can easily be shown, but what about the intangible stuff, like air, water, soil? • Thus is the paradox of environmental economics. • The problem – the way owners use their land may affect others!

  5. Definition • Environmental economics is “the study of how the natural environment and its resources affect the economy, and vice-versa.” • How does our society affect nature? • How does nature and nature/natural resources shape our society? • These are the two questions environmental economics seeks to answer.

  6. One Side… • One aspect of environmental economics seeks to analyze natural resources: • Coal • Natural Gas • Oil • Minerals • Plants and animals (fisheries, farms, agriculture, etc.) • How can we sustain these resources, or use them in the best way?

  7. …And The Other • The other aspect of environmental economics deals with pollution. • We understand that some economic activity causes pollution. • The question is: how “clean” is “clean enough” economically?

  8. The Dirty Room Example • Cleaning your room can be done to varying degrees: • You can just pick up a few things off the floor in a few minutes. • You spend a few more minutes (say a half hour) and vacuum and “straighten up” the room. • Our, you can spend a few hours and dust everything, shampoo the carpet, organize all your drawers, etc. • Which works best? Which makes the most sense? You have to analyze cost (time) vs. benefit (cleanliness of room).

  9. Cost/Benefit Analysis • Think back to marginal cost and marginal product. We kept hiring workers until cost and product were equal. • Apply the same principle to the dirty room example. • You want to clean just enough so that the cost of time equals the benefit of a clean room. • The same applies to the environment – we want to clean up only until the cost equals the benefit.

  10. Cost/Benefit Analysis Blue line = marginal cost Red Line = marginal benefit Price Environmental Quality

  11. Conclusions • What is environmental economics? • Resources – sustain them! • Pollution – clean it up! • But wait…how clean is “clean enough?” • WHEN MARGINAL COST = MARGINAL BENEFIT!

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