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Understanding Environmental Decision Making: Benefit-Cost Analysis and Sustainability Considerations

This review explores the intricate dynamics of environmental decision making, specifically through the lens of benefit-cost analysis. It examines the nature and causes of environmental problems, such as externalities, open-access issues, and the tragedy of the commons. Key concepts like nonexclusive property rights, public goods, and the implications of recycling are discussed. The analysis highlights important sustainability frameworks, including weak and strong sustainability, while addressing scenarios like market inefficiencies in steel production and their environmental impacts.

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Understanding Environmental Decision Making: Benefit-Cost Analysis and Sustainability Considerations

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Presentation Transcript

  1. exam 1 review

  2. environmental decision making:benefit-cost analysis

  3. how do we get those benefits?

  4. nature and causes of environmental problems • Nonexclusive property rights => Externalities • No property rights => Open access problem • Public goods

  5. the market for steel

  6. expect 5 results • output of steel too great • too much pollution produced • price of steel too low • no incentives to search for ways to yield less pollution per unit steel • recycling and reuse of polluting substances discouraged since release into river is so inefficiently cheap

  7. to correct externalities • bargain (Coase) • taxation (Pigou)

  8. open-access • fishing / grazing rights / whales vs. chickens • tragedy of the commons • common-pool resources • nonexclusivity (exploited by anyone) • divisibility / rival (your use diminishes my use)

  9. bison harvesting

  10. public goods • characteristics • nonexcludable (even if do not pay cannot be excluded from enjoying it) • indivisible / nonrival (my enjoyment does not lessen your enjoyment) • national defense / air / information / diversity • free-rider problem

  11. how to think about the future? • Two period model • To maximize dynamic efficiency, set PV of MNB from the last unit in period 1 equal to the PVMNB from the last unit in period 2.

  12. Demand: P = 8-0.4Q, MC = $2 (constant)20 total units • 10.238 units in period 1 / 9.762 units period 2 • Efficient prices? Marginal user cost?

  13. definitions of sustainability • Hartwick rule (“weak sustainability”) • value of the total (natural + physical) capital stock is maintained • Strong sustainability • value of the natural capital stock is maintained • Environmental sustainability • quantities of resources should be maintained (not value)

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