Environmental economics 2

1. Environmental economics2

2. 2 different approaches • Ecological paradigm: concerned with the health and survival of ecosystems • Economic paradigm: concerned with maximizing human welfare • BUT: does that mean current welfare (short-term) or future welfare (long-term)??

3. Ecological paradigm • Ecologists think of maximizing long-term welfare • What do we call that? • Sustainability

4. Economic paradigm • Economists often concerned with how the environment affects human well-being • Environment has no value by itself (intrinsic value)

5. Environmental economics • Maximizing human welfare MUST INCLUDE properly valuing ecosystems and the costs of environmental degradation

6. Environmental economics • To an economist, environmental issues fall into two areas: • Generation of wastes and pollutants as unwanted byproducts of human activities • The management of renewable and nonrenewable natural resources

7. How much is too much? • How much pollution should be permitted? • Current levels too high? . . . Or too low? • Shouldn’t pollution be zero? • Why or why not?

8. Market economy • For many goods, supply and demand determine a market equilibrium. • Examples: iPads, Modern Warfare II, bananas • BUT: for natural resources or environmental quality • Not true market goods • Hard to price

9. Externalities • Key concept • Whenever an economic activity creates ``spillovers’’ on people not directly involved in the activity, there is an externality. = unintentional side effects • Usually negative

10. KEY Slide Externalities are social costs Supply + social cost • When externalities occur, a company’s private production cost is NOT the same as the social cost of production. • Social costs might include costs of pollution cleanup or added healthcare costs • When external costs are ADDED to the costs of production, the supply curve shifts left (for a given price, suppliers will supply less) supply What happens to the price of a product if externalities are Included?

11. Externalities • A factory that pollutes a river creates involuntary costs (negative externalities) for anyone using the river • Fishermen –can’t fish or can’t eat catch • Boaters –unable to boat or increased maintenance • Swimmers – lose swimming spot; increased illness • Water suppliers – costs of making water safe

12. Externalities • There can be positive externalities • Examples? • Your neighbor paints her house and improves her yard with new landscaping. She bears all the cost. She reaps some benefit. • YOU and other neighbors also benefit

13. How deal with externalities? • Several ways • Command-and-control (government regulation) • Tax • Subsidy • Market approach (ie, cap-and-trade)

14. Tax • A tax may be imposed on a product that causes environmental harm, such as a pollutant. • The tax is a way to INTERNALIZE the externality—that is, to REVEAL the true cost of the product (including the social costs such as environmental degradation or health impacts). • What is the effect?