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Environmental and Resource Economics

Environmental and Resource Economics. Dr. Katrin Rehdanz Depts GeoSciences & Economics. Environmental and Resource Economics, lecture 1. Course aims and set-up Efficiency, optimality, sustainability The emergence of environmental and resource economics Economy-environment interdependence.

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Environmental and Resource Economics

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  1. Environmental and Resource Economics Dr. Katrin Rehdanz Depts GeoSciences & Economics

  2. Environmental and Resource Economics, lecture 1 • Course aims and set-up • Efficiency, optimality, sustainability • The emergence of environmental and resource economics • Economy-environment interdependence

  3. Contact • Bundesstrasse 55, Room 027 • Tel: 42838-7047 • Email: katrin.rehdanz@zmaw.de • Web-site: http://www.uni-hamburg.de/ Wiss/FB/15/Sustainability/courses.html or …/envresecon.html

  4. The Course • A comprehensive introduction to the economic theory of environment and resources • Further courses: valuation, international environmental problems • Prior knowledge: micro, macro, calculus • Book: R. Perman, Y. Ma, J. McGilvray, M. Common (2003), Natural Resource and Environmental Economics (3nd ed.), Longman, Harlow, ISBN 0 273 65559 0

  5. The Lectures, before Xmas 31.10.: Sustainability 7.11: Ethics and the environment 14.11: Efficiency and optimality; Market failure and public policy 21.11: Use of environmental resources 28.11: Extraction of non-renewable resources 5.12: Extraction of renewable resources 12.12: Forestry; resource policy 19.12: Valuing the environment

  6. The Lectures, after Xmas 9.1: Pollution control: targets 15.1: Pollution control: instruments 23.1: International environmental problems 30.1: National accounting Exam: 6.2. or 13.2.?

  7. Wahlpflichtfach Umweltökonomie WS ERE1 Environmental & Resource Economics SS ERE4 Valuation Theory WS ERE1 Environmental & Resource Economics ERE3 Agriculture and the Environment Sem Issues in Environmental Economics SS ERE2 Global Environmental Problems

  8. Three Themes • Efficiency: The allocation of goods and services by the market to rational agents is efficient only if there are no externalities • Optimality: Efficiency is a necessary but not a sufficient condition for optimality; optimality includes equity • Sustainability: Taking care of posterity

  9. The Emergence of Environmental and Resource Economics • Classical economics • Neo-classical economics • Welfare economics • Recent developments • An alternative approach • Towards interdisciplinary

  10. Classical Economics • Adam Smith: invisible hand of general equilibrium, social good by individual action • Thomas Malthus: growing population, diminishing returns to scale in agriculture • David Ricardo: diminishing returns to scale (intensive margin), diminishing quality (extensive margin) • John Stuart Mill: innovation, input substitution; amenity value „it is only in backward countries of the world that increased production is still an important object[ive]“ (1857)

  11. Classical Economics -2 John Stuart Mill (1857) There is room in world, no doubt, for a great increase in population, supposing the arts of life to go on improving, and capital to increase. [...] The density of population necessary to obtain all of the advantages both of cooperation and of social intercourse [...] has been attained. A population may be too crowded, though all be amply supplied with food and raiment. [...] Nor is there much satisfaction in contemplating the world with nothing left to the spontaneous activity of nature

  12. Neo-Classical Economics • Value is relative, determined in exchange, reflecting preferences, production costs and scarcity • Demand and supply, partial and general equilibrium • Absolute scarcity no longer seen as a problem, a reflection of the times • Keynes‘ macro-economics indirectly reinvoked interest in economic growth • Earlier growth models: no resource limits

  13. Welfare Economics • Rigorous theory of social good • Utilitarianism: Social good is the weighted sum of individual good • Pareto optimality: At least as good for all, better for one (actual and potential) • Marshall and Pigou: Externalities and taxes – if there are unintended and uncompensated consequences of one agent to the next, the market transactions need not be Pareto improving – Pigou taxes can counteract this

  14. Environmental and Resource Economics • In the 1960s and 70s, things changed: Limits to Growth, Silent Spring, oil crisis, pollution, congestion, space travel • First, natural resources are scarce • Second, environmental services are valuable • Third, there are significant environmental externalities

  15. Spaceship Earth Kenneth Boulding (1966) The shadow of the future spaceship, indeed, is already falling over our spendthrift merriment. Oddly enough, it seems to be in pollution rather than exhaustion, that the problem is first becoming salient. Los Angeles has run out of air, Lake Erie has become a cesspool, the oceans are getting full of lead and DDT, and the atmosphere may become man‘s major problem in another generation, at the rate at which it is filling up with junk.

  16. Economy-Environment Interdependence • Economic activity depends upon and affects the natural environment • Services that the environment provides • Resource base • Amenity service base • Waste sink • Life-support system

  17. The Circular Economy • RPC; RWR+PWP+CWC • First Law of Thermodynamics: R=W=WR+WP +WC • Boulding: Waste feeds back into resources, production and consumption • Capital stock only adds delays, does not change matters • Recycling: R+rW; (1-r)W is real waste • Georgescu-Roegen: Second Law of Thermodynamics: r<1

  18. Environmental andResource Economics • Environmental and resource economics has now become a respectable field • All US & UK universities offer an education programme • There are specialised journals, including JEEM, REE, ERE, EPA, LA while general journals and conferences have regular sessions on env. & res. econ. • Leading economists like Arrow, Bradford, Jorgenson, Nordhaus, Sachs, Solow

  19. Recent Developments • (Evolutionary) game theory for resource management, international agreements • Imperfect competition and endogenous technological development and diffusion for limits to growth, other long term issues • Overlapping generations • International trade and investment • Behavioural economics for valuation

  20. An Alternative Approach • Ecological economics: • Legitimate concerns, particularly about the application of outdated economic theory to environmental issues • Lot of critique, little alternatives • Half-baked ideas, but influential

  21. Towards Interdisciplinarity • Environmental problems violate disciplinary boundaries • Some economics models violate basic facts of physics, chemistry or ecology • Increasing emphasis on multi-disciplinary work • Towards new disciplines, interdisciplines and transdisciplines

  22. Three Fundamental Features • This course: Little attention to recent developments, alternative theories • Focus on basic economic theory as applied to environmental and resource issues • Property rights, externalities, efficiency and government intervention • Central theme: If we treat the environment as an economic good, a lot of environmental problems would be solved

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