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Lecture # 1 - Introduction to Environmental and Natural Resource Economics


What is Environmental Economics?


  • Economics - is the study of choice under conditions of scarcity
    • Economics can be applied to a variety of fields, not just traditional commodities
    • Economics is not about profits or money
      • Money is used to help allocate the resources
    • Economists study how incentives impact people's behavior
      • Due to scarce resources, individual behavior is constrained
      • Humans cannot satisfy all their wants and needs
  • Environmental and natural resource economics- the application of economics to the study of how environmental and natural resources are developed and managed.
    • Natural resources - resources used as inputs to production of goods and services
      • Two types
        1. Renewable - the resource can be replenished
          • Fish, cattle, fruits, etc.
        2. Nonrenewable - one the resource used, it is gone forever
          • Petroleum - diesel fuel, gasoline, plastics
    • Environmental resources - resources provided by nature that are not utilized by humankind directly
      • Parks and wild life
      • Usually impacted by pollution

Why Study Environmental Economics?


  • Market economies - prices reflect the relative scarcity of goods.
    • High price - good is relatively scarce relative to demand
  • Market and prices do not usually exist in environmental economics
    • Environmental and natural resource economics is unique?
      1. Market failures - government intervention may be necessary
        • Monopolies, public goods, etc.
      2. Long time horizons - choices today can impact mankind centuries down the road
        • Nuclear waste
        • Polluting water in a lake
        • Mining for metals
  • Study environmental economics to bring harmony to the economic system and the environment

Questions for Environmental Economics


  1. What is the market failure?
    1. Monopolies - one firm controls a market
      • Usually the reduce production to cause the market price to increase
      • Can earn substantial profits
      • Examples
        • Natural monopolies - telephone, water, natural gas, and electricity
        • Microsoft
        • DeBeers Corporation - control the raw diamonds market
    2. Externalities- buyers and sellers in a market impact third parties
      • Person plays (consumes) loud music impacts the neighbors
      • A firm emitting air pollution impacts people living nearby
      • Positive - public immunizations
        • Gov. inoculates its people, preventing the spread of diseases
    3. Asymmetric information - one party in the market has more information
      • Used car salesman has more info. than the buyer
      • A person with a heart problem gets medical insurance
    4. Public goods - private markets have trouble supplying public goods
      • Usually police, military, inoculations, clean air, etc.
      • Expanded to include education, highways, libraries, mail delivery, etc.
        • Markets may not supply enough of them, so gov. supplies them because they benefit society
    5. Open resource - property that is owned by everyone or absence of ownership
      • People tend to over exploit the resource
      • Tragedy of the Commons
      • Over fish in public lakes
      • Dump trash and litter on a public land
  2. How to correct market failure?
    • Markets do not exist for environmental resources.
      • Government can regulate the resource
        • Traditional method
      • Government creates a market for the resource
        • More governments are using this option
  3. How to evaluate environmental programs?
    • Cost-Benefits Analysis - compare the costs and benefits of protecting a resource
      • Economists find the level of protection where marginal costs equals marginal benefits.
        • This is calculus - max. benefits and min. costs
      • Careful - if a firm is polluting the air, the choice is not to shutdown the firm for zero pollution
        • Firm could relocate to another country and export its products back
          • Further, there is job losses
        • Economists find the firm's production where benefits of pollution abatement are maximized and its costs are minimized
          • Note - difficult to place a value on environmental protection.
          • No market prices

Efficiency versus Equity


  • If an efficient solution occurs, it might not be desirable.
    • Marginal benefits = marginal costs, thus the benefits are maximized relative to the costs
    • Welfare economics says nothing about how the distribution of resources in a society are allocated
      • Equitable - people own equally all of society's resources
      • Highly inequitable - one person owns all society's resources
    • Policymakers need to consider how various groups will be impacted.
      • This can be complicated in environmental economics
      • Global warming - how should the welfare of future generations be weighed when making global warming policy?

Why is Pollution an Economic Problem?


  • Two types of economic analysis:
    • Positive economics - the scientific study of economic relationships
      • Either true or false
      • How do people respond to higher gasoline prices?
      • The temperature today is 300 C
      • How does a firm maximize profits?
    • Normative economics - judgments about "what ought to be" in economic matters
      • Value judgments
      • Neither true or false
      • Many policies are normative
  • Economists should use positive economics as well as everyone else
    • Economists are people with biases
    • Many people take a moral approach to the environment
      • Polluting is the result of unethical behavior
      • Thus, all pollution is evil and should stop
  • Environment resources should be viewed in terms of positive economics
    • Could environmental resources provide us with benefits?
    • Could government change the incentives for environmental protection?
    • Policy makers and society's view points can impact the type of environmental policies

Models of Scarcity:


  • Malthus - population is growing geometrically but food production is growing arithmetically
    • Malthus was a priest and economist
    • Wrote - Essay on the Principle of Population as It Affects the Future Improvement of Society (1798)
    • Land is a fixed, scarce resource and food production is limited
    • If the population exceeded its food production, then some people would "die off."
      • Why economics is called the abysmal science
    • Problem - Malthus ignored the impact of technology
      • Technology increases the production from scarce resources
  • Paul Ehrlich, a biologist in 1971 stated
    • Environmental Impact = (Population)*(Affluence)*(Technology)
      • Growing population puts increased pressure on the environment\
      • Technology helps reduce the impact on the environment
      • Affluence - a wealthier society has more alternatives
        • Citizens can afford to pay higher prices for pollution abatement, etc.
  • Malthusian ideas keep coming back
    • Population Time Bomb
    • Global warming will destroy mankind
    • Doomsday Models - computer models that predicted severe shortages of resources
      • Usually future prices are missing from these models
      • As resources become scarcer, the prices rise.
        • Higher price has four impacts
          • Consumers reduce their demand for products
          • Sellers want to increase production of product
          • Development of new technologies
          • Exploration for new resources
      • Example - Petroleum - scientists predicted in the 1970s that the world would run out of petroleum by 2000
        • As oil became more expensive, companies explored and drilled for more oil
        • High cost oil extraction - Northern Slope of Alaska
          • Deep drilling in the Gulf of Mexico???
        • New technologies
          • Satellite imaging
          • Drilling
          • Oil from shale???
  • Malthusian ideas have not happened!
    • The price of most resources has actually fallen over time!
    • Food prices have fallen by 50% since 1960, and 90% since 1800.
    • Be careful!
      • We have not accounted for environmental damage.
  • Why do pessimistic predictions get more attention than reality?
    1. Funding for scientific research goes to areas with many problems
      • Researchers have to substantiate the problem to receive more funding
      • i.e. Global warming
    2. Environmental groups need to be noticed by both the mass media and by potential donors.
    3. Attitude of the media
      • Bad news is more interesting than good news.
      • Humans focus on bad experiences more than good experiences

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