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
- 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
- Two types
- Renewable - the resource can be replenished
- Fish, cattle, fruits, etc.
- 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?
- Market failures
- government intervention may be necessary
- Monopolies, public goods, etc.
- Long time horizons - choices today can impact mankind centuries down
- 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
- What is the market failure?
- Monopolies - one firm controls a market
- Usually the reduce production to cause the market price to
- Can earn substantial profits
- Natural monopolies - telephone, water, natural gas, and
- DeBeers Corporation - control the raw diamonds market
- 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
- Asymmetric information - one party in the market has more
- Used car salesman has more info. than the buyer
- A person with a heart problem gets medical insurance
- Public goods - private markets have trouble supplying public goods
- Usually police, military, inoculations, clean air, etc.
- Expanded to include education, highways, libraries, mail
- Markets may not supply enough of them, so gov. supplies them
because they benefit society
- Open resource - property that is owned by everyone or absence of
- People tend to over exploit the resource
- Tragedy of the Commons
- Over fish in public lakes
- Dump trash and litter on a public land
- How to correct market failure?
- Markets do not exist for environmental resources.
- Government can regulate the resource
- Government creates a market for the resource
- More governments are using this option
- 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
- 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
economics says nothing about how the distribution of
resources in a society are allocated
- Equitable - people own equally all of society's
- Highly inequitable - one person owns all
- Policymakers need to consider how various groups will
- This can be complicated in environmental economics
- Global warming - how should the welfare of future
generations be weighed when making global
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
- 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
- Could government change the incentives for environmental protection?
- Policy makers and society's view points can impact the type of
Models of Scarcity:
- Malthus - population is growing geometrically but food production is
- 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 =
- 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
- 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
- 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?
- Funding for scientific research goes to areas with many problems
- Researchers have to substantiate the problem to receive more
- i.e. Global warming
- Environmental groups need to be noticed by both the mass
media and by potential donors.
- Attitude of the media
- Bad news is more interesting than good news.
- Humans focus on bad experiences more than good experiences