Environmental Economics for Environmental Sciences - ENR21306 (ENR21306)
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Summary Full Script Environmental Economics
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Course
Environmental Economics for Environmental Sciences - ENR21306 (ENR21306)
Institution
Wageningen University (WUR)
This is the full Script for Environmental Economics for Environmental Sciences. It includes the lecture slides with important graphs, as well as my personal notes taken from the Lectures. It also includes a refresher on mathematic calculus on some problems often used in environmental economics.
Environmental Economics for Environmental Sciences - ENR21306 (ENR21306)
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Environmental Economics for Environmental
Sciences
ENR21306
Lectures – learning material, combined with notes
Anneli Janzer
,Content
Lecture 1 – Foundations of Environmental Economics ..................................................................................... 1
1. What economics is and is not? ................................................................................................................... 1
2. Scarcity ....................................................................................................................................................... 2
2.1 Alternative uses for scarce resources .................................................................................................... 2
2.1.2 Efficiency and Optimality ....................................................................................................................... 2
3. Summary of Lecture 1 ................................................................................................................................ 3
Lecture 2 – Introduction Microeconomics ........................................................................................................ 4
1. Link between the environment and human action .................................................................................... 4
2. Environmental growth and environmental pollution ................................................................................. 4
3. Introduction to microeconomic theory ....................................................................................................... 6
4. Refresher of mathematic calculus .............................................................................................................. 8
5. Summary of Lecture 2 ................................................................................................................................ 9
Lecture 3 - Principles of consumer choice and utility maximization ................................................................ 10
1. Principles of consumer choice .................................................................................................................. 10
2. The indifference curve .............................................................................................................................. 10
2.1 Key properties of the indifference curve .............................................................................................. 11
3. Utility maximization with a budget constraint......................................................................................... 12
3.1 The Marginal Rate of Substitution (MRS) ............................................................................................ 13
3.2 Utility optimization ..................................................................................................................................... 14
3.3 The Lagrange method in seven steps .......................................................................................................... 15
3.3.1 Interpretation of the Lagrange multiplier λ ......................................................................................... 16
3.4 Impact of changes in income or prices ................................................................................................ 17
4 Summary of Lecture 3 .............................................................................................................................. 17
Lecture 4 - Principles of producer behaviour + Efficient resource allocation on a competitive market I ......... 18
1. Principles of Producer Behaviour ............................................................................................................. 18
2. Optimal combination of inputs ................................................................................................................ 19
2.1 Key question 1...................................................................................................................................... 20
2.2 Key question 2...................................................................................................................................... 20
2.3 Key question 3...................................................................................................................................... 21
3. Efficient allocation in a competitive market ............................................................................................ 22
4. Summary Lecture 2-4 ............................................................................................................................... 24
Lecture 5 - Efficient resource allocation on a competitive market II + Market failure as a cause of a
misallocation of natural resources I ............................................................................................................... 25
1. Welfare analysis of competitive market equilibrium ............................................................................... 25
1.1 A class room experiment ..................................................................................................................... 25
, 2. Market failure .......................................................................................................................................... 26
2.1 Consequences of market failure .......................................................................................................... 28
2.2 Welfare implications of market failure ................................................................................................ 28
3. Short summary and highlights of the previous lecture(s) ........................................................................ 31
Lecture 6 – Market failure as a cause of misallocation of natural resources II + Pollution control ................. 32
1. Efficient supply of a public good .............................................................................................................. 32
2. The economics of pollution ...................................................................................................................... 33
3.1 Flow pollution (emissions and damages) ............................................................................................. 33
3.2 Stock pollution (emissions and damages) ............................................................................................ 34
3.3 The private and the social perspective ................................................................................................ 35
Lecture 7 – Pollution control .......................................................................................................................... 36
1. Determining the “optimal pollution level” ............................................................................................... 36
2.3 Modeling the private and the social optimum – an illustrative example ............................................ 37
1.2 (Net) benefit functions of pollution...................................................................................................... 38
1.3 Privately and social socially efficient level of pollution ........................................................................ 39
4 Discounting .............................................................................................................................................. 40
2.1 Discounting of Benefits ........................................................................................................................ 40
2.2 Discounting of costs ............................................................................................................................. 41
2.3 Discounting utility - approaches .......................................................................................................... 42
2.3.1 Exponential discounting....................................................................................................................... 42
2.3.2 Gamma or hyperbolic disounting ........................................................................................................ 42
2.4 Why discount utility? ........................................................................................................................... 42
2.5 Discounting in the climate change discourse ....................................................................................... 43
Lecture 8 – Environmental pollution control: targets ..................................................................................... 45
1. Optimal Pollution consumption 1 ............................................................................................................. 45
2. Optimal Pollution example 2 .................................................................................................................... 45
3. Mechanisms for correcting market failure ............................................................................................... 46
3.1 Criteria for selection of instruments .................................................................................................... 46
3.2 Command and control instruments (CAC) ........................................................................................... 46
3.2.1 Examples: ............................................................................................................................................. 46
3.2.2 Caveats ................................................................................................................................................ 46
3.2.3 CAC generally not cost-effective .......................................................................................................... 46
3.3 Cost-effectiveness (cost-efficiency) ...................................................................................................... 47
3.4 Economic instruments ......................................................................................................................... 47
4. Efficient emission reduction (abatement) ................................................................................................ 47
4.1 Calculation Example ............................................................................................................................ 48
, 4.1.1 Cost-effectiveness ................................................................................................................................ 49
4.1.2 Tradable Permits.................................................................................................................................. 49
4.2 Cap and Trade ...................................................................................................................................... 50
4.3 Flexible permits with offset .................................................................................................................. 50
Lecture 9 – Pollution control – Instruments I .................................................................................................. 51
1. Socially-efficient emission targets and tax ............................................................................................... 51
2. Implications of emission taxes ................................................................................................................. 52
2.1 Example ............................................................................................................................................... 52
Lecture 11 - Pollution control: imperfect information .................................................................................... 58
1. How economists deal with different types of imperfect information ...................................................... 58
4.4 Decision-making with imperfect information ...................................................................................... 58
1.1.1 Two quick exercises ............................................................................................................................. 59
2 Price-based versus quantity-based instruments under uncertainty ......................................................... 59
2.1 Pollution control under uncertainty ..................................................................................................... 59
2.1.1 Overestimation .................................................................................................................................... 60
2.1.2 Underestimation .................................................................................................................................. 61
2.2 Uncertainty and threshold effects ....................................................................................................... 62
3. Revealing Information .............................................................................................................................. 63
Lecture 12 – International environmental problems: Game Theory ............................................................... 65
1. Game theory ............................................................................................................................................ 65
1.1 Nash equilibrium .................................................................................................................................. 66
1.2 Prisoner’s Dilemma .............................................................................................................................. 67
2. International environmental problems as games .................................................................................... 67
2.1 Assurance game................................................................................................................................... 67
2.2 Sequential dynamic games .................................................................................................................. 68
2.3 Chicken game....................................................................................................................................... 68
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