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Summary Environmental economics
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Environmental economics summaryTopic 1: Introduction to environmental economics
Chapter 2: The economic approach: Property rights, externalities, and environmental problems.
The relationship between the environment and the economic system can be considered a closed
system. A closed system is one in which no inputs (energy or matter) are received from outside
the system and no outputs are transferred outside the system.
This implies that energy and matter can neither be created nor destroyed (first law of
thermodynamics). The relationship of people to the environment is also conditioned by another
physical law, the second law of thermodynamics. Known as the entropy law, which states that
entropy increases. Meaning that the amount of energy unavailable for work increases.
According to the Malthusian argument: population growth is exponential and resource growth is
linear.
Pollution comes in the form of local pollution (chemicals from factories, smog) and global
pollution (greenhouse gases).
An allocation of resources is said to satisfy the static efficiency criterion if the economic surplus
(Consumer- and producer surplus) derived from those resources is maximized by that allocation.
Consumer surplus is the excess of total willingness to pay over the actual cost. While producer
surplus is the difference between the marginal cost of production and the selling price.
An efficient property right structure has three main characteristics: exclusivity, transferability, and
enforceability.
Efficiency in a perfect market is achieved because the actors try to maximize their surplus. The
price system, then, induces those self-interested parties to make choices that are efficient form
the point of view of society as a whole.
An externality exists whenever the welfare of some agent depends not only on his or her
activities but also on activities under the control of some other agent. The marginal cost curve of
production for a producer is depicted lower than the marginal cost of society, as they include the
pollution.
The externality causes the output of the commodity to be too large, too much pollution, the
prices of the commodities responsible to be too low, no incentives to yield less pollution, and
recycling and reuse of the polluting substances are discouraged.
Externalities can be either negative or positive, called external diseconomy and external
economy. With external economies, the resources is undersupplied.
With pecuniary externalities, the external effect is transmitted through altered prices and
therefore does not cause a market failure.
There are different ways of entitling resource use: private property, state-property, common-
property, and resnullius or open-acces regimes.
Open-access resources give rise to the tragedy of the commons. Common-pool resources are
shared resources characterized by non exclusivity and divisibility. Divisibility means that the
, capture of part of the resource by one group subtracts it from the amount available for the other
groups. The tragedy of the commons arises because the open-access regime leads to
overexploitation and the scarcity-rent is dissipated; no one is able to appropriate the rent, so it is
lost. We can see now that unlimited access destroys the incentive to conserve.
Public goods (clean air, biodiversity) exhibit both consumption indivisibilities and non
excludability present a complex category of environmental resources. The demand for such
goods can be attained by vertical summation (everyone can consume simultaneously) of the
individual demands, however people have the tendency to lie about their preferences (free-rider
problem). This often leads to a lower level of supply than the efficient level.
Environmental problems can also occur when parties have too much power like in monopolies or
with cartels. This often leads to undersupply to drive up the price, because there is an imperfect
market for trading the property rights.
As with market failure, government failure is characterized by improper incentives like rent
seeking. Due to voter ignorance and unsuccessful opposition this rent seeking is left
unpunished. Successful opposition is, in a sense, a public good, with its tendency for free riding
on the opposition of others.
Besides rent seeking, social policy objectives (low gas price) can also lead to environmental
problems. So we can say that environmental problems often arise due to the divergence
between individual and collective objectives.
Solutions to the efficiency problem caused by ill defined property rights areL private negotiations,
judicial remedies, and regulation by the government.
Coase stated that as long as negotiation costs are low and the effective number of parties is low,
the court could allocate the entitlement to either party, and an efficient allocation would result.
The only effect of the court’s decision would be to change the distribution of surplus among the
affected parties. This Coase theorem shows that the existence of inefficiency triggers pressures
for improvements.
When the number of parties involved is large and the circumstances are common, we are
tempted to correct the inefficiency by statutes or regulations rather than court decisions.
Topic 2: Resource extraction and intergenerational fairness
Chapter 5: Dynamic efficiency and sustainable development
Dynamic efficiency balances present and future uses of a depletable resource by maximizing the
present value of the net benefits derived from its use.
Intertemporal scarcity imposes an opportunity cost that we henceforth refer to as the marginal
user cost. The additional marginal value created by scarcity is the marginal user cost. An
efficient market would not only have to consider the cost of extraction, but also the marginal user
cost. IN an efficient market, the margin user cost for each period is the different between the
price and the marginal cost of extraction.
Since future generations cannot articulate their wishes, negotiating to ensure a fair treatment is
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