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Summary Environmental Economics
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Summary for Environmental Economics contains all the lecture slides and explanations from the lectures
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Environmental EconomicsDrivers of environmental problems:
- Consumption (“affluence”, A)
- technology (T)
- number of people on the planet (P)
IPAT equation: I = P x A x T
- I = emissions, P = population size, A = GDP per capita, T = emissions per unit of output
- Is an accounting equation (or “identity” – an equation that holds by definition):
Quite complex: – All part of the problem… and hence also possibly part of the solution?
- All three have their own dynamics… but they also interact with each other!
Economic growth:
- Is a threat, because it increases “affluence” (A)
- But economic growth may also reduce population growth (P), and it may also possibly foster
(env. friendly) technologies (T)
→Environmental Kuznets curve
- If affluence increases it will increase emission but after long time people become more
aware of the problem so the emission can decrease. People get richer and invest more in
environmental technologies or people become more aware of the damaged effect.
Technological progress:
- May be threat to environment: industr. revol. and mass consumption
- But may also provide solution: env. friendly technologies
Population growth:
- More consumption…
- but also more human capital? More people = more brains and a new Einstein could be born
Extent of damage depends on
- Amount of pollution emitted (either just current, or maybe also dependent on past
emissions)
- Assimilative capacity of the environment ( can the environment clean it itself)
- Location of pollutive source
- Tastes/preferences of people (valuation)
Environmental economics is antropocentric – “the belief that human beings are the most significant
entity of the universe”
Key characteristics of environmental damages
Environmental damages:
- Air pollution, fisheries depletion, climate change, (tropical) deforestation, biodiversity loss
- Are a function of (level of) economic activity (among others)
Air pollution (e.g., China)
- The higher the emissions, the higher the costs (= damages) of additional emissions
, - If emissions increase, damages increase more than proportionally
(Tropical) deforestation
- Emissions of CO2 and loss of timber
- But also habitat destruction → Smaller species populations, and even extinctions
Again, disprop. higher costs with continued forest loss
Mechanics of climate change: +1.5 °C, or +2 °C →how much does it matter?
- At +1.5 °C, Arctic Ocean ice-free in Summer once every 100 years
o Is once every ten years at +2 °C
o Less snow = less white land. ( white is less hot than black)
- Ice needs decades to recover; arctic ice permanently gone at +2 °C, but maybe not at +1.5 °C
- If world’s temperature exceeds +1.5 °C, it may not be possible to stay below +2 °C
Typically: environmental damage (ED) is function of amount
emitted (M; ED(M)) → increasing and convex
More emissions = more damage ( increasing function)
Environmental damages:
- (Societal) costs of emissions
- But also: (societal) benefits of emission reduction
And, as already said – damages also depend on
- Assimilative capacity of the environment
- Location of pollutive source
- Tastes/preferences of people (valuation)
Simple graphs, complex problems
- Two main types of pollutants:
o Flow damage pollutants: discharge in any period of time, causes environmental
damage in just that period. E.g. noise pollution
o Stock damage pollutants: stock of polluting substances plays a role; past emissions
cause damage in current period. E.g. greenhouse gas emissions, nuclear waste
Characterization of (societal) benefits of emissions
Emissions give rise to damages, but are result of activities that are important too
- Feeding an increasingly large number of people on this planet
- But also production of iPads… and some people like to drive big and/or fast cars too
Benefits of emissions: “grey welfare” ( = Sum of producer and consumer surplus )
o Firms produce goods and sell them for price at least as high as costs of producing it
o Consumers buy goods for prices smaller than or equal to the value they attach their
usage
- If we know (societal) benefits of emissions, we can compare them to (societal) damages of
emissions to determine the optimal level of emissions → zero, a lot, or anything in between
Benefits of pollution: “grey” welfare = producer and consumer surplus
- Consumers: demand function
o Private marginal benefits of consumption (PMB)
o “Willingness to pay” (WTP) for extra unit of a good – maximum amount of money
consumers are willing to give up to receive an extra unit of the good
o Purchase extra unit of the good if PMB ≥ P
- Producers: supply function
o Private marginal costs of production (PMC)
, o Willingness to accept (WTA): minimum amount of money producers need to receive
to be willing to produce an extra unit of the good
o Produce one extra unit of the good if P ≥ MC
PMC = Extra cost of producing are increasing
At Q0, WTP > WTA, so increasing Q improves grey welfare (producers, and consumers)
With perfect competition, Q will be higher than Q0
→Grey welfare maximized
Perfect competition: (Q**, P**) is equilibrium outcome
- Production (and consumption) level where consumers’ WTP equals producers’ WTA for last
unit
Market exchange results in maximum grey welfare –Adam Smith!
But at the expense of others…: Environmental damage is an externality
- “The (unintended) consequences (positive, or negative) of an agent’s actions (consumption,
or production) on the welfare of one more other agents (utility, or profits) for which no
compensation is taking place”
Optimal environmental quality
Having covered benefits and costs of emissions… cause of environmental problems?
- Proximate (or direct) causes: overfishing, car exhausts, agr. expansion into rainforest
- Ultimate cause of env. problems: lack of well-defined and enforceable property rights
Essence of environmental problems: Environmental damage is an externality
Optimal environmental policy, according to the economist?
- Level of emissions that maximizes aggregate welfare (= consumer surplus + producer surplus
– environmental damages)
Simplifying assumptions:
- Prod. and cons. cause emissions, “citizens” suffer from them
- No emission reduction options other than reducing output…
o Each unit of production (Q) produces one unit of emissions (M)
, - Hence, env. damage (ED) is function of Q (i.e., ED(Q))
o Increasing and convex
- Consequences of “grey welfare maximization”?
o Compare aggregate welfare for “market solution” (no environmental policy in place)
to that with optimal environmental regulation
Perfect competition, market solution outcome of consumption and production decisions:
- Grey welfare maximized, but at expense of citizens – consumers and producers do not take
into account impact of their decisions on welfare of others
- What production level maximizes aggregate welfare (= “grey welfare” – env. damages)?
The change in Q leads to a large amount of damage decreased while a little decrease of grey welfare.
Suppose output is reduced from Q** to Q***. Consequences for PS, CS and ED?
- So what if we reduce output even more… decrease in joint “grey welfare” (PS+CS) still
smaller than increase in “green welfare” (reduction in ED)?
- Yes, decrease Q until MED (Q) = PMB (Q) – PMC (Q)
o Is production level that maximizes aggregate welfare (= grey welfare – env. dam.)
Production level that maximizes aggregate welfare:
- Q*, production level where PMB (Q) – PMC (Q) = MED (Q)!
- When reducing output from Q** to Q*, aggregate welfare increases by
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