Ch6 Economics

8/8/2019 Ch6 Economics

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ECONOMICS AND THE

ENVIRONMENT



How much is clean air worth?

Can you charge somebody for

damaging your air?

How much are you willing to pay for

clean air? Should you have to pay for clean air?



Is cutting down the rainforests efficient?

What market incentives are there for

research on the environment?

How can the environment be priced and

sold? Does India have any mechanisms for valuing

its environment?



Lecture Objectives: Review Advantages and Limitations of

Market Economics

Understand how economics is creatingnew principles and guidelines for

business activity.



Comparing: Neo-classical Economics

Environmental Economics

Ecological Economics

To reveal policy implications



What is an economy supposed to

do?

What is the Neo-classical

approach?



What is a market?

A system of exchange



What is exchanged?

Resources: land, labor, capital

(ie. goods or services in someform)



How does the market work?

Matching of supply anddemand



Why is the market such a good system?

Optimal use of resources: buyers forcecompetition on suppliers; greatest return for theefforts of suppliers

Pareto efficiency: ³a situation where it isimpossible to make one person better off withoutmaking anyone else worse off´

± Meaning: allocation of resources to the usesthat will bring the greatest overall increase in production and monetary value by matching

producers with the highest bidders



What enables the

market to work?Price or Value setting

Profit motivePrivate property

Government and other regulating institutions



Does the market operate

perfectly?1. General Market Failures:

Monopoly;

information asymmetry;

missing markets;

transaction costs.



Market Failures What company did you buy your air from?

How much did you pay for your air? How was thatprice set?

How clean was the air you bought? How do youknow?

How can a company stop other companies fromdirtying its air? What can you do if someonemakes your air dirty after you bought it?

What rate of return should a company expect toget from investing in air quality?



2. Environmental Market Failures:

Failure to value the environment:

unpriced use values; option values; existence

values; bequest values

Lack of information

Externalities

Common Access Resources/Sinks

Discounting the future

Missing Markets





Externalities

³An unintended cost or benefit of

production or consumption that is not

reflected in the price of the relatedtransactions. Externalities are often

borne by people who are not parties to

the transactions that create them.´



Externalities

Define the externalities of your

company: who are the parties to the

monetary transaction and who or whatpays for the impacts of the transaction



Discounting the Future with

Net Present Value (NPV) NPV = x/(1+.10)nyrs

X + your present money value

.10 = the discount rate

nyrs = the power of how many years down the future

you are looking at

NPV of 100 dollars in five years with a discount rate

of 10% is 100/(1+.10)5 or $62.09



Environmental & Ecological Economics

1. Why should America pay for pollution controls inPakistan rather than in India?

2. Are there any economic tools we can use to valueIndia¶s environment?

3. Are air-conditioned shopping malls reasonablesubstitutes for clean air and clean beaches?



Cleaner air on horizon by year's end: LiaoImprovements to Guangdong power plants will cut

pollution, says minister

Guangdong's biggest cluster of power plants, at Humen in

Dongguan - which are blamed for much of Hong Kong's air

pollution - are being equipped with desulphurisation devices to

cut emissions.

In the longer term, Dr Liao hopes a cross-border emission

trading scheme can be set up to assist other power plants in

Guangdong to cut emissions in a more cost-effective manner.

In the meantime, the government has started talks with CLP

Power and Hongkong Electric on emission reduction and an

emission trading scheme.



Hong Kong administration states preference for

system to be used in cross-border emissions

trading

«the government says a "cap and trade" method is best for HongKong.

Under this system, the government would set an emissions cap

as well as a timetable for this to be lowered. The capped quantity

of emissions would then be distributed to sources of air pollution,including power plants and large factories, in the form of emission

allowances or permits.

Polluters who fail to meet the requirements of the cap would haveto buy emissions reduction credits from others who could

successfully lower their emissions below the capped level



Environmental Economics: From

Market Failure to Government Failure Limited information of how to deal with

specific environmental problems (of area or industry) and of firms¶ capability to deal with

or hide environmental impact Limited resources to regulate, monitor and

enforce

Command and Control regulations:

uniform standards and technologies



Policy Guidelines from Environmental Economics:

I. Benefits of Using the Market

1. Cost effectiveness: example, emissiontrading credits

2. Substitution and technological advance:example, green taxes

3. Other institution/market based schemes:

deposit refund schemes, environmental bonds, transferable quotas, transfer of development rights.



Policy Guidelines from Environmental Economics

II. Better Valuation of Non-

market Valued Assets

1. Financial Costs

2. Averting Behavior 3. Travel Cost Method

4. Hedonic Pricing

5. Contingent Evaluation

For : Better Cost-Benefit

Analysis,

regulations,fines



Environmental Economics and


Weak vs. Strong

Sustainability



Environmental Economics and Ecological

Economics: Weak vs. Strong Sustainability

Efficiency standard vs. ecologicalstandard

Discount rate (growth) driven vs. discountrate (growth) limiting

Resources as inputs & outputs of unlimited economic system vs. economic

system as limited subsystem of ecosystem

Substitutability vs. complementarity



The Environmental Economics Trade-off



Economy H

M

E E

M

S

Recycle?

Neo-classical

Empty World

Figure 1: The Economy as an Open Subsystem of the Ecosystem

(Daly199

6:49

).

S = solar energy H = heat M = matter E = energynatural capital man-made capital

Ecosystem

Ecosystem

Economy

H

M

E E

M

S

Recycle

Environmental

Economics World

Ecosystem



Economy

H

M

E E

M

S

Recycle

Environmental

Economics World

H

EconomyE

M M

E

S

Recycle


Full World

Figure 1: The Economy as an Open Subsystem of the Ecosystem

(Daly 1996:49).

S = solar energy H = heat M = matter E = energynatural capital man-made capital

EcosystemEcosystem



Substitutability vs. Complementarity

Manufactured and knowledge capital for natural capital

Land, labor and capitalsubstitutability

Same service bydifferent product

Technological fixes Ecosystem resilience

Manufactured capital depends on natural capital

Uniqueness, uncertaintyand irreversibility

Ecosystem services

Growth outpaces

substitution Ecosystem fragility



Policy Influences from

Ecological EconomicsStrict demands for environmental protection

reflected in:

Environmental impact assessment Natural preservation areas (parks, reserves)

Absolute limitations on chemicals



Policy Guidelines from


1. Daly Rule

2. Index of Sustainable EconomicWelfare (ISEW)

3. Ecological tariffs on free trade

4. Community based sustainabilitythrough self-sufficiency anddiversification



Policy Guidelines from


1. Daly Rule: "Never reduce the stock

of natural capital below a level thatgenerates a sustained yield unless good

substitutes are available for the

services generated."



Index of Sustainable Economic Welfare

ISEW=

total output

+ unpaid work

- environmental destruction and

degradation- environmental improvementmeasures

- depreciation of human-made

capital+/- welfare distribution effect



Free Trade Limitations

Regional specialization obscures view

of resource exploitation, depresses

ecological and social laws, weakens

terms of trade and impoverisheslandholders

Externalities from the shipping of goods

around the world Therefore, tariffs to compensate or

reduce free trade



Community Based Development

Community rather than corporations or government creates social conditions(wants and needs) that limit impacts

Greater self-sufficiency throughdecentralized control

Local synergies for recycling andenergy reduction

Ethical bonds amongst businesscommunity



Summing up:

Market success in exchange efficiency

Market failures in: valuation, common access,externalities, and discount rate

Environmental economics guidelines: costeffectiveness and market-based incentives

Ecological economics guidelines: limitinggrowth to within global and local ecosystems

*therefore reducing throughput of economy within ecological carrying capacity

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Ch6 Economics

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