Economics of the Environment

Question 1

Key idea?

Answer 1

Economics stresses the importance of incentives in shaping people’s behaviour in relation to scarce resources.

Therefore, economic approaches to environmental policy focus on the rules and incentives shaping the allocation and use of scarce (natural)resources

Question 2

What is resource scarcity?

Answer 2

Resource scarcity is not natural. It emerges when human demand exceeds natural supply.

Question 3

How does resource allocation fail?

Answer 3

Decisions around resource allocation fail to account for full costs of extraction and usage.
Existing policies are based around principles of fairness rather than efficiency and sustainability.

Question 4

What are the assumptions of markets?

Answer 4

Markets enable the most efficient allocation of resources. Assumes:

1. Market is competitive.
2. Good information about quality of goods, enables interchangeable goods.
3. All costs/benefits are born by market participants
   X - UNTRUE: externalities (+ve/-ve unaccounted for)

Question 5

How do markets fail?

Answer 5

1. Externalities
   An externality results when the actions of one individual have a direct, unintentional and uncompensated effect on the well-being of other individuals, or the profits of other firms (Baumol and Oates 1988)
2. Public Goods
   Shared by all, owned by no one
   Non-rival (indivisible), non-excludable
   Free-rider problem (as a positive externality)
3. Common pool resources
   Difficult to exclude,
   Rivalrous
   e.g. Fish stocks.

Question 6

What is in the policy tool-kit?

Answer 6

Command-and-Control

• govt. regulation
  e. .g closure of coal plants

vs.

Pricing pollution

• taxes
• permits and property rights
  e. g. cap and trade scheme

However, economic policies depend on strong governance and regulation. Therefore a combination of economic and government tools e.g. cap and trade scheme.

Question 7

What is Tragedy of the Commons?

Answer 7

Overconsumption and collapse of a common pool resource.
- lacks dialogue as people are acting in their own self-interest and not communicating.

Concept of sustainable yield and exceeding it leading to risk of stock collapse.

State involvement enables collective action and management of individual consumptions.

Question 8

How do institutions vary from organisations?

Answer 8

Institutions (rules of the game) distinct from individuals (players) and organizations (teams) that play the game.
(North, 1990).

Question 9

What are the policy options for water allocation?

Answer 9

1. State.
   Centralised coercion through command-and-control, e.g. hydraulic society.

2.Market.
Privatise through tradable water rights, but water is a ‘slippery property right’ with multiple uses.

3. Self governance.
   Self-imposition of rules

Question 10

What does self-governance involve?

Answer 10

Clearly defined boundaries
Congruence between appropriation and provision rules and local conditions
Collective choice arrangements
Monitoring
Graduated sanctions
Conflict resolution mechanisms
Minimal recognition of rights to organise
Nested enterprises

Question 11

What does scaling up and out involve?

Answer 11

Requires thinking about collective action and the role of enterprise.
In globalised world, managing resources on local scale is insufficient. Need to nest local efforts into national strategies.
E.g. cities contribution to national efforts to reach global accords.