Chapter 1: What Is Environmental Economics?

Question 1

Economics

Answer 1

Economics is the study of how and why people make decisions about the use of valuable resources.

Question 2

Environmental Economics (EE)

Answer 2

EE focuses on the fundamental issue of allocating scarce resources among competing uses.

E.g. use of natural input in production (air, water, land). In sum, it studies how activities affect our natural environment, with a goal of helping society reduce its degradation of the environment.

Question 3

Scarcity

Answer 3

Scarcity happens when consumption is limited by supply; in EE, we refer to the limit of what the natural environment can supply.

Question 4

Opportunity cost

Answer 4

The highest value alternative use of a given resource (land, labour, capital, natural resources)

Question 5

Trade-offs

Answer 5

The alternatives individuals, firms and societies face given scarcity.

Question 6

Marginal Benefit (MB)

Answer 6

The incremental benefit of increasing one unit of a good or service. Also the derivative of the total benefit function.

Question 7

Marginal Cost (MC)

Answer 7

The incremental cost of increasing by one unit the output of a good or service.

Question 8

Efficiency

Answer 8

Maximising output per unit of input or minimising costs for a given level of output. An outcome is economically efficient if all resources are put to their highest valued use.

Question 9

Pareto Efficiency

Answer 9

State of allocation in which it is possible to make everyone better off without making anyone worse off.

Question 10

Equity

Answer 10

Equity relates to how resources are divided among different people or groups.

There exists different equity impacts of environmental programmes:

Horizontal, vertical, and intergenerational equity.

Question 11

Horizontal equity

Answer 11

With HE, there are similar impacts on people with the same incomes

Ex. People that make 20k that live in the city vs in the suburbs are affected by the same policy

Question 12

Vertical Equity

Answer 12

With VE, there are similar impact on people with different income levels

Ex. Westmount, 5mil homes vs 500 rent, still get the same parks, policy, noise reduction, clean sidewalks, etc.

Question 13

Intergenerational Equity

Answer 13

With IE, there are similar impacts on people in the present and in the future.

Ex. Fossil fuels are convenient for us but not for the future

Question 14

How does environmental economics use efficiency and equity to make policy?

Answer 14

Efficiency- central criteria to evaluate outcomes and policies. Make policy that provides maximum amount of protection for the environment at a minimum cost of resources

Equity- important for policies to be both fair and efficient

N.B. sometimes the two objectives are at odds with each others !

Question 15

Why do people pollute?

Answer 15

Because it is the cheapest way they have of solving a certain very practical problem- how to dispose of the waste products remaining after the production and consumption of a good?
Any system will produce destructive environmental impacts if the incentives within the system are not constructed to avoid them.

Question 16

Incentive

Answer 16

something that attracts or repels people and leads them to modify their behavior in some way.

In Econs: relate to P&C decisions.

Question 17

Externality

Answer 17

• occurs when the market fails to capture the social costs or benefits a firm’s or individual’s actions have on the rest of society, MC_firm

Question 18

Property Rights

Answer 18

Property rights are theoretical socially-enforced constructs in economics for determining how a resource or economic good is used and owned.

Question 19

Problem with Externalities and Property Rights in EE

Answer 19

Lack of ownership rights to environmental resources means that there are few incentives to take the environmental consequences of our actions into account.

Question 20

Provate vs Common Property Rights

Answer 20

PPR: the owner has the right to exclude others from using or consuming their resources

CPR: the members in the community have the power to govern the resource within borders.

E.g. Auto emission vs dog waste

Question 21

Rival Good

Answer 21

If one person’s use of the good diminishes or eliminates other people’s enjoyment of the good.

E.g. food, clothing, electronic goods, cars, plane tickets, and houses.

Question 22

Non-Rival Good

Answer 22

If one person’s use does not impact another person’s enjoyment of the good.

E.g. beautiful scenic view, national defense, clean air, street lights, and public safety

Question 23

Excludable Good

Answer 23

If only the people who pay for the good are able to enjoy its benefits.

E.g. Food, electronics, clothing, skateboards

Question 24

Non-Excludable Good

Answer 24

If many people can enjoy the benefits of a good whether they paid for it or not.

E.g. Fireworks

Often have the problem of free-riders

Question 25

What are examples of incentives that might be introduced to force drivers to account for the external costs created when they drive cars?

Answer 25

electric car don't pay toll on brigde

Question 26

What are examples of incentives that might be introduced to influence companies such as car makers and gasoline producers to address the pollution problems associated with cars ?

Answer 26

Environmental taxes or subsidies for pollution control

Question 27

Why have GHG risen over time ?

Answer 27

Growing use of carbon fuels, such as gasoline, coal and oil

Question 28

Difference between Stock and Flow pollutants

Answer 28

Stock: accumulate and have persistent damages (CO2, heavy metals, waste) Flow: dissipate or are absorbed within a short time frame (<1 year): (SO2 1-4 days, Nox 2-5 days, CO 1-4 months)

Question 29

From how much CO2 has risen since the 1950s?

Answer 29

25%

Question 30

What is creating the effect og global warming of climate change?

Answer 30

GHG trap heat in the earth's atmosphere

Question 31

What are the consequences and the costs of global climate change? Show examples of costs.

Answer 31

Consequence: people, plants and animals must adapt to the new climate Costs: estimated in $ to be $70-100 billion per year - Represent the loss of crops, health impacts, the loss of species and ecosystems and other effects. - The costs will not be equal around the world or among species. E.g. some species are more adaptable than others, coastal areas may be harder hit due to rising sea levels and the Artic and the Antartic are warming much faster than tropical areas of the globe.

Question 32

What are some sources of GHG emissions and their ratio?

Answer 32

Electricity and heat (40%) Transportation (21%) Industry (19%) Residential (10%) Other (10%)

Question 33

Mitigation

Answer 33

A mitigation action is a specific action, project, activity, or process taken to reduce or eliminate long-term risk to people and property from hazards and their impacts. To slow global climate change, we must find ways to burn fewer carbon fuels such as gasoline, coal and oil.

Question 34

What is the trade-off we face linked to Mitigation?

Answer 34

between the costs associated with changing energy sources and the costs associated with not changing energy sources. Different types of cost.

Question 35

Precautionary principle

Answer 35

Says that society should act to reduce possible future damages even if the trade-offs between the costs and the benefits are unknown in order to reduce risk. - The PP is an answer to the uncertainty that exists in the C&B, their timing and distribution of CC and GHG emission. - The PP was use in the Rio declaration of 2012 as the approach that shall be widely applied bu States according to their capabilities.

Question 36

Sustainable Economy

Answer 36

One that allows people's well being to rise (or at least stay the same) over time (but not fall).

Question 37

What will be the determinants in knowing if we will be able to sustain our economy in the future?

Answer 37

1. Investment in social capital 2. Sustainability of natural capital for other inputs - New technology may allow us to find ways to overcome resource scarcity - Find new resources or new ways to do things when certain natural resources run low.

Question 38

What is the Trade-off we are facing with Sustainability?

Answer 38

As the output of G&S grows, environmental quality is diminished.

Question 39

What are the concepts used in presenting the trade-offs between environment and output?

Answer 39

Production possibility frontier (PPF) Community indifference curves (CIC)

Question 40

Production possibility frontier (PPF)

Answer 40

A curve depicting all efficient output possibilities for two or more goods given a set of inputs. - demonstrates the tradeoff of output of goods and environmental quality

Question 41

Community indifference curves (CIC)

Answer 41

Combinations of environmental quality and goods perceived by society to provide a given level of well being - used by society to decide what quantity of G&S it wants and the corresponding level of environmental quality

Question 42

Two views on the environmental trade-offs and the PPF?

Answer 42

Pessimistic: High use of natural resources today might lower the PPF over time, leading to an unsustainable economy with lower consumption in the future. Optimistic: Investment in research and efficiency today may yield technological improvements, shifting the PPF outward, leading to a sustainable economy that allows consumption to grow in the future while also improving the environment.

Question 43

Myth 1: Economists believe that the market solves all problems

Answer 43

1. 1st theorem of welfare economics - private markets are perfectly efficient on their own 2. Maximum general welfare is what economists mean by the "efficiency" of competitive markets 3. If the market "fails" the 1st theorem no longer holds - public goods (social benefits/costs > private benefits/costs) - generates free riders - Externalities – total social costs of production > private costs - common property or open access resources – no one recognizes the full cost of using the resource like Scarcity rent

Question 44

Scarcity Rent

Answer 44

Scarcity rent is the cost of "using up" a finite resource because benefits of the extracted resource are unavailable to future generations. Must be included in the calculations of effciency.

Question 45

M2: When economists do see a market problem, they always recommend a market solution

Answer 45

1. Economists tend to search for intruments of Public Policy that can fix one market essentially by introducing another - pollution imposes large external costs and the government can establish a market for rights to emit a limited amount of that pollutant (as long as this new market does not fail !!!) 2. Non market approaches - mandated pollution control equipment - minimum efficiency standards - eco-labelling

Question 46

M3: When non-market solutions are considered, economists still use only market prices to evaluate them

Answer 46

To identify then environmental goal of a policy need to evaluate B&C: 1. Economists typically favor using market prices "because these prices reveal how members of society actually value the scarce amenities and resources under considerations" 2. "Revealed preference methods": ex: observed to pay more for a house in a geighborhood with cleaner air. 3. Costs: include all diminished utility, health care costs, diminished productivity - Use value – ex: pharmaceutical value in rain forests - Non-use value – ex: intrinsic value of species or ecosystems

Question 47

M4: The economic analyses are concerned only with efficiency rather than distribution

Answer 47

- Tend to give more attention to measures of aggregate social welfare than to measures of the distribution among members of society of the B&C of policies - An improvement in distributional equity is inevitably the subject of considerable dispute - Available data often permit reliable estimates of the impacts of environmental policies on important subgroups of the population - Good cost benefit analysis will also identify important distributional consequences.

Question 48

What are the 4 conclusions from Fullerton and Stavins?

Answer 48

1. Economists do not necessarily believe that the market solves all problems – in the presence of externalities and public goods, laissez-faire policy don't lead to social efficiency. 2. When economists identify market problems, they do not always recommend market solutions 3. When market or non-market solutions to environmental problems are being assessed, economists do not limit their analysis to financial consideration 4. Although the efficiency criterion by definition aggregate in nature, economic analysis can tell us much about the distribution of both the B&C of environmental policy.

Question 49

Environmental Kuznets Curve

Answer 49

3 stages of econ development: 1. Pre-industrial economies (lowest income per capita, low environmental degradation (pollution) 2. Industrial economies: Pollution peaks, IPC better than previous 3. Post-industrial economies (service economy): pollution decreases to get back to Pre-indus. Levels and IPC keeps growing.