Transcript ECON 4910 Spring 2007 Environmental Economics Lecture 1

ECON 4910 Spring 2007
Environmental Economics
Lecture 1
Lecturer: Finn R. Førsund
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Content of course
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Background
Environmental policy
International issues
Dynamic issues
Valuation
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Necessary mathematical background
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Solid microeconomics course from Bachelor
Be able to formulate and solve static
optimisation problems
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Be able to formulate and solve static nonlinear optimisation problems with constraints
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Be able to use the Lagrangian approach
Be able to derive Kuhn – Tucker conditions
Be able to formulate and solve dynamic
optimisation problems
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Be able to use optimal control theory
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Background
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What is environmental economics?
Environmental problems and policy solutions
Social choice: how much environmental
protection
Efficiency and markets
Market failure: public bads and externalities
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Environmental policy
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Property rights
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Pigovian fees
Regulating pollution
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The Coase theorem
Regulation instruments: command and control,
economic incentives
Emission fees and marketable permits
Regulation with unknown control costs
Audits, enforcement and moral hazard
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International issues
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Transboundary pollution
Global warming
Stratospheric ozone depletions
Acid rain
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Dynamic issues
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Stock pollution problems
Environmental effects function of
accumulated waste
Models of waste accumulation and disposal
Steady state outcomes
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Valuing the environment
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Theory of environmental valuation
Consumer demand for environmental goods
Environmental valuation techniques
Hedonic price theory
The travel cost method
Stated preferences: Contingent valuation
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Building blocks of environmental
economics
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Four building blocs:
Production of man-made goods and
generation of pollutants
Production of environmental services
Interaction economic activity and the
environment
Evaluation of man-made and
environmental goods
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Catalogue of environmental economics
models
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The aggregate pedagogical model
The environment-resource model
The general equilibrium model, Pareto
efficiency
The external effect model
The microeconomic policy oriented model
Purification possibilities as cost functions.
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Most aggregate pedagogical model
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Benefit from pollution and costs of pollution
B  b( P ), b '  0, b ''  0
D  d ( P ), d '  0, d ''  0
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B = benefit, P = pollution, D = damage
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Social choice
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How to choose P
Social choice criterion: Maximisation of net
benefits on the aggregate level
MaxP B  D  b( P)  d ( P)
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Necessary first order condition
b '( P)  d '( P)  0
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Second order sufficient condition
b ''( P)  d ''( P)  0
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The fundamental pedagogical marginal
rule
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Optimal pollution where marginal benefit from
pollution equals marginal damage of pollution
Towards policy instruments:
What is behind benefit of pollution?
What is behind damage of pollution?
Must disaggregate to formulate prescriptions
for policy instruments.
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The materials balance
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Pollution is generically a problem with joint
outputs in economic activities of production
and consumption
The first law of thermodynamics tells us that
matter cannot disappear
A production activity using physical inputs
must generate residuals
General feature of residuals that they arise
from use of inputs in a wide sense
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Multiple output production theory
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Transformation function between outputs and
inputs
F(y,x)
F(y,x)
F(y,x)  0 , y  R , x  R ,
0 ,
0 ,
 yi
x j
m
+
n
+
i = 1,..,m , j = 1,..,n
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The trade-offs between outputs for given
inputs may be termed factor isoquants
Substitution possibilities between inputs for
given outputs are product isoquants
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Illustrations
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Factor isoquant
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Output isoquant
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Factorially determined multi-output
production (Frisch)
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z are pollutants generated in the production
of y using inputs x
i
y i = f ( x1,.., x n ) , i = 1,..,m
z  g ( x1,.., x n )
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