Transcript Economics and the Environment

Economics and the
Environment
Some mysteries
• Why are there so many chickens and so
few bald eagles?
• Why do people waste water, which may be
the world’s most precious resource?
More mysteries
• How did the American Bison survive?
– Both the bison and the passenger pigeon
were slaughtered for food. The passenger
pigeon is extinct.
More mysteries
• Why is Disney World better taken care of
than Yellowstone National Park?
Still more mysteries
• How could a successful paper recycling
program result in fewer trees and forests?
• Why are salmon disappearing from the
Pacific Northwest?
NOTE: Read and consider all statements
or questions carefully; don’t accept them
as ``fact’’ or ``true.’’
The person or organization making the
statement or asking the question may be
trying to influence your thinking.
e.g.: IS Disneyland better taken care of
than Yellowstone???
Goal of the environmental
movement
• Solve environmental problems—protect and
conserve the natural environment—using the
best methods possible.
• What does THAT mean? Methods that:
– Protect the environment
– Are as inexpensive as possible
– Don’t have other bad consequences (such as putting
people out of work)
– Lead to sustainable resource use
• What are some methods??
What is economics?
• The study of how people use limited
resources to satisfy unlimited wants
– The study of the allocation of scarce
resources
To some economists
these are both holes in the ground
• Mt. St. Helens
• Butte, Montana
What does economics have to do
with the environment??
Economics and the environment
•
The environment is an economic good.
a) It is scarce.
b) It has alternative uses
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Provide resources
Provide recreational opportunities
Provide various other services
c) Given a. and b.: we must choose among
alternatives
Economics is about
making choices
• Since resources are scarce  people must
make choices.
• They face opportunity costs
– When you make one choice, the 2nd best alternative is
given up
• Examples?
– Should open space become farmland or housing?
– Cleaner air/expensive cars or dirtier air/cheaper cars
– Others??
Environment as
economic good
• People want more of it as their incomes
increase
Two views about
economics & environment
• Herman Daly: argues that growth can’t be
forever and that ``enough is best.’’
– Economic growth can lead to environmental
degradation and wealth inequality
• Julian Simon: human welfare can continue
to improve
– Population growth is good, puts pressure on
resources, leads to price increases, provides
opportunity and incentive for innovation
Simon
• Key for him is human ingenuity:
– Humans have capacity to increase knowledge
base
– More people means more people trained to
solve problems means greater economic
conditions in the future.
• In economics, as in ecology:
• YOU CAN’T DO JUST ONE THING
– All choices or actions, be they about the
environment or something else, have short
and long-term consequences.
– Can you think of examples?
Economics
• Again: the valuation and allocation of
scarce resources
• Classical economics considers 3 ``factors
of production’’ – i.e. resources used in the
production of goods and services:
– Land – natural resources
– Labor – human effort and expertise
– Capital – human-made goods used to make
other goods, i.e. tools, machinery, buildings
Environmental economics
Includes also ``Natural Capital’’
– Natural resources
– Ecological services
Classical economists treat natural
resources as ``substitutable’’: if we run
out of oil, we’ll use hydrogen.
Ecological economists say some natural
resources have no substitutes.
Natural capital
• What the environment provides for our
production and consumption.
– Source: that part of the natural environment
from which materials move
– Sink: that part of the natural environment that
receives an input of materials
• Resource degradation = overuse of
sources
• Pollution = overuse of sinks
Supply-demand
• Prices for goods set by ``supply’’ and
``demand’’
– e.g. when prices go up, demand dropsso
supply (unpurchased goods) goes
upsuppliers lower prices to get rid of
inventoryeventually, price reached where
demand equals supply
– This is the EQUILIBRIUM price
Change in demand
• If demand increases,
curve shifts right.
– Equilibrium price
increases
• This increase in demand
is occurring at all price
levels.
– NOT a result of a
decrease in price
Some facts of economic life
• Everything has a cost
– ``no such thing as a free lunch’’
– May be in money, or in lost opportunity, or in
lost time, or in environmental degradation
Some facts of economic life
• Tradeoffs are necessary
– That is, since resources are scarce, choices
must be made
– It doesn’t mean that you CAN’T do something
that improves two things at once
• E.g., a technological advance might provide a
better product AND a greener, more sustainable
one. An electric car, for instance, might be simply
a better car as well as a more efficient one.
• But often improvement in one dimension comes at
some cost
Some facts of economic life
• Incentives matter
Some facts of economic life
• Voluntary trade creates value
Some facts of economic life
• Diminishing returns
– As one input (or factor of production)
increases when others remain constant, the
benefit realized reaches a maximum and then
declines.
– Example: studying for test
• 0 hrs: 60
• 3hrs: 88
1hr: 70
2 hrs: 82
4hrs: 90
5hrs: 82
– Environmental example?
Some facts of economic life
• Supply and demand
– These are key to a working market
– Markets are ways to organize economic
activity between buyers and sellers
– Why important? A way to allocate scarce
goods
– Markets exist to find the equilibrium price
Supply-demand curve
•
equilibrium price
Use of supply and demand
• Many goods and services can be priced
using law of supply and demand
• Often hard to use S & D to value
environmental goods and services
• There isn’t a true market for most
environmental goods or services
Some facts of economic life
• Markets can fail
• Often there may be factors not included in the cost of a
particular good
• Example: What factors should be included in the price
we pay for electricity?
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Cost of the fuel (natural gas) (inc. transportation)
Cost of the generating plant
Cost of labor to run the plant
Cost of transmission lines
• What’s missing??
– Air pollution resulting from electricity generation
– =EXTERNALITY
Free-market system
• As in U.S.
• Prices of goods and services influence
how much of a given good or service is
produced and consumed
• True free market is open to all; supply and
demand determine prices
• If market truly free, two technologies
should compete on merits, including costs.
IS U.S. A TRUE FREE MARKET
ECONOMY?
WHY OR WHY NOT?
• Cost of fuel includes:
– Extraction
– Transport
– Refining
– Storage
– And… profit
• Does NOT include:
– Health effects from air pollution
– Ecological effects of increased CO2
Gross National Product
• GNP
• The sum of all goods and services
produced (or consumed) in a country in a
given time.
• Most commonly used indicator of
economic health and wealth of a country.
GNP and the environment
• Much of our economic well-being depends
on natural assets (true to varying degrees
for all countries)
• Therefore, use and misuse of natural
resources and the environment should be
included in national income accounts such
as GNP…
• ….They’re not.
Problems with GNP and NNP
• Natural resource depletion
Imagine a company makes some product,
wearing out machinery over time
• Output is part of GNP; capital depreciation (the
wearing out of machinery) is SUBTRACTED to get
NNP—the net production of the economy
Oil company drains oil from underground
field; the value of the oil produced is part of
GNP
• But: no deduction to NNP to account for the
nonrenewable resource used up
Pollution
Imagine a company has these choices:
– Produce $100 million of output and, in the
process, pollute local river by dumping wastes
OR
– Use some workers to properly dispose of
wastes but only make $90 million of output.
If the company chooses to pollute, its
contribution to GNP is larger
• GDP was never intended to do what it
commonly is used to do: assess the
welfare of a population.
• Developer of GDP said, ``the welfare of a nation
[can] scarcely be inferred from a measure of national
income…’’
Alternative to GNP
• GPI = Genuine Progress Indicator
• Idea: has a country’s growth, production
of goods and services, actually resulted in
an increase in its citizens’ well-being?
The problem:
• The environment is a public good
– A commons
• Everyone wants a clean environment
– But not everyone is willing to pay what it
would cost
– We want others to pay, and we get a ``free
ride’’
– e.g.: Fireworks show
Externalities
Costs borne or benefits received from an
economic transaction by people or others not
directly involved in the transaction
• Costs (negative externalities)
– Health effects of pollution
– Global warming
• Benefits (positive externalities)
– Increase in your home’s price when your
neighbors paint theirs and landscape their
yards
NIMBYism
• What is it:
– Not In My BackYard, meaning ``keep your
polluting, dirty, undesirable (development,
hazardous waste site, landfill, etc) out of our
neighborhood.’’
• Some related ideas:
– LULU: Locally Unwanted Land Use
– PIBBY: Put It in Blacks’ BackYards
– NIMTOF: Not In My Term in Office
NIMBY
• Nobody wants these facilities
• Who can fight them best?
– Rich, politically connected, educated
• So, they often go into poor or minority
neighborhoods.
– Sometimes, with sweeteners
NIMBY examples
• Your examples
• Others
Cape Wind, MA
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CAPE WINDS TEST TOWER - A SIGN OF THINGS TO COME. NO TRESPASSING IN OUR
OWN NANTUCKET SOUND! This tower was placed 11 miles from our coastline. It is less than
half the height, it is one-quarter of the width and IT IS STILL VISIBLE FROM MASHPEE TO
CHATHAM ON ANY CLEAR DAY. The proposed wind farm comes as close as 4.7 miles, the
towers are 417 feet tall and 16 feet wide! They want to put 130 towers with a 10-story oil-filled
transformer station covering 24 miles of our coastline. REMEMBER , your beach is Nantucket
Sound.
externalities
• Costs (usually) that are not factored into
the price of a product or service.
• Environmental externalities include
– Pollution
– Overuse of common pool resources (Tragedy
of the Commons)
How reduce externalities?
1. Government intervention
1. Typically command-and-control
2. Incentives
3. Market-based approaches
1. If market functions freely, some economists
believe there’ll be an optimal level of
environmental protection and resource use
1. People will pay for the amount of protection they
want
Law of diminishing returns