Microeconomics and the Environment

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Microeconomics and the Environment

• EVSC 239

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Two paradigms of Economics and Ecology

• 1. the ecological paradigm, based on the science
  of ecology, stresses the health and survival of
  ecosystems.
• 2. the economic paradigm relies on environmental
  economics the application of economic theory to
  environmental issues and emphasizes maximizing
  the welfare of humans, even if this means harming
  the environment.
• Ecological economics attempts to resolve the
  differences

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Some history
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John Bellamy Foster - Vulnerable Planet

• Monopoly capitalism ? globalized monopoly
  capitalism
• Synthetic products as basic elements of
  industrial output
• Scale of economic production/economic progress

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From Vulnerable Planet economics and
environment

• Synthetic products as basic elements of
  industrial output
• Advances in five fields steel, coal-petroleum,
  chemicals, electricity, and internal combustion
  engine
• Progress in physics and chemistry not accompanied
  by an equally rapid expansion in the knowledge of
  how such substances might affect the environment
• Scientific management also changed labors
  relation to the production process worker
  reduced to status of an instrument of production
  moving control of the job from the worker to
  management
• Taylor (1911) dissociation of labor process from
  skills of the workers (2) separation of
  conception from execution and (3) use of this
  monopoly of knowledge to control each step of the
  labor process and its mode of execution
• Transform skilled labor to simple,
  interchangeable parts
• Thus human labor commodified further human
  productive and cultural diversity decreased

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Commodification.

• As labor became more homogeneous ? so did much of
  nature. Examples?
• Scientific foresters goal
• the maximum amount of nutrients, water, and
  solar energy into the next cut of timber. S/he
  cleans up the diversity of age and size classes
  that are less efficient to cut, skid, process and
  sell. S/he eliminated slow-growing and unsalable
  trees, underbrush and any animals that might harm
  her/his crop. S/he replaces natural disorder with
  neat rows of carefully spaced, genetically
  uniform plantings of fast growing Douglas-firs.
  S/he thins and fertilizers to maximize growth.
  S/he applies herbicides and insecticides and
  suppresses fires to protect this crop against the
  ravages of nature that must be fought and
  defeated.
• What is the result of this goal?

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Synthetic age

• After WWII productive technologies with
  intense impacts on the environment have displaced
  less destructive ones. counterecological pattern
  of growth
• Examples?
• Artificial fertilizers pesticides synthetics
  fibers plastics detergents with high phosphate
  content
• it is therefore the pattern of economic growth
  rather than growth (or population) itself that is
  the chief reason for the rapid acceleration of
  the ecological crisis in the postwar period.

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The 4 laws of ecology and economic production

• Everything is connected to everything else
• .dramatic collapse
• Everything must go somewhere
• 1st law Thermodynamics no final waste, matter
  and energy are preserved, and waste produced in
  one ecological process is recycled in another
• Nature knows best
• any major man-made change in a natural system is
  likely to be detrimental to that system
• Nothing comes from nothing
• 2nd law Thermodynamics energy is used up but
  not destroyed energy is transformed into forms
  are not longer available for work

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2 paradigms of Economics and Ecology

• 1. the ecological paradigm, based on the science
  of ecology, stresses the health and survival of
  ecosystems.
• 2. the economic paradigm relies on environmental
  economics the application of economic theory to
  environmental issues and emphasizes maximizing
  the welfare of humans, even if this means harming
  the environment.
• Ecological economics attempts to resolve the
  differences

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Dominant pattern of capitalist development

• The only lasting connection between things is the
  cash nexus
• Cash nexus has become the sole connection between
  human beings and nature
• It doesnt matter where something goes as long as
  it doesnt re-enter the circuit of capital
• externalities
• The self-regulating market knows best
• For profit, not for nutrition quality of food
  is debased, birds and other species are killed,
  and human beings are poisoned
• Natures bounty is a free gift to the property
  owner
• Kapp capitalism must be regarded as an economy
  of unpaid costs, unpaid in so far as a
  substantial portion of the actual costs of
  production remain unaccounted for in
  entrepreneurial outlays. Who pays?

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Ecologists vs Economists

• Ecologists Concerned with?
• Resilience
• Sustainability
• Intrinsic value
• Economists Concerned with?
• Efficiency and material wealth
• Only consider environment that is useful to humans

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So if money is the guide

• Henry Ford II answered the question- why Detroit
  automakers prefer to make large, gas-guzzling
  cars
• minicars make miniprofits
• Few trends could so thoroughly undermine the
  very foundations of our free society as the
  acceptance by corporate officials of a social
  responsibility other than to make as much money
  for their stockholders as possible. -Milton
  Friedman 1962
• Capitalism cannot exist without constantly
  expanding the scale of production any
  interruption in this process will take the form
  of an economic crisis.
• Resources are infinite and the economy can grow
  forever -Julian Simon
• Common statement There is no conflict between
  economic growth and environmental protection.
  --- sustainable economic growth.
• Anyone who thinks you can have infinite growth
  on a finite planet is either a madman or an
  economist. Kenneth Boulding

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Economics and Environment

• In economic theory, environmental issues are
  separated into two main categories
• 1. The generation of wastes and pollutants as
  unwanted by-products of human activities
• How much should be permitted? Is pollution too
  high/too low? What are tradeoffs with pollution
  levels?
• 2. The management of natural resources, including
  renewable and nonrenewable resources.
• Which resources to use for different tasks?

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(Correct) Economic theory

• 1. The recognition that natural processes provide
  an essential support to human well-being that
  needs to be adequately taken into account in all
  attempts at measuring well-being.
• 2. The recognition that this support is finite
  and that there are limitations both in terms of
  the inputs which can be extracted from the
  biosphere and the waste outputs which can be put
  back into it.

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Externalities negative ext.

• Private costs are the firms costs of production.
  
• Private benefits go to consumers of the firms
  products, and to the producers as income.
• Private optimum occurs when marginal private
  costs equal marginal private benefits, at a
  quantity produced and consumed equal to Qp.

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Externalities negative ext.

• Market economy private optimum will be achieved
  in a perfect competition (Qp).
• Add Losses due to water pollution from production
  to private costs of production marginal social
  costs
• Social optimum marginal social costs marginal
  social benefits (Qs)

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How to deal with negative externality?

• Market failure ? when the market process leads to
  a solution that is not socially optimal
• Solution economically is to internalize the
  externalities. How?
• Pollution tax
• The social cost of pollution now becomes a
  private cost a dollar amount that the firm will
  have to pay for each unit of pollution.
• The object of this tax is not just to penalize
  the firm.
• It is to send an economic message firms that
  create less pollution will pay less tax. This
  creates an incentive for the firm to control its
  pollution.

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w/ pollution tax

• creates a new market equilibrium at which less of
  the polluting good is produced.
• raises the market price of the good external
  cost is thus internalized
• Consumers will buy less and producers will
  produce less (w/tax it is now less profitable).

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Pigovian tax

• The British economist Arthur Pigou was the 1st
  economist to propose this solution in order to
  internalize the total costs of an activity into
  the market.
• A tax of this type is therefore sometimes
  referred to as a Pigovian tax.
• From a theoretical point of view, the Pigovian
  tax is a fine solution to the problem of
  externalities.
• There is just one problem how do we know how
  much the tax should be?
• Some costs we can measure others (ecological
  costs?) harder to measure

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Tradable pollution permits

• policy-makers decide first on the level of
  pollution reduction that is needed. A certain
  quantity of pollution permits is issued.
• These permits may be distributed to existing
  firms, or may be sold at auction to firms that
  are producing the goods responsible for the
  pollution.
• This system is designed to reach the same overall
  level of pollution as a traditional system of
  regulation but at a lower economic cost.
• Under the trading system, a firm could even
  choose to increase its level of pollution as long
  as it is able to purchase credits from another
  firm.
• the price of a pollution permit will be
  determined by market supply and demand, not by
  the government.

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Positive externalities?
-- a subsidy would encourage the provision of
open land. It is in the social interest to
encourage landowners, through tax rebates or
purchase of development rights, to keep land in
an undisturbed state.
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Positive externality parallel to negative
externality
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Cost-Benefit Analysis

• Used when you have to make specific decisions
  which have economic environmental implications
• Tool used by decision-makers to balance the / -
  consequences of a proposed action
• Example large dam. What are the / - ?
• How to put a dollar value on social and
  ecological losses (or gains)?

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Different kinds of value

• Use value the values placed on a resource by
  those who directly use it.
• Non-use value
• Option value value of preserving the option of
  doing something else by doing nothing
• Existence value value of preserving something
  for its mere existence
• Bequest value value of leaving an undamaged
  (less damaged) world to future generations

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How to measure non-use value?

• Contingent evaluation
• essentially a survey technique, in which people
  are asked how much they would be willing to pay
  to preserve rafting or hiking opportunities.
• The resulting estimate of willingness- to-pay
  can be included in a cost-benefit analysis --
  although its reliability is debatable.

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CBA benefit/cost ratio

• If we can measure all the costs and benefits
  associated with dam construction, and we find the
  benefits outweigh the costs, should we then
  proceed with dam construction?
• Should also consider the benefit/cost ratio,
  obtained by dividing total benefits by total
  costs.
• If ratio is only slightly larger than 1 (i.e.
  benefits exceed costs, but only slightly))
  maybe some other project will offer a better
  benefit/cost ratio.
• a series of small dams rather than one large
  one.
• Critics of cost- benefit analysis
• difficulties involved in obtaining reliable
  estimates,
• some things, like spiritual value or the value of
  community, are essentially impossible to estimate
  in dollar terms.
• Should use cost-benefit analysis with caution

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Public goods and common property resources

• Rival Goods whose use is limited to one user at
  a time.
• Excludable The right to use or consume the
  good can be refused to others.
• A good that is both rival and excludable is
  called a private good.
• Music at a concert is non-rival and excludable.
  Why?
• Club-goods the access-right is the membership,
  which allows the members to enjoy all the clubs
  facilities in common
• Common property resources rival and
  non-excludable
• Public goods non-rival and non-excludable
• Congestion threshold

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4 types of goods
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readings

• Read chapters 6 and 7 (the tragedy of the
  commons) in Valuing the Earth Economics,
  Ecology, Ethics i.e. Reader 1.b

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Tragedy of the commons

• Overuse of non-excludable or open access
  resources is a phenomenon that has been called
  the tragedy of the commons
• paradox of aggregation if everyone tries to
  obtain more for themselves, this behavior results
  in less for everyone. The pursuit of personal
  interest leads each individual user to take as
  much as possible of the resource, which increases
  the overall level of extraction of the resource
  and drives it irremediably to its destruction
  and to the ruin of all the users.
• Global commons When the scope of a resource is
  regional or even global (ex oceans. Atmosphere)

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Example Climate Change

• What is it?
• What are its impacts?
• Negative.
• Positive.
• Less predictable impacts
• Positive feedback effects
• How to evaluate these impacts?
• Economists have employed the tool of cost-
  benefit analysis. Others have criticized this
  approach as attempting to put a monetary
  valuation on issues that have great social,
  political, and ecological implications, which go
  far beyond money value.

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readings

• Make sure youve read carefully the
  microeconomics and environment module by thursday