Environmental Economics AAE Econ Env. St. 343

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Environmental EconomicsAAE / Econ / Env. St. 343

• Instructor Dave Lewis
• TA Luciana Moscoso Boedo

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Question 1 Why do environmental problems occur
and how can we do better?

• Ex Why did the New England cod fleet deplete the
  cod fishery? Whats the solution season
  closures, marine reserves, licensing vessels,
  habitat quotas, something else?
• Major concepts market failure, externalities,
  public goods, economic efficiency, property
  rights, environmental policies.
• Environmental issues air / water pollution,
  urban sprawl, groundwater depletion, ocean
  fisheries.

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Question 2 How much environmental damage should
be allowed?

• How clean should we make Lake Mendota? Should we
  tighten CAFÉ standards? Should we save the North
  Atlantic Right Whale?
• Major concepts non-market values and valuation
  methods, cost-benefit analysis, discounting,
  efficiency vs. fairness.

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Question 3 Are we running out of natural
resources?

• What does it mean to talk about running out of
  a natural resource like petroleum or copper? Have
  we been running out? Will we run out?
• Major concepts non-renewable resources, dynamic
  extraction, resource substitution and
  sustainability.

Historical Copper Production
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Question 4 How do countries interact to affect
the global environment?

• Why did the United States fail to ratify the
  Kyoto Protocol? Why has the U.S. drastically cut
  SO2 emissions, but done little about CO2
  emissions?
• Major concepts game theory and strategic
  interaction.
• Environmental issues international environmental
  treaties.

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Readings

• Textbook Hanley, N., Shogren, J., and B. White.
  2001. Introduction to Environmental Economics.
  Oxford University Press.
• Outside readings journal, magazine, and other
  articles available as downloads on your myUW page.

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Course Website

• www.aae.wisc.edu/lewis
• Announcements
• Homework assignments
• Homework solutions
• Review materials
• Exam solutions
• Course notes

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Grading

• Two midterms (20 each)
• Homework (20)
• Final Comprehensive Exam (40) Thursday,
  December 18, 245 pm.

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The Importance of Homework

• Homework averages (Fall 2005, 2006) sorted by
  final grade
• A, AB 95
• B, BC 85
• C 60
• D, F 25

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The Cost of Skipping Class

• Not everything covered in class will be found in
  your textbook.
• Homework and exams will focus on material covered
  in class.
• Your final grade will reflect your attendance.

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Policy on Make-Up Exams and Late Homework

• Exams are given only at the scheduled time.
• If you have to miss an exam
• You must inform me before the exam.
• The points will be reallocated to the final.
• Homework due in class on the dates that I will
  announce.
• On the day an assignment is due, I will accept
  late assignments between the time class ends and
  when I leave work for the day (usually 5 pm).
• Lowest homework grade is dropped.

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Introduction

• Q What do you do for a living?
• A Im an economist.
• Q Oh, so whats going to happen with the stock
  market?
• A Actually, Im an environmental economist.
• Q Huh?

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Introduction

• Economics is broader than financial matters.
• Example is recent bestseller Freakonomics, by
  Levitt and Dubner
• How is the KKK like a group of real estate
  agents?
• Why do drug dealers live with their moms?
• What makes a perfect parent?

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Introduction

• Economics is valuable because it disciplines
  ones thinking.
• Every course of action involves some social gain
  and some social loss.
• At what cost to society do we eliminate water
  pollutants?
• At what cost do we ban whale hunting?
• At what cost do we extinguish wildlife species?
• At what cost do we dirty lakes and rivers?

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Introduction

• Questions from my own research on land
  conservation
• How can incentives for private landowners be
  constructed to encourage wildlife conservation?
• How should conservation efforts be allocated to
  prevent biodiversity loss?
• How does conserved land influence neighboring
  land values and development patterns?
• What is the effect of aquatic species invasions
  on lakeshore property values?

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Introduction

• The objective for this course is not to have you
  pick sides in environmental disputes.
• The objective here is to provide you with a
  rigorous framework with which to evaluate
  environmental issues.

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How Do Economists Think About the Environment?

• Economists do not believe that the free market
  solves all problems.
• Examples
• The market fails to allocate pollution
  efficiently.
• The market fails to conserve wildlife
  efficiently.
• Environmental economics is interested in
  understanding the conditions of market failure.

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How Do Economists Think About the Environment?

• Some environmental problems (though not all) can
  be addressed by the creation of new markets.
• Examples
• Alter market prices to correct market failure.
• Trading pollution permits.
• Many environmental problems are not adequately
  addressed with market solutions.

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How Do Economists Think About the Environment?

• Economic value encompasses more than just goods
  traded in a marketplace.
• Examples
• An endangered species may have economic value
  even if nobody uses it.
• The Amazon rainforest may have economic value to
  people who never visit.
• Economics is concerned with valuing non-market
  goods.

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How Do Economists Think About the Environment?

• Using the environment in a certain way often
  precludes using it in some other way.
• Examples
• Preserving habitat precludes using land for other
  uses, such as for homes.
• Constructing a dam for power may eliminate fish
  migrations.
• Economists are most concerned with identifying
  and evaluating tradeoffs.

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The Focus of this Course

• The use of real-world case studies is meant to
  develop your economic intuition.
• I want you to be able to understand and recognize
  economic issues related to natural resources and
  the environment.
• Good reference for developing intuition
• Harford, T. 2006. The Undercover Economist.
  Oxford University Press.

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The Message of this Course

• Rational human behavior can result in
  environmental problems.
• Humans behave according to the incentives they
  are given.
• To alter human behavior we must alter incentives.
• Costs and benefits drive decisions.
• Costs and benefits may be difficult to quantify.
• The more we understand, the better our decisions.