Dr Roger Fouquet

1
Tutorial 3
Environmental and Resource Economics Course
EC307 (DFL)

• Dr Roger Fouquet
• Department of Economics, SSED
• University of the South Pacific

2
Part 1

• Course Outline

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Course Objectives

• By the end of the course, you should have
• Knowledge of Key Environmental issues
• Knowledge of Main Ideas in Environmental
  Economics
• Ability to Use Tools to Analyse Environmental
  Issues
• Ability to access Important Sources of
  Information
• Knowledge of Main Institutions Addressing
  Environmental Issues

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Lectures

• Environmental Economics (Units 1-4)
• Mid-Semester Break
• Resource Economics (Units 5, 8,9,10)
• Environmental Economics in Practice
• (units 6,7,10)

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ENVIRONMENTAL ECONOMICS
THEORY
I. Economic Efficiency Market Failures
II. Environmental Policy
PRACTICE
IV. Cost-Benefit Analysis
III. Environmental Valuation
CASE STUDIES
VI. Air Pollution
VII. Climate Change
THEORY CASE STUDIES
X. Sustainable Development
V. Energy
VIII. Fisheries
IX. Further Resource Issues
NATURAL RESOURCE ECONOMICS
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Part 2 Summary of EC307

• Key Ideas from Environmental and Resource
  Economics

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Key Ideas

• Market Failures and Environmental Policy
• Environmental Valuation
• Market-Based Instruments
• Optimal Rate of Resource Use through Time
• Substitution of Natural and Other Capital

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1. Efficiency, Property Rights and Government
Intervention

• Markets Do Not Signal Accurately Relative
  Scarcity and Value of Environmental Resources
• Incentives to Over-Use Environmental Resources
• Degradation of Environmental Quality
• Lack of Property Rights
• Role for Government Intervention

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The Net Loss of Market Failures
Demand (MSB)

MSC
MPC
Q1
Q
Quantity of Tourists
10
The Impact of Rent-Seeking/Corruption
Demand (MSB)

MSC
MPC
Q1
Q
Quantity of Tourists
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2. The Role of Environmental Valuation in
Improving Efficiency

• Improving Allocation depends on
• Knowing Peoples Value of the Environment
• Government Intervention is Driven by
• Environmental Valuation Estimates
• Environmental Valuation is
• A New Discipline
• Inevitably Approximate

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Non-market valuation techniques
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NPV of Sustainable Farming
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The Net Loss from Excess Pollution

MCA
MBA
Total Net Benefits of Emissions at E instead of
E0
E0
E
Emissions/Pollution
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The Impact of Technology

MCA
MBA
Total Net Benefits of Emissions at E instead of
E0
E0
E
Emissions/Pollution
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3. The Role of Market-Based Instruments in
Improving Efficiency

• Funds Available for Environmental Policy are
• Limited and Need to be Use Effectively
• Market-Based Instruments work by
• - Altering Incentives to Use Environmental Res.
  
• - Minimising the Cost of Reducing Pollution
• Governments Using M.B. Instruments
• Will Achieve Environmental Standards
• With Less Burden on the Economy

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COSTS of ABATEMENT under COMMAND and CONTROL

MCA1
MCA2
Permits/Emissions
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COSTS of ABATEMENT under COMMAND and CONTROL

MCA1
TOTAL COSTS OF ABATEMENT
MCA2
Permits/Emissions
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COSTS of ABATEMENT under FLEXIBLE MECHANISMS

MCA1
MCA2
MCA1MCA2
Permits/Emissions
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COSTS of ABATEMENT under FLEXIBLE MECHANISMS

MCA1
C gt A gt DECLINE IN TOTAL COSTS
MCA2
MCA1MCA2
C
B
A
Permits/Emissions
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4. Value and Rate of NaturalResource Use through
Time

• Nature Provides Resources
• Stocks (e.g. Petroleum) or Flows (e.g. Wind
  Energy)
• Stocks and Flows (e.g. Fisheries and Forests)
• Past Rates of Use of Natural Resources are
• Important for Present and Future Consumption
• Maximising the Value of Natural Resources depends
  on
• Efficient Management of the Rate Through Time
• Good Resource Management will be Key to
• the Long-Run Survival of the Economy

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Resource Price Equilibrium

• If Pt lt P0 . (1 i )t
• gtExtract Resource Today
• gt Rise in Todays Supply,
• Reduce Future Supply
• gt Fall in Todays Price
• Rise in Future Price
• If Pt gt P0 . (1 i )t then Invest for Future
• gt Rise in Todays Prices
• Fall in Future Prices
• Equilibrium Pt P0 . (1 i )t

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Linking Gordon Model with the Sustainable Yield
Function
YE3
Equilibrium/ Sustainable Yield Function
Catch, Yield
YE2
CE2
CE3
CE1
YE1
F1
Fish Population (F)
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Open-Access and Fishing Efforts

• Optimal Effort gt Creates Profits
• Profits Signal Incentive to Enter Market
• Fisheries are (often) Open-Access
• Invest in Fishing Equipment, Skills
• gt Starting Fishing
• gt Increase Total Effort (e.g. to E3)
• gt Decrease Sustainable Yield (e.g. to C3)
• So, Open-Access Fishing
• Can Lead to Over-Fishing

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5. Substitutability andIrreversibility of
Resources

• Important Questions are Raised
• To What Extent Can Natural Resources be
  Substituted?
• To What Extent Can Natural Resources be
  Substituted
• with Other Resources
• (e.g. Physical, Financial or Human Capital)?
• Natural Resources are Often Irreplaceable, so
• Decisions and Rates of Use may be Irreversible
• With Impacts on the Survival of the Economy

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The Process of Population Growth on Resource
Demands
Resource Limit?????
Resource Use
Dwellings
B
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Is an Optimal Growth Sustainable?
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The Economy, Society EnvironmentAn
Interdependent System
Raw Materials
ENVIRONMENT
ECONOMY
Pollution
Assimilative Capacity Amenities
Information Culture
Income Goods
SOCIETY
Raw Materials include Land, Air and Water,
Primary Products and Energy
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Sustainable Development

• Current Civilisation is Growing
• Pressures on Resources and Environment
• How Stable is Current Civilisation to Shocks?
• What Shocks?
• Internal Terrorism
• External Climate Change
• Reduce Vulnerability to Shocks
• Develop Rules for Sustainable Development

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Sustainable Development

• Rule 3 Weak Sustainability
• Constant Total Stock of Capital
• gt Substitution between Capital Stocks
• What rate of Substitution?
• Rising Rate as Capital Stock Declines (EKC?)
• Extremes No Substitution
• Rule 4 Strong Sustainability
• Constant Stock of Each Form of Capital

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Key Ideas

• Market Failures and Environmental Policy
• Environmental Valuation
• Market-Based Instruments
• Optimal Rate of Resource Use through Time
• Substitution of Natural and Other Capital

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Part 6

• Timetable for EC307 (DFL)

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Assessment

• Assessment 1 (Week 4) 10
• Assessment 2 (Week 7) 10
• Mid-Semester Test (Week 8) 10
• Assessment 3 (Week 12) 10
• Exam - 60

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Exam

• Part A
• Understanding of Concepts
• 1 of 3 sets of questions 30
• Part B
• Analysis of Environmental Resource Problems
• 2 of 4 sets of questions 70

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How You Will Get Good Grades

• Process the Information
• Listening/Reading Well
• Think about What your Taking-In
• Ask Questions to Yourself, to Me!
• Use the Tools of Economic Analysis
• Understand How to Use the Tools
• Use them to Solve Problems
• Be Creative/Imaginative Explore/Take Risks
• In How You Look at Issues
• In the Questions You Ask
• In the Solutions You Propose
• In Finding Interesting Points to Make

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