Environmental Economics

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Environmental Economics

• Prof. Dr. Katrin Rehdanz
• Department of Economics

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Environmental Economics, lecture 1

• Course aims and set-up
• Efficiency, optimality, sustainability
• The emergence of environmental and resource
  economics
• Economy-environment interdependence

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Contact

• IfW, Room A-308
• Tel [phone]
• Email katrin.rehdanz_at_ifw-kiel.de
• Web-site
• http//www.eare.wiso.uni-kiel.de/Lehre

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The Course

• A comprehensive introduction to the economic
  theory of the environment
• Further courses valuation, international
  environmental problems, resource economics
• Prior knowledge micro, macro, calculus
• Book R. Perman, Y. Ma, J. McGilvray, M. Common
  (2003), Natural Resource and Environmental
  Economics (3nd ed.), Longman, Harlow, ISBN 0 273
  65559 0

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The Lectures (1)

• 23.4. Sustainability
• 30.4. Ethics and the environment
• 7.5. Efficiency and optimality Market failure
  and public policy
• 14.5. Pollution control targets
• 21.5. Pollution control instruments
• 28.5. International environmental problems (1)
• 4.6.International environmental problems (2)

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The Lectures (2)

• 11.6. Pollution control - CCS
• 18.6. Environmental Demand
• 25.6. Environmental Valuation (1)
• 2.7. Environmental Valuation (2)
• 9.7 National accounting
• 16.7. Tbd
• Exam 23.7. or 30.7.?

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Three Themes

• Efficiency The allocation of goods and services
  by the market to rational agents is efficient
  only if there are no externalities
• Optimality Efficiency is a necessary but not a
  sufficient condition for optimality optimality
  includes equity
• Sustainability Taking care of posterity

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The Emergence of Environmental and Resource
Economics

• Classical economics
• Neo-classical economics
• Welfare economics
• Recent developments
• An alternative approach
• Towards interdisciplinary

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Classical Economics

• Adam Smith invisible hand of general
  equilibrium, social good by individual action
• Thomas Malthus growing population, diminishing
  returns to scale in agriculture
• David Ricardo diminishing returns to scale
  (intensive margin), diminishing quality
  (extensive margin)
• John Stuart Mill innovation, input substitution
  amenity value it is only in backward countries
  of the world that increased production is still
  an important objective (1857)

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Classical Economics -2

• John Stuart Mill (1857)
• There is room in world, no doubt, for a great
  increase in population, supposing the arts of
  life to go on improving, and capital to increase.
  ... The density of population necessary to
  obtain all of the advantages both of cooperation
  and of social intercourse ... has been
  attained. A population may be too crowded, though
  all be amply supplied with food and raiment.
  ... Nor is there much satisfaction in
  contemplating the world with nothing left to the
  spontaneous activity of nature

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Neo-Classical Economics

• Value is relative, determined in exchange,
  reflecting preferences, production costs and
  scarcity
• Demand and supply, partial and general
  equilibrium
• Absolute scarcity no longer seen as a problem, a
  reflection of the times
• Keynes macro-economics indirectly reinvoked
  interest in economic growth
• Earlier growth models no resource limits

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Welfare Economics

• Rigorous theory of social good
• Utilitarianism Social good is the weighted sum
  of individual good
• Pareto optimality At least as good for all,
  better for one (actual and potential)
• Marshall and Pigou Externalities and taxes if
  there are unintended and uncompensated
  consequences of one agent to the next, the market
  transactions need not be Pareto improving Pigou
  taxes can counteract this

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Environmental and Resource Economics

• In the 1960s and 70s, things changed Limits to
  Growth, Silent Spring, oil crisis, pollution,
  congestion, space travel
• First, natural resources are scarce
• Second, environmental services are valuable
• Third, there are significant environmental
  externalities

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Spaceship Earth

• Kenneth Boulding (1966)
• The shadow of the future spaceship, indeed, is
  already falling over our spendthrift merriment.
  Oddly enough, it seems to be in pollution rather
  than exhaustion, that the problem is first
  becoming salient. Los Angeles has run out of air,
  Lake Erie has become a cesspool, the oceans are
  getting full of lead and DDT, and the atmosphere
  may become mans major problem in another
  generation, at the rate at which it is filling up
  with junk.

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Economy-Environment Interdependence

• Economic activity depends upon and affects the
  natural environment
• Services that the environment provides
• Resource base
• Amenity service base
• Waste sink
• Life-support system

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Environmental andResource Economics

• Environmental and resource economics has now
  become a respectable field
• All US UK universities offer an education
  programme
• There are specialised journals, including JEEM,
  REE, ERE, EPA, LA while general journals and
  conferences have regular sessions on env. res.
  econ.
• Leading economists like Arrow, Bradford,
  Jorgenson, Nordhaus, Sachs, Solow

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Recent Developments

• (Evolutionary) game theory for resource
  management, international agreements
• Imperfect competition and endogenous
  technological development and diffusion for
  limits to growth, other long term issues
• Overlapping generations
• International trade and investment
• Behavioural economics for valuation

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An Alternative Approach

• Ecological economics
• Legitimate concerns, particularly about the
  application of outdated economic theory to
  environmental issues
• Lot of critique, little alternatives
• Half-baked ideas, but influential

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Towards Interdisciplinarity

• Environmental problems violate disciplinary
  boundaries
• Some economics models violate basic facts of
  physics, chemistry or ecology
• Increasing emphasis on multi-disciplinary work
• Towards new disciplines, interdisciplines and
  transdisciplines

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Three Fundamental Features

• This course Little attention to recent
  developments, alternative theories
• Focus on basic economic theory as applied to
  environmental and resource issues
• Property rights, externalities, efficiency and
  government intervention
• Central theme If we treat the environment as an
  economic good, a lot of environmental problems
  would be solved