Introduction to

1
Introduction to
Environmental and Resource Economics Course
EC307 (DFL)

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

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Part 1

• Course Outline

3
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

• Assignment 1

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MCA
MBA
Total Benefits of Emissions at E instead of E0
E0
E
Emissions/Pollution
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MCA
MBA
Total Costs of Emissions at E instead of E0
E0
E
Emissions/Pollution
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The Optimal Level of Pollution

• Optimal Level Not Zero Pollution
• 1. No Pollution gt No Economic Activity
• No Goods gt Reduction in Utility
• 2. Use Very Expensive Ways to Reduce Pollution
• Very High MCA
• gt Polluter (and Society) Value Highly
• the Right to Pollute (at Low Levels of Poll.)
• Not Unrestricted Pollution
• People Suffer Highly (at High Levels of
  Pollution)
• Very High MBA

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MCA (Marginal Abatement Cost)
MBA (Marginal Benefits of Abatement)
E0
E
Emissions/Pollution
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The Optimal Level of Pollution

• Optimal Pollution Level where MCA MBA
• If Pollution gt Optimal Level gt Inefficiency
• because MBA gt MCA
• gt Societys Values Reductions gt Values
  Pollution
• gt Improve Total Net Benefit by Reducing
  Pollution
• If Pollution lt Optimal Level gt Inefficiency
• because MBA lt MCA
• gt Societys Values Pollution gt Values
  Reductions
• gt Improve Total Net Benefit by Increasing
  Pollution

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MCA
MBA
Total Net Benefits of Emissions at E instead of
E0
E0
E
Emissions/Pollution
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FIRMS DECISION ABOUT PERMITS

MCAi WTPi or Demand for Permits
Allocated Permits to Firm i
Si
Ei0
Permits/Emissions
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The Market for Tradable Permits Incentives to
Buy and Sell Permits

• Compare Current MCAij with Permit Price
• If P(Q) gt MCAij
• gt Cheaper to Reduce Pollution
• and Sell Permits
• If P(Q) lt MCAij
• gt Cheaper to Buy Permits

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INDIVIDUAL DECISION ABOUT PERMITS

MCAi or Demand
Allocated Permits to Firm i
Permit Price
Reduce Emissions
Sell
Si
Ei1
Ei0
Permits/Emissions
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INDIVIDUAL DECISION ABOUT PERMITS

MCAi or Demand
Allocated Permits to Firm i
Buy
Reduce
Permit Price
Si
Ei0
Ei1
Permits/Emissions
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The Market for Tradable PermitsEquilibrium
Price and Quantity

• MCAi is firms Demand/WTP for Permits
• Add up All Firms MCAi
• Market Demand for Permits
• Equilibrium
• where Demand Supply
• Excess Demand gt Raise Price of Permits P(Q)
• Excess Supply gt Reduce Price of Permits P(Q)

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Low Price Excess Demand

• If the Current Price is Below P,
• What Happens?
• Suppliers Incentive to Reduce Quantity Supplied
  Down the Supply Curve
• Consumers Incentive to Increase Quantity
  Demanded Up the Demand Curve
• Excess Demand
• Supplier Power

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Supplier Power Drive-Up Prices

• Excess Demand Supplier Power
• Suppliers can Threaten to Find Consumer Willing
  to Pay More
• Consumers Forced to Pay More to Consume
• Drive-Up the Prices
• Some Consumers No WTP More
• Quantity Demanded Falls
• Quantity Supplied Rises
• Excess Demand Rising Prices
• Until Equilibrium No Excess Demand

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Price ( per banana)
Demand
Supply
2. Rise in Quantity Supplied
3. Fall in Quantity Demanded
P Equilibrium Price
1. Supplier Power Drive-Up the Price
P(1) Low Price
Quantity (no. of Bananas)
Q(D1) Excess Quantity Demanded
Q(S1) Insufficient Quantity Supplied
Q Equilibrium Quantity
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Government Failures

• Government may be requested to
• Improve Environmental Quality
• But Many Factors make it Hard
• Costs of Information and Decision-Making
• Opportunity Costs (Each Policy has Many Effects)
• Other Market Failures
• Self-Interest
• Influence of Pressure Groups (Rent-Seeking)
• Assess whether Government Policy
• Better than No Policy?

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Part 3

• Timetable for EC307 (DFL)

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Assessment

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

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How You Will Get Good Grades

• Process the Information
• Listening/Reading Well
• Think about What your Taking-In
• Ask Questions Yourself, then me!
• Use the Tools of Economic Analysis
• Understand How to Use the Tools
• Use them to Solve Problems
• Be Creative/Imaginative
• Be Adventurous/Explore
• Think Differently
• Have FUN in EC307

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Part 3

• Key Ideas from Environmental and Resource
  Economics

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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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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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3. The Role of Market-Based Instruments in
Improving Efficiency

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

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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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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