ESP 162: Environmental Policy

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ESP 162 Environmental Policy

• Mike Springborn
• Department of
• Environmental Science Policy

Image http//soulveggie.blogs.com/photos/uncatego
rized/hexglobesm021_1.jpg
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Overview

• Introductions
• Review syllabus/website
• First assignment
• Todays discussion
• What is this course? What is public policy
  analysis? What is economics? Environmental
  economics? The place of economics in policy?
• The discipline of economics and subfields of
  environmental and resource economics
• Focal economic ideas relevant for policy
• Preview readings
• Experiment

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Class Website
http//www.des.ucdavis.edu/faculty/Springborn/cour
ses/esp162/index.html
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Course readings

• KO Course textbook, Keohane and Olmstead
• Additional articles are hyper-linked and should
  require your UC Davis username and password.

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Homework listed on website
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Writing for ESP 162

• See notes on website
• Writing for ESP 162

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Conceptual overview map on the website
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Public Policy Analysis

• (Websters dictionary)
• Policy
• A definite course or method of action selected
  from among alternatives and in the light of given
  conditions to guide and usually determine present
  and future decisions.
• A projected program consisting of desired
  objectives and the means to achieve them.
• Analysis
• Separation or breaking up of a whole into its
  fundamental elements or components or component
  parts.
• A detailed examination of anything complex made
  in order to understand its nature or to determine
  its nature or to determine its essential
  features, through a study.

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Public policy analysis

• MUNGER, Analyzing Policy (New York, NY WW
  Norton, 2000), p. 6
• Policy Analysis is the process of assessing, and
  deciding among alternatives based on their
  usefulness in satisfying one or more goals or
  values.
• WEINER AND VINING, Policy Analysis (Upper Saddle
  River, NJ Prentice Hall, 1998), p. 27
• Policy Analysis is client-oriented advice
  relevant to public decisions and informed by
  social values.
• MAJONE, Evidence, Argument, Persuasion in the
  Policy Process, (New Haven CT Yale University
  Press, 1989) p. 7
• The job of analysts consists in large part of
  producing evidence and arguments to be used in
  the course of public debate. 

Source Perreira (2009) http//www.unc.edu/perre
ira/guide1.html
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What is economics?

• Allocation science the study of how society
  allocates should allocate scarce resources
• Some concepts will provide useful tools for
  solving problems (e.g. cost-benefit analysis to
  compare alternatives)
• others will be useful for making broad
  philosophical arguments.
• "A refuge for scoundrels?
• Descriptive and prescriptive
• Descriptive (positive) what is, what will
• Concerned with causality understanding how the
  world works
• Prediction forecasts about what will happen
  under different conditions
• Prescriptive (normative) what should be
• Concerned with efficiency (equity).

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Environmental economics

• The application of economic principles to the
  study of how scarce environmental resources are
  (descriptive) and should be (prescriptive)
  managed.
• Major concerns
• (1) failures of the market system associated with
  environmental (public) goods, and
• (2) evaluate alternative policies designed to
  correct such failures
• Failures typically occur when human activity
  leads to costs and/or benefits to others which
  are not included in prices paid, i.e. when there
  exist externalities

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Environmental Economics, a composite field

• Microeconomics (core-general theory) the
  behavior of consumers (individuals) producers
  (firms) interacting in markets.
• Public economics how government policies (do and
  should) effect the economy and individuals
  (welfare economics, public goods, externalities,
  taxation).
• Macroeconomics (core-general theory) the
  economy as a whole with an emphasis on
  understanding growth (expansion/depression),
  interest rates and employment
• Industrial organization the behavior of firms
  under imperfect competition
• Political economy behavior of actors in
  government
• Agricultural economics behavior of the
  agricultural sector
• International trade international exchange
  (patterns of imports and exports) and the
  movement of production between countries.
• Development economics issues of poverty and
  industrialization in developing countries.
• Game theory the behavior of individuals/firms in
  the economy who act strategically (make choices
  accounting for the expected actions of others).

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• Resource economics the study of how society
  allocates scarce natural resources, usually
  changes to a stock.
• either harvest/extraction or emission of resource
  stock or stock pollutant.
• Major concern problems following from open access

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Why study environmental/resource economics?

• Many causes and consequences of environmental
  degradation and poor natural resource management
  are economic.
• "Market-based" approaches to resource management
  and environmental regulation are increasingly
  common at all levels of government.
• Economics plays a central role in environmental
  policy debates.
• Concerns about the cost burden of environmental
  policy
• ? a central hurdle to more stringent policy
• Knowing the basic principles enables you to
  formulate or refute economic arguments.

Keohane Olmstead, 2007
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Key ideas in economic thinking

• Economic rationality
• behavior that is optimal (consistent with values
  and objectives of the decision maker given
  available information). Economic agents (people,
  firms, etc) are optimizers who make choices to
  maximize their own payoffs. (Hackett, 2006, pg.
  8)
• Demo/experiment Ultimatum game
• Economic incentives
• forces in the economic world that attract or
  repel people, causing them to change their
  behavior (e.g. in production or consumption) in
  some way.
• Without incentives that cause decision makers to
  feel the true costs of their actions, few will
  voluntarily account for all the effects of their
  choices.
• Is this a problem of the free market prevailing?

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Key ideas in economic thinking
Cost/benefit and policy analysis

• Opportunity cost
• The true cost of an action is given by what is
  forgone by taking the action.
• Economics focuses on the problem of allocating
  scarce resources among alternative uses.
  Allocation to one use means forgoing allocation
  to another use or opportunity creating an
  opportunity cost.
• Examples
• If 1,000 is used for some purpose (e.g. public
  project) instead of leaving the money in the
  bank, the opportunity cost is the 1,000 plus the
  interest that money would have earned if it had
  not been spent.
• If a city builds a hospital on a piece of public
  land the opportunity cost is the forgone value of
  putting the land to its highest alternative use,
  perhaps a school or maybe simply selling the
  property to developers.
• Valuation
• Willingness to pay (e.g. for environmental
  quality), willingness to accept (e.g. for
  environmental degradation)

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Key ideas in economic thinking
Cost/benefit and policy analysis

• Scarcity
• Something is said to be scarce if the following
  is true If it were offered to people at no cost,
  more would be wanted than is available.
• Trade-off
• The situation when something must be given up to
• obtain something valued. (No free lunch.)
• E.g. More goods ? more pollution.
• Devoting resources (money, labor, time, etc) to
  issue A means
• we cant focus those resources on issue BZ.
• Externality
• a cost or benefit incurred by a party not
  involved in the transaction (external costs,
  external benefits)
• Market participants (demanders and providers) do
  not bear all of the costs or reap all of the
  rewards from the transaction.
• Demo/experiment public good provision game

Delhi Sands Flower-Loving Fly, San Bernadino
County
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Criticism of mainstream economics
Prickly City, 09/02/09
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Criticism of mainstream economics

• The market system is a closed circular flow
  between production and consumption, with no
  inlets or outlets.
• Natural resources are separate and distinct
  from a closed market system
• and thevalue of these resources can be
  determined only by the dynamics that operate
  within this system.
• The costs of damage to the external natural
  environment by economic activities must be
  treated as costs that lie outside (or) cannot be
  included .
• The external resources of nature are largely
  inexhaustible (or) can be replaced by other
  resources or by technologies .
• There are no biophysical limits to the growth of
  market systems.

• The Economist Has No Clothes
• Unscientific assumptions in economic theory are
  undermining efforts to solve environmental
  problems
• by Robert Nadeau
• Scientific American, April 2008.

Illustration by Matt Collins
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Only as objective as the practitioner.

• A 2009 e-mail, written by the U.S. Chamber of
  Commerces senior health policy manager proposes
• spending 50,000 to hire a "respected economist"
  to study the impact of health-care legislation
• "The economist will then circulate a sign-on
  letter to hundreds of other economists saying
  that the bill will kill jobs and hurt the
  economy.
• We will then be able to use this open letter to
  produce advertisements, and as a powerful
  lobbying and grass-roots document.
• Source Health bill foes solicit funds for
  economic study Michael D. Shear, Washington
  Post, Monday, November 16, 2009

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Sacred cows?

• Supposed economic sacred cows
• free trade, markets
• Economists are perceived to view with suspicion
• most efforts to intervene in the markets, e.g.
• setting a minimum wage
• instituting industrial policy
• regulating prices
• analyses that do not rely on mathematical
  modeling.

Material and quotes from In Economics
Departments, a Growing Will to Debate Fundamental
Assumptions, Patricia Cohen, New York Times,
7/11/07.
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Sacred cows?

• Philip J. Reny (chairman of the economics
  department at the University of Chicago the
  temple of free-market economics)
• theory and methods are taught to avoid personal
  biases and conclusions that arent found in the
  data
• (Like any science) the field changes course
  slowly It requires evidence, and if evidence is
  there, it will accumulate and positions will
  move.
• Dani Rodrik (economist, Kennedy School of
  Government, Harvard)
• I fall into the methods of the mainstream, but
  not the faith.
• Faith the belief that more markets and free
  trade are always good and government regulation
  is always bad.
• Most mainstream economists think that voicing any
  skepticism or doubt provides ammunition to the
  barbarians

Material and quotes from In Economics
Departments, a Growing Will to Debate Fundamental
Assumptions, Patricia Cohen, New York Times,
7/11/07.
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Value systems Efficiency, distribution, ethics
and morality

• How do we decide what decision should be
  preferred by society?
• Pareto optimality (make no one's slice smaller)
  --gt "potential" Pareto optimality, Kaldor-Hicks
  criteria (make the pie as big as possible)
• Ethics/morality Is environmental degradation
  intrinsically wrong? Why is it okay to advocate
  market-based instruments (e.g. cap and trade) to
  control environmental degradation but we find the
  idea of regulating child pornography with such an
  approach abhorrent? (Sterner, 2003, p. 198)
• For an overview of ethics and value systems for
  environmental economics, see Hackett (2006,
  Chapter 2) ways to distinguish a "bad" economy
  from a "good" one, judging actions on intrinsic
  "rightness" versus measureable costs and
  benefits, determining the proper balance between
  individual self-interest and the common good.)
• Hackett, Steven (2006). Environmental and
  Natural Resources Theory Policy and the the
  Sustainable Society, 3rd edition, M.E. Sharpe,
  Inc., New York, NY.

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Course Outline, Part I

• Analytical Tools What is a market and how does
  it function? What economic and environmental
  outcomes are desired? When is there a role for
  policy (government intervention), i.e. when does
  an unregulated market fail to generate the
  desired outcome?
• Benefits and Costs, Demand and Supply
• Market Equilibrium and Economic Efficiency.
• Introduction to market failure externalities,
  public goods and the tragedy of the commons.
• Applying analytical tools to environmental
  quality Socially optimal pollution control
• Benefit Cost Analysis
• Overview dynamic issues
• Measuring Benefits
• Measuring Costs
• Application Climate Change
• Application Arsenic

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Course Outline, Part II

• Policy for Market Failure
• Introduction and criteria for evaluation
• Decentralized Policies
• Command and Control Strategies
• Market Based Strategies
• Price instruments (e.g. taxes)
• Quantity instruments (e.g. cap and trade)

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Interesting blogs

• http//www.marginalrevolution.com/
• Tyler Cowen (George Mason University)
• Alex Tabarrok (George Mason University)
• http//www.env-econ.net/
• Tim Haab (Department of Agricultural,
  Environmental and Development Economics at The
  Ohio State University)
• John Whitehead (Department of Economics at
  Appalachian State University)

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For lab on Wednesday

• Classroom experiment  
• Supply and demand (Experiment 1) 
• Reading material posted on class website
• Theodore C. Bergstrom and John H. Miller,
  Experiments with Economic Principles
  Microeconomics, 2nd edition, Irwin McGraw-Hill,
  2000.
• Read pages 3-6 the first three pages of the PDF
  before lab.