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Module (2) Environmental (neoclassical)
economics
Traditional paradigm of neoclassical economics
monetary evaluation Cost-Benefit
Analysis Techniques of monetary evaluation for
the environment. Polluter pays
principle Negative externalities and the
reality The environmental Kuznet curve
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Traditional paradigm of neoclassical economics
monetary evaluation
Monetary evaluation gives a clear quantitative
result (the product)... Based on the model of
Pareto efficiency and on Kaldhor-Hicks potential
compensation But the latter principle generates
distributional issues if in a project the rich
gets richer more than the poor gets poorer, it
is then economically feasible to do the project,
no matter if the compensation happens. Distributi
onal issues often are not an economists problem.
The decision-maker should worry about them.
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Cost-Benefit Analysis
Decision making is based on CBA. i.e. for
evaluation of alternative projects at the micro
level, or for the implementation of a government
policy (environmental tax, emission limits) at
the macro level. Effective CBA is related to the
identification of total economic value this is
expressed only in monetary terms. TEV Direct
use value indirect use value option value
existence value USE VALUES NON-USE
VALUE Environmental economics tries to
internalize costs that are not present in the
market by using methodologies to price them.
Internalization of externalities ...but the
process to get the number has some distorsions...
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Techniques of monetary evaluation for the
environment
Willingness to pay/willingness to accept Travel
cost method Hedonic pricing Often they simply
dont work how far can we force the citizen to
give a price? Marketcentric view. CBA has more
sense in a context where the market is dominant
(i.e. a western city) than in a context where
market mechanisms are highly absent (i.e. the
tropical forest)
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One example of an environmental tax
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Polluter pays principle and negative
externalities
Based on the Coase theorem, that is to clarify
property rights example of a factory polluting
the waters upstream from a bathing place. Bathers
have to travel to another place. Theorem says
that Pareto efficiency can be reached by market
forces. The task is to define who to give
property rights, then compensation of negative
externalities will be paid if you have the
right. The polluter pays principle says that the
rights are given for a clean environment to the
users. Firm has to pay for the negative
externalities. For example the price of
travelling to another place. Two cases 1.
compensation gt increased revenues from pollution
? stop pollution (no production, or find a clean
technology)2. compensation lt increased revenues
from pollution ? people are paid to go bathing to
another place Is internalizing negative
externalities enough? If bathers are totally
compensated but the ecosystem dies is enough?
Paying the price in money is a necessary
condition but might not be a sufficient
condition. This is a marketcentric and
anthropocentric approach.A more radical view is
an ecocentric approach.
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But, in the reality
A final comment in the real world, the
acceptance of this principle would be an
improvement in the ecological crisis. Market
forces would reduce the output level of
pollution. Polluters do not pay for negative
externalities (First problem the necessary
condition is not respected) Sometimes the value
of life is closely connected to the ecological
value, especially for those people that live
directly in contact from the earth, like tribal
people, traditional people and rural people
what is your willingness to accept for losing
the right of use of your land? In other cases
more close to us there are problems of
quantifying the price. mainly these are issues of
ethical nature, but neoclassical economics models
do not accept ethics, i.e. the value of life
imagine for example the ethical non-sense of such
a question what is your willingness to accept
for the death of a friend or a relative? Often
insurance value of life is a monetary indicator
for the price of life, thus discriminating
between rich and poor people. Of course there is
no price because other values exist. Only the
homo oeconomicus would be able to give us an
answer, but he is only an invention of
economists. Reality is different from the
perspective of economics models based on only
money value. Ecological and human values are
not included in the reduccionism of these
models Ecological economics tries to address
these issues because they are part of the reality
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Environmental Kuznet Curve
Some environmental economists are optimistic
about the future, under the Environmental Kuznet
Curve hypothesis. What is the relationship
between economic growth and environmental
degradation? That of an inverted U shaped curve
environmental degradation rises with income,
untill a point where, as income grows,
willingness to have a cleaner environment grows,
which implies a better environment. This issue is
connected to the supposed dematarialization of
the economy and to the consideration of the
environment as a luxury good. But in reality
there is no evidence yet of dematerialization And
the NIMBY (Not-in-my-backyard) perception
displaces the environmental loads to poorer
countries Finally, even if dematerialization will
occurr, who guarantees us that the outcome will
not be a The Matrix like scenario?
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Environmental Kuznet Curve
Paper from EKC Vienna Wuppertal report pag. 66