class: center, middle, inverse, title-slide # Environmental Economics ## Introduction ### David Ubilava ### January 2021 --- # Economics and Environment *Environmental Economics* studies the role that the environment plays on the economy, the impact that the economy has on the environment, and the appropriate ways of regulating economic activity so that balance is achieved among environmental, economic, and other social goals. --- # Economics and Environment Environment impacts economies (people, really) in many ways. - The negative impact of warming climate on crop yields in the tropical region, and on winter resorts in the mountains of the temperate region; - The increased incidence of health problems due to air pollution, which results in more sick days and reduced productivity, in addition to increased morbidity and mortality. --- # Economics and Environment Economy also impacts the environment in a number of ways. - The inverted U-shaped relationship between per capita real income (or GDP) and environmental issues (e.g. pollution), better known as the *Environmental Kuznets Curve* or *EKC*. The general premise behind the EKC is that pollution levels first--increase--then--decrease with the progress from cleaner agrarian economy to polluting industrial economy to cleaner service economy. --- # Economics and Environment <div class="figure" style="text-align: center"> <img src="01-Intro_files/figure-html/ekc-1.png" alt="Environmental Kuznets Curve: An Illustration" width="90%" /> <p class="caption">Environmental Kuznets Curve: An Illustration</p> </div> --- # Externalities and Regulation The issue with environmental goods (or bads) - unlike most other goods and services - is that markets typically do not work to yield the *socially desirable* amount of output (e.g., the optimal amount of pollution). In fact, environmental bads - which consumers do not desire - typically are the by-product of supplying market goods. Thus, the demand for market goods is, in itself, an incentive for generating environmental bads. The goal (of an environmental economist) then becomes assessing the costs of and benefits from mitigating environmental bads (e.g., pollution control), and designing regulatory mechanisms to ensure the right balance between the costs and benefits is achieved. --- # Externalities and Regulation Two major questions arise with respect to pollution: - What is the socially desirable amount of pollution? - How can we get polluters to maintain their emissions at the socially desirable level? --- # Externalities and Regulation Determining the right amount of pollution involves assessing damages from pollution. Air pollution may affect population through multiple channels: - adverse health effects, - worry about adverse health effects, - increased susceptibility to illness, - illness itself. Many of the adverse impacts of pollution cannot be easily measured, which further complicates the issue. --- # Externalities and Regulation Faced with the prospect of having to reduce pollution levels, the firm has an array options: - end-of-pipe treatment, - modifying the production process, - modifying the product characteristics, - relocating the production activities, - buying permits to emit pollution. These options are costly, and a profit-maximizing firm (which also happens to be a polluter) will not voluntarily applying any of these options. How to motivate firms to pollute less? Even the most effective ways of doing this still involve some administrative/control costs. --- # Environmental Decision Making The process of environmental decision making consists of two major steps. - First, we must determine who the key stakeholder(s) are in the decision making. Usually, this is all or a subset of the people affected by the decision. For example, in the case of a publicly--owned forest, the potential stakeholders are: hunters, hikers, birdwatchers, people with a view of the forest, people who value the forest for wildlife habitat, timber producing companies, etc. - Second, we must determine what the objective is in the decision making. This can be profits or benefits accrued by producers, consumers, or the government. --- # Environmental Decision Making There is always an implicit or explicit viewpoint from which decisions are judged to be as 'good' or not. Often we take the viewpoint of the 'economic adviser' or the 'benevolent dictator' - an imaginary person who doesn't have preference for any particular groups of people (e.g., firms, consumers, government officials), but who is trying to suggest what's best for the society as a whole. --- # The Value of the Environment ## Biocentrism Biocentrism places the biologic world at the center of its value system. It makes a distinction between *instrumental value* and *intrinsic value*. The former pertains to the use value, the latter - does not. For example, something can still have intrinsic value, even when it is of no use otherwise. Biocentrism argues that all living things have intrinsic value, regardless of their instrumental value. Advocates of biocentrism often promote the preservation of biodiversity, animal rights, and environmental protection. --- # The Value of the Environment ## Anthropocentrism Anthropocentrism places the human at the center of its value system. It argues that the biological world and the environment exist to provide material gratification to humans. Strictly speaking, anthropocentrism places only instrumental value on the environment, which is different from *utilitarianism*, which emphasizes both instrumental and intrinsic values that people may attain from the environment. --- # The Value of the Environment ## Utilitarianism Utilitarianism is, also, a human--oriented ethical stance. It promotes actions that maximize happiness and well-being for all affected individuals. Utilitarianism (and anthropocentrism too, for that matter) doesn't ignore the environment or the biological world. But it promotes the environment most preferred by humans, as the only species to have ever contemplated what is or is not a good environment. --- # The Value of the Environment ## Sustainability Sustainability is a dynamic concept, and it refers to the capacity for the biologic world to coexist with human civilization. It allows the use of natural resources, but precludes their overuse. It allows the use of the environment for human needs, as long as the long-term health of the former is not jeopardized. The debate over sustainability has focused on its two aspects: (i) the degree to which 'natural capital' can be viably replaced by 'human capital,' and (ii) the obligation the present generation owes to future generations.