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Foreign Trade University

International Economics Faculty

ENVIRONMENTAL ECONOMICS

FTU 2023
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• Course Code: KTEE404

• Credit: 3
• Evaluation:
Attendance: 10%
Mid-term Exam (Group work): 30%
Final Exam: 60%
• Requirements:
Class Attendance: At least 75% of class lectures
Mid-term exam: At Least 4/10
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• Text book:
1. Field, Barry and Nancy Olewiler, Environmental
Economics-Updated 2nd Canadian ed, McGraw-Hill,
2005
2. Field, Barry and Field, Martha, Environmental
Economics-An Introduction, 7ed, McGraw-Hill, 2017
• Readings:
üJonathan M. Harris, Environmental and Natural Resource
Economics, A contemporary Approach, Houghton Mifflin,2nd
Edition 2006
üNguyen The Chinh, Kinh tế và Quản lý Môi trường, NXB
Thống Kê, 2003
üAcademic papers
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CHAPTER 1.
INTRODUCTION TO
ENVIRONMENTAL
ECONOMICS
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I. Environmental Economics study

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1. What is Economics?
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1. Economics
Economics is the study of the allocation of scarce resources.

• Note that the theories of economics can be applied to any

scarce resource, not just traditional commodities.

• Economics is not simply about profits or money. It applies

anywhere constraints are faced, so that choices must be

made.

• Economists study how incentives affect people’s behavior.

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2. What is Environment?
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2. Environment

• The sum total of all surroundings of a living

organism, including natural forces and

other living things, which provide conditions
for development and growth as well as of
danger and damage.
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3. Environmental Economics Definition

• Environmental Economics is the application of

the principles of economics to the study of how

environmental resources are managed.

• It is concerned with fundamental issue of

allocating scare resources among competing

uses.

⇒efficient allocation of environmental resources.

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According to T Eugine,

• “That part of economics which deals with inter-

relationship between environment and economic
development and studies the ways and means by
which the former is not impaired nor is the latter
impeded.”
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Environmental economics focuses on:

• How and why people make decision that have

consequences for the natural environment

• How economic institutions and policies can be

changed to bring these environmental impacts more

into balance with human desires and the needs of the
ecosystem itself.
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Why study environmental economics?

• Environment and Economics are two sides of the same

coin:

+Environmental conditions constrain economic activity

+Economic activity has environmental impact

+Economic activity → environmental problems

+Environmental problems → economic loss

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4. Environmental issues

• What major Environmental issues do we face in the

twenty first century?

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• https://www.youtube.com/watch?v=A0pB1qw8SMs
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• Pollution: Air, Water

• Global warming
• Overpopulation
• Natural resource depletion
• Waste disposal
• Climate change
• Loss of biodiversity
• Deforestation
• Urban sprawl
• Ozone layer depletion
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5. The Economic Approach

• Use a set of models and techniques rooted within the

standard neoclassical mainstream of economic thought to

apply economic concepts to the environment
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It deals with

• The allocation of renewable resources & non-renewable

resources

• Common property resources

• Public goods

• Externalities

• Property right
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• The Economic Valuation Approach seeks to put a price on

each natural resource and environmental input to the

economy
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Try to answer the question:

“Why do people behave in ways that

cause environmental destruction?”
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People pollute because:

• Lack of the moral and ethical strength

• It is the cheapest way they have of solving a certain very

practical problem: how to dispose of the waste products

remaining after production and consumption of a good.
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To solve the problem of people polluting

environment
• Change the behavior

• An “Economic incentive”

What will we study is

• How incentives processes work; and

• How to restructure them so that people will be led to make

decisions and develop lifestyles that have more benign

environmental implications.
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II. Sustainability of our Environment and

Economy

1. Trade-offs and Sustainability

2. The Environment and Growth: Sustainability over time

3. The Environmental Kuznets Curve

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1. Trade-offs and Sustainability

• Production Possibility Frontier (PPF)

• Community Indifference Curve (CIC)

• Community’s Preference
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Production–Possibility Frontier (PPF)

• Vertical axis is
aggregate economic
output of an economy
• Horizontal axis is
environmental quality

PPF is a way of diagrammatically depicting the choice faced by a

group of people between two desirable outcomes- output of
goods and services and environmental quality
Production–Possibility Frontier (PPF).
• Point "C" lies below the curve,
denoting underutilized
production capacity.
• Points "A", "B", lie on the curve,
denoting efficient utilization of
production and environment.
• Point "X" lies outside the curve,
representing an impossible
output.

Below ē, the economy could not produce any more output since
there are too few natural resources to sustain production.
Emax is the maximum level of environmental quality since there is
no goods production at all.
Assume a concave production possibility frontier. Suppose that society
decides to increase the production of market goods by 10,000 units, and that
as a result environmental quality falls by 10 units. If a further increase of
10,000 units of market goods is sought, we can expect that environmental
quality will:

a) fall by 10 units. Environmental

Quality
b) fall by less than B
10 units.
ΔEQ A
c) fall by more
♬ than 10 units. PPF
d) increase by less
than 10 units.

Market Goods

ΔG 2
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 Community Indifferent Curve (CIC) and
Community’s Preference
The community indifference curves
describe how community evaluates
trade-offs between Economic
goods and Environment quality

Each point on a CIC shows

combinations of environmental
quality and goods perceived by
community to provide a given level
of utilities

On the utility possibilities curve,

Community’s preferred point is the
point at which the community
indifference curve is tangent to the
PPF.
2. The Environment and Growth: Sustainability
over Time

Sustainability is the choice for what happen to the

economy and environment over time

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 PPF in 50 years (Pessimistic scenario)
• With rapid growth of
population, depleted large
stocks of natural
resource, high pollution
• Humanity is in danger of
overshooting the earth’s
capacity to sustain
economic activity
• Keep production at c2,
environmental quality falls
to e3

Pessimistic Scenarios: PPF in the next 50 years

 PPF in 50 years (Optimistic Scenario)
• Future technological c
progress to tap new 4
source of energy, control c4

pollution problem and c2

overcome any resource

limitations.
• At c2-the same level of
goods in the base year,
we have e4
environmental quality
rather than e2
(b) Optimistic Scenarios: PPF in the next 50 years
 PPFs in Developed and Developing countries

• Many argue that

developing countries
cannot afford high levels of
environmental quality.
• Perhaps due to past
resource exploitation,
population pressure, less
sophisticated technology
• Output and environmental
quality appear to be
substitutes for developing
country
3
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3. Environmental Kuznets Curve (EKC)

• The environmental Kuznets curve is a hypothesized

relationship between environmental quality and economic

development: various indicators of environmental
degradation tend to get worse as modern economic growth
occurs until average income reaches a certain point over
the course of development
 The EKC hypothesis

EKC –
Environmen
tal Kuznets
Curve
The EKC
• It has been hypothesised that a relationship like an inverted U shown
in Figure in previous slide holds for many forms of environmental
degradation.

• If the EKC hypothesis held generally, it would imply that instead of

being a threat to the environment as is often argued, economic
growth is the means to environmental improvement.

• That is, as countries develop economically, moving from lower to

higher levels of per capita income, overall levels of environmental
degradation will eventually fall.

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III. SUSTAINABLE DEVELOPMENT (SD)

What is the difference between

Economic Growth and
Economic Development?
Measuring Growth Rates

• Measuring Economic Growth Rates: GDP, GNP (scale &

growing rate)

• Measuring Economic Development: The improvement in

quality and quantity

Definition of SD

"Sustainable development is development that meets the

needs of the present without compromising the ability of
future generations to meet their own needs”
It contains within it two key concepts

• The concept of needs, in particular the

essential needs of the world's poor, to which

overriding priority should be given; and

• The idea of limitations imposed by the state of

technology and social organization on the

environment's ability to meet present and future
needs.
The three dimensions

• Sustainable
.
Development provides an
essential introduction to the complex
relationships between the economy, society
and the environment
Balance of 3 dimensions
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The Sustainable Development Goals

(SDGs)
Group projects: group formation

ØFirst, figure out one or more environmental problems

(local, national or global) that you care about.
ØThen find a group of 10-11 students with similar
interests.
ØYou are going to work together to do a research project
related to one specific environmental problem.
ØFor example, you could study "air pollution in Hanoi" or
"water pollution from textile factories near Hoi An".
Ø All groups must have a different environmental
problem.
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Timeline
Output Deadline

Create Group member list (name, Friday, week 1 (11/8)

email) and group leader on a
spreadsheet

Register your group’s topic on the Friday, week 2 (18/8)

spreadsheet

Complete the outline of the report Friday, week 4 (1/9)

and post the google drive link to the
spreadsheet
Group Presentation Last week of the course

Submit the final report Last day of the course

Group Report
nRequirements:
ü The report should provide a critical evaluation of
an environmental problem, with particular
attention to its economic aspects.
üThe report should illustrate that you can apply
some of the concepts and methods developed in
class to a real world problem.
üIt should not be limited to a simple description of
the issue, but should include your own economic
analysis.
Outline of the report

1. Introduction of the Environmental Problem

2. Economic Reason behind the Environmental
Problem (what are the economic reasons
behind such a problem; what is the economic
explanation) (hint: externality, public good,
asymmetric information, etc; see, Lecture 2,3)
3. Policy implications (what is being done;
examples from anywhere in the world)
Topics may be one of the following headings
• Energy
• Water

• Agriculture
• Biodiversity
• Air pollution

• Acid rain
• Transportation
• Solid waste

•…
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https://www.youtube.com/watch?
v=WmVLcj-XKnM&t=2s