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Chapter 1

This chapter introduces environmental economics, focusing on how economic principles apply to the management of environmental resources and the decision-making processes that impact the ecosystem. It discusses the importance of incentives, the relationship between economic growth and environmental quality, and the need for effective policy design to address environmental issues. The chapter emphasizes the goal of using economics to achieve sustainable environmental improvements.

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linyun jiang
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4 views

Chapter 1

This chapter introduces environmental economics, focusing on how economic principles apply to the management of environmental resources and the decision-making processes that impact the ecosystem. It discusses the importance of incentives, the relationship between economic growth and environmental quality, and the need for effective policy design to address environmental issues. The chapter emphasizes the goal of using economics to achieve sustainable environmental improvements.

Uploaded by

linyun jiang
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Chapter 1

What is Environmental
Economics?

© McGraw-Hill Education 1
Environmental Economics

• Economics: study of how and why individuals and groups make


decisions about the use and distribution of valuable human and
nonhuman resources (Scarcity => choices/behaviour)

• Environmental Economics: application of economic principles to the


study of how environmental resources are managed
• How and why people make decisions that have consequences for
the natural environment
• How economic institutions and policies can be changed to bring
these environmental impacts more into balances with human
desires and the needs of the ecosystem itself

© McGraw-Hill Education 2
Economic Analysis

• We use analytical models


• simplified representation of reality
• isolate and focus on the most important elements of a situation
• express connections between different factors involved in
environmental quality issues

• Positive economics: study of “what is”


• Understand how an economic system actually operates; how
people make decisions in different types of circumstances

• Normative economics: study of “what ought to be”


• Involves value judgments
© McGraw-Hill Education 3
Moral Approach

• Moral approach: Environmental degradation is the result of human


behaviour that is unethical or immoral
• Why people pollute? Because people lack the moral and ethical
strength to refrain from the type of behaviour that causes
environmental degradation
• How to reduce pollution? Increase the general level of
environmental morality in the society – moral reawakening and
rebuilding

© McGraw-Hill Education 4
Economic Approach

• Economic approach: Environmental degradation is the result of


human behaviour as optimal choices within the economic system
• Incentives matter – benefit vs. cost, in terms of money, time,
reputation, guilt, risk and uncertainty, altruism, regret

© McGraw-Hill Education 5
The Importance of Incentives

• Why people pollute? Because it is the cheapest way to dispose of


waste products remaining after production or consumption
• People make these decisions within a certain set of economic and
social institutions (public/private organizations, laws, practices)
• Institutions structure the incentives that lead people to make
decisions

• Environmental economics studies


• How this incentive process works
• How incentives can be restructured so that people will be lead to
make decisions and develop lifestyles that have more benign
environmental implications

© McGraw-Hill Education 6
Incentives: A Household Example

• An incentive is something that attracts or repels people and leads


them to modify their behaviour in some way – benefit vs. cost
• An economic incentive is something in the economic world that
leads people to channel their efforts at economic production and
consumption in certain directions
• Example: Pay-as-you-throw (PAYT), unit pricing, gives people
incentives to reduce solid waste and increase recycling

© McGraw-Hill Education 7
Incentives and Climate Change

• Greenhouse effect => climate change: a global problem


• How to reduce emission of greenhouse gases such as carbon dioxide
(CO2)?
• Conventional “command-and-control” policies (Ch11):
• Laws/regulations and enforcement (inspections, monitoring, fines)
=> compliance
• Incentive-based policies:
• Emission charges/taxes (Ch12) – Example: carbon tax
• Market-based trading programs (Ch13)

© McGraw-Hill Education 8
EXHIBIT 1.2 Carbon Taxes Around the World

© McGraw-Hill Education 9
The Design of Environmental Policy

• Two criteria of environmental policy:


• Efficiency (Allocative efficiency): appropriately balance the
benefits and costs of environmental improvements
• Cost-effectiveness (Productive efficiency): get the most pollution
reduction for the money spent

• A problem with policy design - perverse incentives: incentives


created by a policy that actually work against the overall objectives of
that policy

© McGraw-Hill Education 10
Macroeconomic Questions: Environment and Growth

• What is the relationship between economic growth and environmental


quality? A simple trade-off?
• Environmental Kuznets Curve
• “Some pollution increases during the early stages of a country’s
development and then begins to diminish as countries gain
adequate resources to tackle pollution problems.”
• At low incomes, people tend to value development over
environmental quality, but as they achieve greater wealth, they are
willing to devote greater resources to environmental quality
improvements.

© McGraw-Hill Education 11
EXHIBIT 1.5 Economic Growth and the Environment

Access the text alternative for slide images.


© McGraw-Hill Education 12
Benefit-Cost Analysis

• For both public policy and business, effective decision-making


requires adequate information about the consequences of the
decisions
• Benefit-cost analysis – Ch6, 7, 8
• Political controversy on many environmental issues (e.g. Pipeline
dispute between Alberta and BC)
• One side has major concern on benefits
• The other side is primarily concerned with costs
• We need to consider BOTH.

© McGraw-Hill Education 13
EXHIBIT 1.6 Benefits and Costs of Reducing Nitrogen Oxide
(NOx) Emissions

Access the text alternative for slide images.


© McGraw-Hill Education 14
International Issues

• Scope of environmental problems can be


• local, regional – within the same country
• International – across national borders
• global – earth (e.g., destruction of the earth’s protective layer of
stratospheric ozone, global climate change)
• Dealing with global environmental issues requires international
cooperation – Ch19
• 1997 Kyoto Protocol
• 2015 Paris Agreement

© McGraw-Hill Education 15
TABLE 1.1 CO2 Emissions per Capita, Selected Countries

© McGraw-Hill Education 16
Summary

• This chapter provided an overview of environmental economics


• Many of the concepts developed here will be explored throughout this
course
• How to address the issues raised by external costs
• The importance of incentives in influencing choices and behavior
• The trade-offs we face between the production of goods and
services and environmental quality
• The challenges of developing effective policies to address major
issues such as global climate change
• Our overall objective is to find ways to use economics to achieve a
cleaner, healthier environment that can be sustained over time

© McGraw-Hill Education 17

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