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Lecture Week 2

The document outlines the principles of economics and specifically focuses on environmental economics, which studies decision-making related to environmental resource management. It highlights three fundamental issues regarding environmental degradation, quality, and institutional design for improvement. Additionally, it discusses the design of environmental policy, economic criteria for policy evaluation, and the importance of efficiency, cost-effectiveness, and innovation incentives.

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Jamal Ud Din Qureshi
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9 views

Lecture Week 2

The document outlines the principles of economics and specifically focuses on environmental economics, which studies decision-making related to environmental resource management. It highlights three fundamental issues regarding environmental degradation, quality, and institutional design for improvement. Additionally, it discusses the design of environmental policy, economic criteria for policy evaluation, and the importance of efficiency, cost-effectiveness, and innovation incentives.

Uploaded by

Jamal Ud Din Qureshi
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Environmental

Economics
LECTURE WEEK-1
Economics-definition
Economics is the study of how and why individuals and groups make decisions about
the use and distribution of valuable human and nonhuman resources.
It is not solely the study of profit-making businesses making decisions in a capitalist
economy.
Economics is concerned with decision making by agents, which include consumers,
firms, government agencies, and non-profit organizations like environmental advocacy
groups.
One goal of economics is to understand what motivates particular decisions. This
knowledge is used to anticipate (or predict) what decisions agents will make in
particular contexts.
Environmental Economics-
definition
Environmental economics is the application of the principles
of economics to the study of how environmental resources
are managed.
Environmental economics is the study of agent’s decisions
that have environmental consequences and how to affect
these decisions to achieve environmental quality goals.
Types of economics
Economics is divided into microeconomics, the study
of the behavior of individuals and small groups, and
macroeconomics, the study of the economic
performance of economies as a whole.
Environmental Economics
Environmental economics draws from both sides, although
more from microeconomics than from macro economics. It
focuses primarily on how and why people make decisions
that have consequences for the natural environment. It is
concerned also with 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.
Three fundamental issues:
1. What is environmental degradation and why do we have it?
2. What level of environmental quality should we strive for?
3. How do we design institutions to improve and/or protect
environmental quality?
Why do we have environmental
pollution?
Some common but incomplete explanations:
a) Environmental degradation is the result of immoral or unethical
behavior.
-- If this is true then we all act immorally.
-- Environmental economics (and economics in general) does not pass
judgment on people. We only seek to understand their behavior
b) Environmental degradation is the result of the profit motive. Firms only care about the
bottom line, and hence, do not care at all about the
impacts their decisions have on environmental quality.
Continued…
c) Environmental degradation is the result of the lack of information.
“If we only knew how our actions affect the environment we would
change our behavior.”
This has occurred to a certain extent and better information is
probably a good thing, but it’s not enough of an explanation. Even if
we had perfect information about the consequences of our actions
we would still pollute.
The Design of Environmental
Policy
Suppose we are faced with a pollution problem. What can society do
to mitigate the problem?
As a matter of public policy, we would change the institutions that
people operate under in order to change the incentives they face.
Now think about a coal-fired power plant. And suppose we want to
make sure that its emissions into the air are limited. How do we do
this?
First, we have to decide how much emissions we are going to allow.
Then we have lots of options:
Continued…
a) “If this plant emits more than __ tons of sulfur dioxide a year,
industrial management can face fines or legal obligations.”
b) Require the management of the plant to install a particular device
that “scrubs” the emissions as they leave the smokestack.
c) Tell the plant managers, “You can emit as much as you want but
you must pay a tax for every ton of emissions.
Economic Criteria for Policy
Evaluation
(1) Efficiency -- the social benefit minus the social cost of a regulation
is as large as possible.
(2) Cost-effectiveness -- an environmental target is reached at least
cost.
If a policy is efficient it must also be cost-effective. Sometimes
it is not possible to determine an efficient policy, but we can
almost always design one that is a cost-effective.
Continued…

(3) Fairness -- How are the costs and benefits of a policy distributed among
income classes, races, geographical locations, industries, etc.?
In general, efficient or cost-effective policies are not necessarily fair.
(4) Incentives for innovation -- we would like environmental policies to
motivate sources of pollution to look for better (cheaper) ways to control
emissions and to motivate victims to look for ways to protect themselves.
(5) Enforceability -- Everything else equal, policies that are easier to enforce
are preferred.
We will focus on (1), (2), and (4).
Thanks

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