Environmental Economics – ECON 2390Course Orientation

January 18, 2010

2

Introduction to the course

This is a course in environmental economics. We will apply the tools of micro-economic

policy to questions of pollution control, climate change, environmental quality, bio-diversity, etc.

We seek to develop policy rooted in principles of economic efficiency and fairness (equity)

Analysis will replace opinion

3

Class Etiquette

The only rule is “do not disturb your colleagues while in class.”

If you cannot be without your cell turned on or if you must remain in constant text communication with your 200 close friends, please seek therapy.

During exams all cell phones, MP3 players, and other devices will remain off and stored. Only conventional (non-phone) electronic calculators will be allowed.

Please be completely familiar with the rules on academic honesty

Plagiarism and Cheating http://webapps.cc.umanitoba.ca/calendar10/regulations/plagiarism.asp

Impersonation at an examination

http://webapps.cc.umanitoba.ca/calendar10/regulations/exams/exams_personations.asp

4

Managing the course

Read ahead. Plan on reading the assigned chapters at least twice. Make sure you understand and can explain the key

terms at the end of each assigned chapter. The note (available through my web site are

supplementary and eligible for the exam). Make a practice of reading the two national papers

(Globe and Mail and National Post), especially with respect to current environmental issues.

Students who get an A, have a good understanding of current affairs.

5

True or False or ?

Over the last 100 years, the forest cover in Canada has declined

Over the last decade, the air quality in Canada’s largest cities has declined

Lake Winnipeg’s percentage of dissolved phosphorous has increased because of intensive commercial agriculture

Waterfowl (geese, ducks ,etc.) populations on the Prairies have declined since 1980

The world is getting warmer.

6

Assumptions and preconceived notions are the main impediment to clear analysis

c:\personal\videos\Rosling Standard of Living and Fertility.mp4

Notes for Chapter 1

ECON 2390

8

Definition of economics

Analysis of choices (consumer and investor), among alternatives that have different benefits and costs (net benefits) to maximize the welfare the individual decision-maker.

Determination of the optimum mix of private, collective, and coercive decision-making to maximize social welfare.

9

Key ideas

Incentives have a critical role in producing environmental degradation and in designing environmental policies, and

Analysing short and long-run benefits and costs of environmental improvements is the foundation of policy

Pollution can be produced by private, collective and coercive economic systems (e.g., China is a major producer of greenhouse gases (GHG).

The profit motive is not the cause of pollution – some of the worst pollution has been produced in socialist and former communist countries.

As incomes rise, countries tend to become more interested in environmental quality. However….

As incomes rise, individuals tend to pollute more and use more energy because they can afford more toys and lifestyle (vacations in Mexico)

10

What is pollution?

External effect (externality) to a production or consumption process

Externalities are public goods. Public vs. private goods

A pure private good is a producer or consumer commodity or service that involves only two parties to the exchange – the consumer (buyer) and the producer (seller). A pure public good involves consumption and production that must involve everyone. The seller cannot control who participates in consumption.

Caution – public goods (and “bads”) have nothing to do with the “public” sector.

a public “good” involves the inability of the producer to exclude consumption and therefore the inability for the producer to appropriate all the value

a public “bad” is produced by any operation, public or private, that forces those who are not parties to the transaction accept the external effects and by-products

11

Efficiency and ethics

Moral outrage is useful only to bring attention to a problem, it usually complicates the development of sound policy.

However, the distribution of the benefits and cost are critical issues for all economic policy.

People, private firms, voluntary organizations and government routinely cause pollution because they have limited resources and have goals that focus on the welfare of the household, firm and organization.

Avoiding pollution raises costs or takes time, which are scarce. Dealing with pollution diverts resources from other worthwhile goals.

12

Trade-off (production)

The Production Possibility Frontier (PPF) shows all combinations of goods/services and environmental quality within a given technology and institutions.

Movements out reflect more wealth.

Movements out are caused by technological advance and institutional change.

The shape of the PPF can be changed by policy.

Why is the relationship convex (i.e., why does the slope become steeper as it approaches each axes?

Developed countries typically have PPF that dominate those of developing countries.

Environmental Quality

Stu

ff

13

Trade-off (consumption)

Indifference relationships show preferences by society.

Society A has a taste for more stuff, while society B prefers environmental quality.

Why are the relationships concave? That is why does the slope moderate as it approaches either axis?

These are often referred to as “community indifference curves.”

Environmental Quality

Stu

ff

Society A

Society B

14

The shape of the CIC reveals preference

Environmental Quality

Stu

ff High value on stuff

High value on the

environment

15

Advice for Chapter 1

Make sure you understand the following key ideas PPF Environmental Kuznets curve Trade-offs and sustainability Externality (the key idea in the course)

The key terms on page 23