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Environmental Economics

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the study of how environmental and natural resources are developed and managed.

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Environmental Resource

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resource provided by nature that is indivisible (ex: air quality, water quality)

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Natural Resource

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resource provided by nature that is divisible into smaller units and can be allocated at the margin (ex: oil, forests, biodiversity)

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Why should we study environmental economics?

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1.) Prices reflect the relative scarcity of goods, but many environmental goods do not have prices (air quality) or even markets. 2.) Environmental economics is often related to market failures. 3.) Time is an important aspect of natural resources. 4.) Irreversibility - some changes to the environment are essentially irreversible.

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The Self-Extinction Premise

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reproduction and population growth exceed growth in food production, resulting in starvation.

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Climate Change

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concentration of greenhouse gases have increased beyond normal levels since the Industrial Revolution, retaining excess heat.

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Water Accessiblity

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40% of the worlds population live in areas with moderate-to-high water stress

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Positive Feedback loops

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secondary effects tend to reinforce the basic trends. When one thing goes up, another thing goes up.

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Negative Feedback loops

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self-limiting rather than self-reinforcing. When one thing goes up, another thing goes down.

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Role of Economics

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set of tools to help understand human behavior. 1.) Market systems' negative feedback loops 2.) Identify when markets fail 3.) Basis for designing incentives to restore balance when market fails

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Closed System

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a system where there are no inputs and no outputs of energy and matter from outside the system (the environment is an example)

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Open System

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a system which imports or exports energy or matter from outside

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Positive Economics

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attempts to describe what is, what was, or what will be.

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Normative Economics

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deals with what ought to be

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Consumer Surplus

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difference between total willingness to pay for the good and the actual cost of the good.

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Producer Surplus

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difference between the price of the good and the marginal cost of producing the good

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Property Rights

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bundle of entitlements defining the owners' rights, privileges, and limitations for the use of the resource

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A well-defined or efficient property right will be:

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1.) Exclusive: all benefits and costs accrue to only the owner. 2.) Transferable: property rights can be exchanged voluntarily. 3.) Enforceable: property rights cannot be seized by others.

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Short Run Producer Surplus

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profit plus fixed cost

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Long Run Producer Surplus

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profit plus rent

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Rent

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return to scarce inputs owned by the prodcer

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Scarcity Rent

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returns that persist in the long-run competitive equilibrium. It is the cost of "using up" a finite resource because benefits of the extracted resource are unavailable to future generations.

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Market Failure

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social benefits not the same as private benefits, or social costs are not the same as private costs.

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Reasons that market failures occur:

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1.) markets fail to provide the right amount of public goods (free riders) 2.) markets overstimulate consumption of common resources (tragedy of the commons) 3.) markets become monopolized (max profit at lower quantities with deadwt loss)

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Externalities

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third-party effects caused by the production or consumption of a good for which no appropriate compensation is paid

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Property Right Structures:

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* state-property regimes * common-property regimes * open-access regimes where no one owns or exercises control over resources

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Nonexclusively

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implies that resources can be exploited by anyone

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Divisibility

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capture of part of the resource by one group subtracts it from the amount available to the other groups

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Public Goods

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indivisible (non-rival) and non-excludable. They will be under-provided in a private market because of free-riders

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Non-excludable

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persons cannot be kept from enjoying the benefits of a good even if they do not pay for it

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Indivisible

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one persons' consumption does not affect anothers'

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Asymmetric Information

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when one party has more information about a given situation than the other party does. In this case, the decision maker with too little information cannot make an efficient decision.

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Imperfect Information

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when one side of the exchange does not have all the information they want

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Rent Seeking

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the use of resources in lobbying and other activities directed at securing protective legislation.

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Coase Theorem

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when negotiation costs are negligible and affected parties can freely negotiate, the entitlement can be allocated by the courts to either party and an efficient allocation will result

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Potential issues with Coase Theorem:

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1.) if the property right is assigned to the polluter, pollution could become a profitable activity 2.) relies on number of polluters being small. If the number of polluters is large, negotiation is difficult and free-rides more prevalent. 3.) Relies on transaction costs being small

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Decision Rule

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B = Benefits C = Costs If B > C then support the action, otherwise oppose the action

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Total Benefits

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the value of total willingness to pay, which is the area under the market demand curve from the origin to the allocation of interest.

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Total Sum

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sum of marginal opportunity costs, which is the area under the marginal cost curve.

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First Equimarginal Principle

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Net benefits are maximized when the marginal benefits from an allocation equal the marginal costs. (MB = MC)

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Pareto Optimality

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Allocations are said to be Pareto optimal if not other feasible allocation could benefit at least one person without any deleterious effects on some other person.

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Dynamic Efficiency

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An allocation of resources across "n" time periods satisfies the dynamic efficiency criterion if it maximizes the present value of net benefits that could be received from all the possible ways of allocating those resources over the "n" periods.

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Social Cost of Carbon

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Marginal increase in the PV (in dollars) of the economic damages resulting from a small increase in carbon dioxide emissions.

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The Survey Approach

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Involves asking polluters about their control costs.

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The Engineering Approach

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Using engineering information to estimate the technologies available and the costs of purchasing and using those technologies.

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The Combined Approach

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Combining both survey and engineering approaches.

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Expected value of net benefits

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sum over the possible outcomes of the present value of net benefits of that outcome weighted by its probability of occurrence.

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Discount Rate Rule

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Lower the discount rate, the higher the value placed on the future

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Second Equimarginal Principle

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The least-cost means of achieving an environmental target will have been achieved when the marginal costs of all possible means of achievement are equal. (MCa = MCb = MCc)

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Impact Analysis

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attempts to quantify the consequences of various actions.

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Nonmarket valuation

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monetization of goods and services without market prices.

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Two types of nonmarket:

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1.) goods and services not traded in any market 2.) benefits associated with values unrelated to use

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Assuming magnitude of damage requires:

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1.) identifying affected categories 2.) estimating relationship between pollutant and damage 3.) estimating averting or mitigating behavior 4.) placing monetary value on damages

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3 main types of values

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1.) use value 2.) option value 3.) nonuse value

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Use Value

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the willingness to pay for direct use of environmental resource

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Option Value

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the willingness to pay for the future ability to use the environment

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Nonuse Value

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individuals willingness to pay to preserve a resource that he/she will never use

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Total Willingness to Pay

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Use Value + Option Value + Nonuse Value

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Bequest Value

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ensure a resource is available to future generations

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Existence Value

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ensure a resource continues to exist in the absence of any interest in future use

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3 ways to estimate TWP

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1.) Examining behavior 2.) Infer from demand for related goods and services 3.) Survey Responses

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Stated Preference

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methods to elicit respondents' willingness to pay when the value is not directly observable

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Revealed Preference

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methods which are based on actual observable choices and from which actual resource values can be directly inferred

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Contingent Valuation Method

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a survey methodology in which respondents are asked what value they would place on some level of environmental change. The goal is to elicit peoples' WTP in a hypothetical market.

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Strategic Bias

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tendency to overstate or understate WTP in order to affect policy

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Information Bias

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when respondents are forced to evaluate goods or attributes for which they have little or no experience

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Starting Point Bias

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tendency for reference points to induce higher or lower responses

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Hypothetical Bias

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tendency for hypothetical payments to differ from actual payments due to a difficulty in correctly picturing the situation

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Compensating Variation

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amount of money to compensate for a price increase in order to make the consumer just as well off as before the increase

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Equivalent Variation

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the amount of money to make consumer indifferent (same income) between money and price increase

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Endowment Effect

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psychological value of something you own is greater than something you don't. Require more to be as well off without it than you would be willing to pay to get that same thing.

Environmental Economics Exam 1 (Chapters 1-4) – Flashcards

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