Environmental Economics

Econ 260
What is Environmental
Economics Ch.01

Introduction
Environmental Economics is the study of environmental problems with
the perspective and analytical ideas of economics. In this field, we
mostly use tools learned in microeconomics to investigate and analyze
environmental problems.
Recall the difference between microeconomics and macroeconomics.
Microeconomics is the study of the behaviors of individuals or small
groups (households, firms, a particular industry or market).
Macroeconomics is the study of performance of economies as a whole.
In economics, we are generally concerned with allocation of scarce
resources among competing uses.
The concepts of scarcity, opportunity costs, trade-offs, incentives,
marginal benefits and marginal costs are key ingredients to
understanding environmental problems and what can be done about
them.
Two concepts efficiency and equity are often important parts of
economic analyses. Efficiency is about using resources in the best way
possible while equity is about being fair. Economists are generally more
comfortable talking about efficiency than equity.

Introduction
Let us now touch upon some general ideas about why environmental problems arise and how
we might be able to deal with them?
It is cheap to pollute. People pollute because it is the cheapest way to dispose of the waste
products remaining after production and consumption of a good. This idea suggests that
pollution can be controlled by making disposal of waste products more expensive.
Pollution is an externality problem. The cost of polluting environment is paid or borne
not only by polluter ( private costs) but also the rest of the society (external cost).
However, the polluter does not think about the cost to others while making consumption
or production decisions. Therefore, the idea of making the polluter pay more ( private
costs+ external cost) than his/her private costs could be useful in dealing with pollution
problem.
Environment is a public good. A public good can be shared by many people at the same
time without diminishing the share for an individual. This leads to free riding problem.
Lack of property rights. As most of the natural resources lack strong property rights, they
tend to get overused (hence more pollution). Therefore, creating property rights might
provide a solution in many circumstances.
Although each of these ideas is a good way to explain cause of pollution, they are related
ideas.

A Practical Illustration: Smog and

Motor Vehicles

Motor vehicle emissions are considered major source of air pollution in

urban areas. In Canada, automobiles discharge approximately 11% of
total carbon dioxide emissions, 17% of nitrogen oxides, 20% of volatile
organic compounds, and 47 % of carbon monoxide. These compounds
contribute to urban smog, acid precipitation, and global warming. In
turn, these environmental conditions adversely affect health of people
and our ecosystem.
We hardly think about the adverse impact of our driving on the rest of the
society. When we make decisions to drive, they are based on our
private benefits and costs of driving. As a result, we are more likely to
drive and pollute more than what is beneficial to the society.
Let us now quickly look at the concept of incentives to see what can be
done to reduce air pollution from automobiles. To begin , consider the
following.
Total Quantity of emissions = Number of vehicles X Average kilometres travelled X
Emissions per kilometre.

A Practical Illustration: Smog and

Motor
Vehicles
The relationship shown before
tells us that
we can influence the air pollution
from automobile emissions by targeting one or more of the three variables
number of vehicles, average kilometres travelled and emissions per
kilometre.
To reduce number of vehicles : increase costs of owning and maintaining
vehicles (high sales tax, frequent costly inspection, high annual tax ),
encourage people to use public transportation by making it cheap and easily
available
To reduce average kilometres travelled : increase costs of travelling through
higher gasoline taxes ( or annual tax based on kilometres travelled)
To reduce emissions per kilometre: mandate regular servicing and emission
tests, make rules and regulations targeting firms to produce vehicles with
higher fuel efficiency ( went from 15L/100km in 1965 to 7.4L/100km in
2003)
As older vehicles are more polluting, programs designed to retire them can help
reduce emissions effectively. Awareness programs and appropriate incentive
provided to the pollution-control industry can also be helpful in reducing
emissions over time.

Economic output and Environmental

Quality

In the next several slides, we will link economic output and

environmental quality at a given time or over time, using the
concept of production possibility frontier (PPF).

Economic output and Environmental

Quality

Economic output and Environmental

Quality

Environmental Kuznets Curve (EKC)

It is a statistical relationship between an indicator of environmental
quality and income level for economies. This relationship can be
estimated for a country over time or for a sample of countries at
one point in time.
In the next few slides, we will look at several estimates for EKC. Note
that EKCs vary significantly over time and across environmental
quality indicators.

Environmental Kuznets Curve

Environmental Kuznets Curve

Environmental Kuznets Curve

Pollution Havens and Halos

A pollution haven is a region or country where regulators deliberately
have lax environmental policies to try to attract industry to their
region.
A pollution halo is a region or country where environmental rules and
regulations are relatively stricter , which makes it attractive to
environmentally friendly industries or environmentally conscious
people.
People have pointed out that developing countries may be turning
into pollution havens based on relocation of many manufacturing
industries to these countries. But conclusive empirical evidence
has not been found for this.