# Simple Environmental Economics Classical economics looks at supply and demand, cost of production for suppliers. Cost of production includes processing,

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Simple Environmental Economics Classical economics looks at supply and demand, cost of production for suppliers. Cost of production includes processing, labor, distribution, taxes and so forth. Does not look at environmental costs, economic costs not involved in production. These costs are called “externalities.”

Externality Examples A power plant’s carbon emissions heats up planet. Cost: ecosystem is damaged. A mining company pollutes a river. Cost: Fishermen downstream lose jobs. A logging company cuts down trees. Cost: Local people lose their homes, jobs. A new dam floods a city. Cost: People must move; they lose their jobs.

Externalities & Costs Environmental economics adds externalities to costs. But how to estimate those figures? What is the cost of moving a town, getting people new jobs? What is cost of lost species? What is cost of dirty air?

Simple Pricing Theory Price=demand/supply. Assumes only one manufacturer. Assumes everything is sold, even if price has to fall or rise. Cost=materials, processing, labor, distribution, taxes and so forth. As supply falls, price increases. As demand rises, price increases.

Example 1: Supply=Demand Cost of production=\$1 Base price=\$1.25 Amount produced=100 Demand=100 100/100=1 (demand/supply) 100*1*1.25=\$1.25 per unit, or \$125 Production cost=\$1*100=\$100 Profit=\$25

Example 2: Demand Falls Cost of production=\$1 Base price=\$1.25 Amount produced=100 Demand=95 95/100=.95 100*.95*1.25=\$1.19 per unit, or \$119 Production cost=\$1*100=\$100 Profit=\$19

Example 3: Demand Rises Cost of production=\$1 Base price=\$1.25 Amount produced=100 Demand=105 105/100=1.05 100*1.05*1.25=\$1.31 per unit, or \$131 Production cost=\$1*100=\$100 Profit=\$31

Adding Externalities Cost of production=\$1 Cost of externalities=\$0.20 Cost rises to \$1.20 How do we compute externalities? How do we even know what they are? How long do they last? Who gets the money, and how do they get it? Market-driven, government driven?

Example 1a: With Externalities Cost of production=\$1.20 Base price=\$1.25 Amount produced=100 Demand=100 100/100=1 100*1*1.25=\$1.25 per unit, or \$125 Production cost=\$1.20*100=\$120 Profit=\$5—a huge fall!

Example 2a Cost of production=\$1.20 Base price=\$1.25 Amount produced=100 Demand=95 95/100=.95 100*.95*1.25=\$1.19 per unit, or \$119 Production cost=\$1.20*100=\$120 Profit=none—a loss of \$1

Example 3a Cost of production=\$1.20 Base price=\$1.25 Amount produced=100 Demand=105 105/100=1.05 100*1.05*1.25=\$1.31 per unit, or \$131 Production cost=\$1.20*100=\$120 Profit=\$11—still a huge fall in profit

Making It Work “Cap & trade:” Carbon emissions “capped” at current levels. Reduce emissions, sell the difference to other polluters. Market already working in Europe. “Carbon offsets:” Buy a forest that eats carbon, reducing emissions that way. Helps you stay under cap, maybe sell the difference. Who enforces cap? Who runs, regulates the market?

Other Environmental Costs Can cap and trade be extended to water pollution? Can it work with things other than carbon, like mercury or medical wastes? Can it work for displaced people? Many unanswered questions—critical ones for the developing world. Can developing world develop without becoming heavy polluters?

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