1. Economics 350 Environmental Economics Air pollution Hazardous wastes Cost-benefit analysis Abatement costs Water pollution Optimal pollution Global warming Endangered species EPA Solid municipal waste Tradable discharge permits Command and control Emission taxes

2.  Households: “pay as you throw” garbage systems  Firms: CO 2 taxes and tradable SO 2 permits Appeals to moral behavior Recognizes that people respond to incentives Moral Approach Economic Approach  Households: “give a hoot, don’t pollute”  Firms: emission standards Why do people behave in ways that harm the environment?

3. Economic Way of Thinking  Rationality  Scarcity  Marginal analysis  Equilibrium  Positive vs. normative analysis

4. Environmental Policy  Objectives Environmental quality Sustainable development Biodiversity  Types of Policies Command and Control Market Approaches  Effectiveness Cost/Benefit Analysis

5. Environmental Policy  Politics Special interests Fairness issues  Outlook Pessimists  Thomas Malthus Bootleggers & Baptists ?

6. Malthusian Model time Food production Population Thomas Malthus

7. Environmental Policy  Politics Special interests Fairness issues  Outlook Pessimists  Neo-Malthusians  “Limits to Growth” Optimists  “cornucopians”  Technology and markets Julian Simon

8. Economy and Environment Economy Nature Natural Resource EconomicsEnvironmental Economics resourcesresiduals

9.  PPC shows all combinations of two goods that can be produced from given resources and technology  Illustrates tradeoff between the two goods  PPC shows all combinations of two goods that can be produced from given resources and technology  Illustrates tradeoff between the two goods Economy and Environment: PPC Market Goods Environmental Quality PPC A B ΔGΔG ΔEQ Note: Environmental degradation may shift PPC inward over time. Production Possibilities Curve

10. Assume a concave production possibility curve. Suppose that society decides to increase the production of market goods by 10,000 units, and that as a result environmental quality falls by 10 units. If a further increase of 10,000 units of market goods is sought, we can expect that environmental quality will: 12345 a) fall by 10 units. b) fall by less than 10 units. c) fall by more than 10 units. d) increase by less than 10 units.

11. Producers Consumers Residuals: R p Discharged: d R p Residuals: R c Discharged: d R c Recycled: r R c Goods: G Recycled: r R p Raw Materials M M = d R p + d R c M = G + R p – ( r R p + r R c ) Fundamental Balance

12.  3 Ways of Reducing M Reduce G  Reduce “consumerism”  Zero population growth? Reduce R p  Reduce residual intensity of production  Sectoral shift Increase ( r R p + r R c )  Mandatory content requirements Fundamental Balance M = G + R p – ( r R p + r R c )

13. Types of Pollutants  Cumulative  Noncumulative  Local  Regional  Global  Point Source  Non-Point Source  Stationary Source  Mobile Source  Continuous Emissions  Episodic Emissions Radioactive waste, plastics, many chemicals Noise Noise, visual SO 2 CO 2, CFCs Smoke stacks, waste treatment plants Agricultural runoff Factories Cars, planes, boats Power plants, factories, waste treatment plants Oil and chemical spills

14. US Pollution Control Expenditures: 2005 Abatement Expenditures (billions $) CapitalOperatingTotal% of Total Air$3.88$ 8.63$12.5147 Water$1.35$ 6.73$8.0830 Solid Waste$0.68$ 5.32$6.0023 Total$5.91$20.68$26.59 U.S. Census Bureau, Pollution Abatement Costs and Expenditures: 2005, MA200(05), U.S. Government Printing Office, Washington, DC, 2008. Online: http://www.census.gov/prod/2008pubs/ma200-05.pdf

15. Review of Microeconomic Theory  Rational man model An individual seeks to maximize his or her utility. For social optimality the rule is: Taking action until the marginal private cost of further action equals the marginal private benefit of that action. Taking action until the marginal social cost of further action equals the marginal social benefit of that action

16. Market Model  What Q is produced?  What Q should be produced?  What Q is produced?  What Q should be produced? Supply Demand quantity Price Q* P* Normative Positive

17.  Consumer Surplus = ∑ (WTP – Price)  Total Expenditure = P*Q  Consumer Surplus = ∑ (WTP – Price)  Total Expenditure = P*Q Market Model: Demand Side Demand quantity 5 $50 Buyer’s Marginal Benefit or WTP Price $25 1 Consumer Surplus Total Expenditure Market price

18.  Producer Surplus = ∑ (Price – Marginal Cost) Market Model: Supply Side Supply quantity Price 3 $25 Total Cost Producer Surplus Seller’s Marginal Cost $10 Market price

19. CS Market Model  Free Market Outcome: P*, Q* Maximizes social welfare: SW = CS + PS  Free Market Outcome: P*, Q* Maximizes social welfare: SW = CS + PS Supply Demand quantity Price Q* P* PS Deadweight Loss

20. Market Model  Problem Set 1, #8  Problem Set 1, #9

21. Equimarginal Principle Total Costs of Production OutputPlant APlant BPlant C 020515 1251322 2373032 3506047 48010577 5115155117 Suppose you wanted to produce Q = 11. How would you allocate output among the three plants if you wanted to minimize the costs of production? Allocate output such that MC A = MC B = MC C Define: __________________ Plant A: Q = 4 Plant B: Q = 3 Plant C: Q = 4 MC = $30 in all plants TC = 80 + 60 + 77 = $217

22.  Imperfect competition  Imperfect information  Externalities  Public goods/Common Resources  Imperfect competition  Imperfect information  Externalities  Public goods/Common Resources Market Failures

23.  Occur when decision makers do not consider all costs (or benefits) of their actions  Two views A. C. PigouRonald Coase Externalities

24. Cashmere Externalities

25. Externalities: PigouPigou Social Cost = Private Cost + External Cost cashmere $ D1D1 S private Q1Q1 P1P1 P2P2 Q2Q2 S social Marginal external cost How can society achieve social optimum?  Impose tax = marginal external cost Internalize the externality!  Free Market: P 1, Q 1  Optimal Outcome: P 2, Q 2  Free Market: P 1, Q 1  Optimal Outcome: P 2, Q 2 Free market overproduces goods that generate a negative externality TEC

26. a) Supply equals demand. b) Supply is less than demand. c) Marginal social benefit equals marginal social cost. d) Marginal social benefit is greater than marginal social cost. 12345 Waste water runoff from large poultry farms adversely affects their neighbors. You know you are at the socially optimal level when:

27. M&M Experiment

28. Public Goods & Common Resources Rival in consumption Non-rival in consumption Excludable Non-Excludable Private Goods Artificially Scarce Goods Common Resources Public Goods  Excludability: can you be excluded from consuming the good?  Rivalry: does my consumption hinder your consumption?  Excludability: can you be excluded from consuming the good?  Rivalry: does my consumption hinder your consumption?

29. Tragedy of the Commons  Commonly-owned resources tend to be over-exploited Conflict between self-interest and the common good  Examples Garrett Hardin Am I in danger of being over- harvested?

30. Sample Problems  Problem Set 1: #20 (Externality)  Problem Set 1: #18 (Public Goods)

31. ΣMB MB H MB A MB S MC Social Optimum occurs where ΣMB = MC SO 2 (μg/m 3 ) Dirtier air  $

32. D = Σd dAdA dSdS dHdH

33. There are essentially three ways of reducing M (raw material usage) and, therefore, residuals discharged into the natural environment. These include all of the following except a) reducing G (output of goods) b) increasing Rp (production residuals) c) increasing rRp + rRc (recycled production and consumption residuals) d) all of the above. 12345

34. All of the following are examples of point-source pollutants except one. Which one is not an example of a point-source pollutant? a) municipal waste treatment plants b) agricultural chemical runoff c) electric power plants d) Eramet Metals manufacturing plant 12345

35. Public goods are distinguished by two primary characteristics. These are: a) market failure; high prices b) government intervention; high prices c) nonrivalry; nonexclusivity d) rivalry; exclusivity 12345

36. The efficient output will be less than the free market output when: 12345 a) Marginal social cost and marginal private cost are equal b) Marginal social cost is greater than marginal private cost c) Marginal social benefit and marginal private benefit are equal d) Marginal social benefit is greater than marginal private benefit

37. The table below shows the marginal benefit from water quality for the only two citizens of a town. Water quality is a public good. If the marginal cost of water quality is $75 per quality unit, what is the efficient quantity of water quality? FantingGary Marginal benefit of water quality Water Quality Marginal benefit of water quality 801100 70285 603 45435 25515 060 12345 a) 1 b) 2 c) 3 d) 4 e) 5 f) 6