2. Think … Share 1 2

3. Chapter one

4. Environmental Economics Applying Economic tools on Environmental

5. This Chapter Focus on ■ What major environmental issues do we face? ■ How can economics help us understand these issues? ■ How do economic and ecological perspectives differ, and how can we combine them to address environmental issues?

6. The Economy MicroeconomicMacroeconomic

7. Microeconomic The prefix “micro-“ means http://economics.about.com/od/economics-basics/u/Microeconomics-101.htm “small,” so microeconomics is the study of small economic units.

8. Microeconomics concerns * Externalities and other market side effects * Consumer decision making and utility maximization * Firm production and profit maximization * Individual market equilibrium * Effects of government regulation on individual markets

9. Macroeconomics Macroeconomics is the “big picture” version of economics. Rather than analyzing individual markets, macroeconomics focuses on aggregate production and consumption in an economy. http://alison.com/courses/Introduction-to-Economics?gclid=CK_SsdaD0LICFdHLzAodDnAAlg

10. Macroeconomics concerns * Why some economies grow faster than others. * The effects of general taxes system such as income and sales taxes on output and prices. * The causes of economic upswings and downturns (Economic cycles). * The effects of monetary and fiscal policy on economic. * How interest rates are determined.

11. Two Approaches There are two approaches in addressing natural resource and environmental economics. 2. The Ecological Economics Approach 1. The Traditional Economic Approach

12. This approach uses a set of models and techniques rooted within the standard neoclassical mainstream of economic thought to apply economic concepts to the environment.

13. 2. The Ecological Economics Approach Rather than applying economic concepts to the environment, ecological economics seeks to place economic activity in the context of the biological and physical systems that support life, including all human activities.

14. Environmental Economics MicroeconomicMacroeconomicEnvironmental The Traditional Economic Approach

15. Environmental Microeconomics

16. 1. Measuring external costs and benefits An external cost is a cost that a producer or a consumer imposes on another producer or consumer, outside of any market transaction between them. "External" means "outside." Here, "outside" means outside of any buying and selling among people or firms. If there is an external cost on you, you are giving something up without receiving any agreed-upon payment. Microeconomic and Valuation Techniques Pollution of air or water is the prime example of an external cost.

17. 1. Measuring external costs and benefits An external benefit is a benefit that someone gains because of someone else's action, outside of any market transaction between them. Immunizations give external benefits. When you get a vaccine for a certain disease, you make it less likely that you will contract the disease. That is the internal benefit. What you also do ? is make is less likely that other people will get the disease, because they probably will not catch it from you. Microeconomic and Valuation Techniques

18. 1. Measuring external costs and benefits This value can then be compared to the costs of correcting the problem through pollution control technology or reduced output of polluting activities. We can internalize externalities through … for example, estimating a money value for damage caused (Cost) by acid rain pollution. Microeconomic and Valuation Techniques Tax on the polluting activity.

19. Microeconomic and Valuation Techniques 2. Valuing resources and the environment as assets In this technique, a present benefit or cost receives a somewhat higher value than a future benefit or cost—how much higher depends on the discount rate employed and on how far into the future the comparison extends. This involves considering inter temporal resource allocation, the choice between using a resource now or conserving it for future use. The standard economic technique to balance present and future benefits and costs is to use a discount rate.

20. Thus the discounted present value (for one cash flow in one future period) is expressed as:

21. Net Present Value - NPV NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. if NPV is negative, the project should probably be rejected because cash flows will also be negative. For more info: http://www.investopedia.com/terms/n/npv.asp#ixzz28A6OYiAjhttp://www.investopedia.com/terms/n/npv.asp#ixzz28A6OYiAj

22. Cost C Benefit B Years 6000 20351 22502 25653 26854 NPV without Tax

23. NPVPV(C)PV(B)Discou nt Rate 10% Cost C Benefit B Years -6060 0 1.0006000 13.6418.1831.815 0.90920351 23.1318.17241.3 0.82622502 30.0418.77548.815 0.75125653 40.3017.75858.055 0.68326854 + 47.1 Discounting over multiple years Accepted

24. Cost C +30% Benefit B Years 6000 9.5351 12.4502 14.6653 17.4854 NPV with annual Tax 100% from Capital

25. NPVPV(C)PV(B)Discou nt Rate 10% Cost C Benefit B Years -120120 0 1.00012000 11.88.6731.815 0.90920351 19.310.2341.3 0.82622502 23.810.1048.815 0.75125653 3211.9058.055 0.68326854 - 33 Discounting over multiple years Rejected

26. 3. Devising appropriate property rights rules for environmental resources and establishing rules for use of common property resources and for provision of public goods. For example, a fishery may be privately owned, or it may be public with access limited by government sale of fishing licenses. Similarly, a wildlife preserve may be privately owned and managed or may be maintained as a public park. Microeconomic and Valuation Techniques

27. http://www.theatlantic.com/business/archive/2012/05/how-property-rights- could-help-save-the-environment/257756/ assignment

28. This often involves a combination of values observable in the market, such as values of land or goods, and estimates of nonmarket values, such as natural beauty and maintenance of species diversity. 4. Balancing economic costs and benefits through some form of cost-benefit analysis. Microeconomic and Valuation Techniques

30. 1. external costs and benefits 2. discount rate 3. property rights rules for environmental resources 4. cost-benefit analysis Summary Microeconomic and Valuation Techniques

31. WEBSITES 1. http://www.worldwatch.org/ The homepage for the Worldwatch Institute, an organization that conducts a broad range of research on environmental issues. The Worldwatch annual “State of the World” report presents detailed analyses of current environmental issues. 2. http://www.ncseonline.org/ Website for the National Council for Science and the Environment, with links to various sites with state, national, and international data on environmental quality. 3. http://www.emagazine.com/ Website for E/The Environmental Magazine. The site includes many archived articles on all environmental topics. 4. http://www.unep.org/geo/geo3/ Website for the Global Environment Outlook-3, a United Nations publication. The report is an extensive analysis of the global environmental situation.