1. ENVIRONMENTAL ECONOMICS
Spring 2015
Assoc. Prof. Mahmut Tekçe

2. Environmental Economics
primary focus is how to use or manage the natural environment (air, water, landmass) as a valuable resource for the disposal of waste.

3. Environmental Economics
originated in the 1960s
one of the fastest-growing fields of study in
economics.
increasing recognition of the significant roles that nature plays in the economic process as well as in the formation of economic value.

4. Environmental Economics
Dates back to the Classical economists.
Analysis of limited land and natural resources by Smith and Ricardo
Mill: land not only has agricultural and extractive uses, but it is also a source of amenity values.
Analysis of externalities and market mailures by Marshall, Pigou, etc.

5. Natural resource economics
Environmental economics
Ecological economics

6. The modern sub-disciplines of natural resource economics and environmental economics have largely distinct roots in the core of modern mainstream economics.
Natural resource economics emerged mainly out of neoclassical growth economics
Environmental economics out of welfare economics and the study of market failure.

7. Ecological economics is a relatively new (1980s) and interdisciplinary (ecology and economics) field
‘Eco’ comes from ‘oikos’ (household)
Ecology is the study of nature’s housekeeping, while economics is the study of human housekeeping.
Ecological economics: study of how these two sets of housekeeping are related to one another.

8. Fundamental issues in the economic approach to resource and environmental issues
Property rights, efficiency and government intervention
The role, and the limits, of valuation, in achieving efficiency
The time dimension of economic decisions
Substitutability and irreversibility

9. Economy and Environment
economy is assumed to depend on the natural environment
the extraction of nonrenewable resources and the harvest of renewable resources
the disposal and assimilation of wastes
the consumption of environmental amenities

10. Economy and Environment
Economic activity draws resources from the environment, and provides flows back into the environment.
These flows must satisfy the laws of thermodynamics:
First law: Conservation of mass/energy (materials balance principle)
Second law: Entropy is non-increasing

11. Economy and Environment

13. Natural Resources
all the ‘original’ elements that comprise the Earth’s natural endowments or life-support systems: air, water, the Earth’s crust, and radiation from the Sun.
Arable land, wilderness areas, mineral fuels and nonfuel minerals, watersheds, and the ability of the natural environment to degrade waste and absorb ultraviolet light from the Sun.

14. Natural Resources
Non- renewable resources
Renewable resources

15. Renewable Resources capable of regenerating themselves
within a relatively short period.
plants, fish, forests, soil, solar radiation, wind, tides, etc.

16. Renewable Resources Flow resources Stock (Biological) resources
solar radiation, wind, tides, and water streams
Stock (Biological) resources
various species of plants and animals
can be irreparably damaged if they are exploited beyond a certain critical threshold

17. Nonrenewable Resources
either exist in fixed supply or are renewable only on a geological timescale, whose regenerative capacity can be assumed to be zero for all practical human purposes.

18. Nonrenewable Resources
Recyclable resources
metallic minerals (iron, aluminum, copper, and uranium)
Nonrecyclable resources
fossil fuels

19. Neoclassical Approach
Natural resources are ‘essential’ factors of production
Natural resources are scarce.
The economic value of natural resources is determined by consumers’ preferences, and these preferences are best expressed by a freely operating private market system.

20. Neoclassical Approach
Market price can be used as an indicator of resource scarcity.
Natural resources can always be replaced (partially or fully) by the use of other resources that are manufactured or natural.
Technological advances continually augment the scarcity of natural resources.
natural ecosystem is treated as being outside the human economy and exogenously determined

21. Neoclassical Approach
Key issues:
the market as a provider of information about resource scarcity
resource (factor) substitution
scarcity augmenting technological advance
the nature of the relationships between the human economy and the natural environment

22. Neoclassical Economics
“Invisible Hand” theorem: idealized capitalist market economy
Freedom of choice based on self-interest
Perfect information
Competition
Mobility of resources
Ownership rights

23. Price signals
Free good – no price
Scarce good – positive price

24. Price as a signal of emerging resource scarcity
decreasing resource scarcity over time

25. Input substitutability
Factor substitution
one kind of resource can be freely replaced by another in the production process.
Input substitutability
Constant factor substitution possibilities
Diminishing factor substitution possibilities: the opportunity cost of using natural capital increases at an increasing rate as natural capital becomes scarce
No factor substitution possibilities: to produce a given level of output a certain minimum of natural capital input is needed

26. Technological Advance
the ability to produce a given amount of output by using less of all inputs
conservation of resources
the amount of resource conservation depend on the impact that technological advance has on the relative productivity of each of the inputs

27. The human economy and the natural world

28. the human economy is composed of three entities: people, social institutions and commodities
the value of resources is assumed to emanate exclusively from their usefulness to human
matter and energy from the natural environment are continuously transformed to create an immaterial flow of value and utility

29. Ecological Perspective
Environmental resources of the biosphere are finite
Mutual interdependencies: everything is related to everything else
Biosphere is characterized by a continuous transformation of matter and energy

30. Ecological Perspective
Material recycling is essential for the growth and revitalization of all the subsystems of the biosphere
Nothing remains constant in nature
The human economy is a subsystem of the biosphere

32. the human economy is completely and unambiguously dependent on natural ecological systems for its material needs
the growth of the economic subsystem is ‘bounded’ by a nongrowing and finite ecological sphere
nature acts as both a source of and a limiting factor on the basic material requirements for the human economy

33. Ecology
systematically studies the relationships between living organisms and the physical and chemical environment in which they live.

34. Ecosystem living organisms in a specified physical environment,
the interactions among the organisms,
the nonbiological factors in the physical environment that limit their growth and reproduction.

35. Components of the Ecosystem
Atmosphere
Hydrosphere
Components of the Ecosystem
Litosphere
Biosphere

36. Dynamic interaction between abiotic and biotic components
Abiotic components
habitat for organisms.
reservoir of the six most important elements for life (C, H, O, N, S, P).

37. Biotic components
Producers: organisms capable of photosynthesis.
Consumers: organisms whose survival depends on the organic materials manufactured by the producers.
Decomposers: micro-organisms and many other small animals that rely on dead organisms for their survival

38. A functioning natural ecosystem is characterized by a constant transformation of matter and energy.
Material recycling is essential for the growth and revitalization of all the components of the ecosphere

39. Energy and thermodynamics
The first law of thermodynamics: principle of conservation of energy - matter and energy can neither be created nor destroyed, only transformed.
The second law of thermodynamics: energy transformations – in every energy conversion some useful energy is converted to useless (heat) energy (entropy)

40. In all conversion of energy to work, there will always be a certain waste or loss of energy quality.
Useful energy cannot be recycled
Natural ecosystems require continual energy flows from an external source

41. Ecology and the human economy
The human economy is a subsystem of the biosphere
Natural resources cannot be viewed merely as factors of production
Humans lead to;
Simplification of ecosystems
Creation of industrial pollution (waste)

42. waste-absorptive capacity of the natural environment: ecological threshold
trade-off between economic goods and environmental quality

43. Assimilative capacity of the natural environment
the assimilative capacity of the environment is limited.
the assimilative capacity of the natural environment depends on the flexibility of the ecosystem and the nature of the waste.
pollution reduces the capacity of an environmental medium to withstand further pollution

44. Assume a linear relationship between waste and economic activity
W = f (X, t)
W : level of waste generated
X : production of goods and services
t : technological and ecological factors
if t assumed constant;
W = βX

48. Market Economy and Allocation of Environmental Resources
Ownership of a resource:
ownership rights are completely specified
the rights are completely exclusive
the ownership rights are transferable
ownership is enforceable

49. When these four conditions are met, self-interest based behavior of individuals will ensure that resources are used where they are most valued.
Environmental resources tend to be common property resources.
The ownership of environmental resources cannot be clearly defined.

50. for the common property resources, economic pursuit on the basis of individual self-interest would not lead to what is best for society as a whole
the use of commons needs to be regulated by a ‘visible hand’

51. Externalities Positive and Negative
In the presence of real externalities, there will be a divergence between private and social evaluations of costs and benefits

52. Negative Externality
A negative externality is a cost that is suffered by a third party as a result of an economic transaction.
In a transaction, the producer and consumer are the first and second parties, and third parties include any individual, organisation, property owner, or resource that is indirectly affected. 

53. Positive Externality: Social benefits = Private benefits + External benefits External benefits > 0 Social benefits > Private benefits Negative Externality: Social costs = Private costs + External costs External costs > 0 Social costs > Private costs

54. Market Economy and Environmental Resources
Fundamental question:
Why may markets fail to allocate environmental resources optimally?
Externalities

56. Macroeconomic Effects of Environmental Regulations
Environmental externalities cause a misallocation of resources.
Policies needed
Taxes, penalties
Risk of inflation and unemployment
Job destroying and job creating effects
“cleaning up the environment creates more jobs than it destroys”

57. Macroeconomic Effects of Environmental Regulations
‘Porter hypothesis’ Strictly enforced environmental policy could have the effect of forcing firms to adopt more efficient production technologies. In the long run, the effect of this would be a reduction in production costs and a further stimulus to the economy

59. Macroeconomic Effects of Environmental Regulations
Debate: Regulation vs Deregulation
Effect of environmental regulations on long-run economic performance
Expenditure on pollution control limited