Environmental Economics by

CH1 : INTRODUCTION AND OVERVIEW

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CIRCULAR FLOW MODEL

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Shows relationship
between firms and households with the objective of firms to
maximize profit from production and of households to maximize
satisfaction from consumption.

LINK BETWEEN ECONOMIC ACTIVITY AND THE ECONOMIC

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MATERIALS BALANCE MODEL

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Is an extension to the basic circular flow
model whereby the natural environment is included in analysis.

Flow of resources

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Sources-In producing goods and services, firms extract, transport and process natural resources such
as wood, water, animals, plants and minerals. The efficient use and management of natural
resources are the focus study of natural resource economics.

Flow of residuals

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Residuals are the pollutants that remain in the environment after a process (natural or technological) has occurred.
The flow of residuals is the area of concern of environmental economics.

Law of thermodynamics

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1st Law- matter and energy maybe transformed from one form to another.
the quality of matter and energy may deteriorate after some time.

ENVIRONMENTAL ECONOMICS

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Is a field of economic study that deals with the impacts of economic activities on the natural

SCOPE

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POSITIVE ECONOMICS

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Is the analysis of economics based on facts and objective data analysis or facts that can be verified.
Positive statement can be argued objectively using facts.
Some aspects of environmental economics ,such as causes and effects, are positive in nature.

NORMATIVE ECONOMICS

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Is the analysis of economics that is subjective in nature and may involve opinions and value judgment.
Selecting the proper policies to address environmental problems is a normative analysis as there may be different opinions by different people on the same issue.
For instance, people may disagree on what is the best way to tackle the global warming issue.

NATURAL RESOURCE ECONOMIC

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a branch of economic study that deals with the use of natural resources for economic activities.
It focuses on how natural resources such as wildlife and mineral deposits are valued, managed and are used in
the economy and in making economic decisions.

DEFINITION

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MICROECONOMICS

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The study of economics in individual units.

MACROECONOMICS

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The study of economics as a whole.

RESOURCES

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RENEWABLE RESOURCES

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Renewable resources are natural resources that can be renewed (replenished) naturally.
These include air, wind, water, sunlight, farm animals and forest plants. Resources can be
considered renewable if the rate of replenishment (renewal exceeds the rate of depletion
(consumption).

NATURAL RESOURCES

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Ecological units and universal natural resources. Ecological units
include microorganism, the atmosphere, flora, fauna and mineral deposits.

NON-RENEWABLE RESOURCES

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Are natural resources that are either cannot be reproduced once
used or that are consumed much faster than nature can create them. Examples are fossil fuels
(natural gas, petroleum and coal) and uranium.

ASSILIMATIVE CAPACITY

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Assimilative capacity refers to the ability of nature (river, lake, air or soil)
to absorb or carry waste without causing negative effects on the environment. Carbon dioxide
emissions from vehicles for instance can be absorbed partially by forests. However, when
assimilative capacity is exceeded, pollution will occur.

POLLUTION

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MOBILITY

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STATIONARY POLLLUTION

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Pollution coming from a source that is fixed. Examples are coal-
burning power plants, sewage treatment facilities and factories.

MOBILE POLLUTION

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Is pollution coming from moving sources, such as from trucks, airplanes and
cars.

IDENTIFIABLE

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POINT SOURCE

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Pollution coming from sources that cannot be identified accurately and
that degrade the environment in a indirect way over a relatively broad area. Examples are
urban and agricultural runoff (water drainage).

NON-POINT SOURCE

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Is when the pollutant
can be identified as coming form a single source. Examples are pollutants from a factory
smokestack, an effluent pipe or a ship.

ORIGIN

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NATURAL POLLUTANTS

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Are those that come from natural processes, such as particles from volcanic
eruption and pollen from plants.

ANTHROPOGENIC POLLUTANTS

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Pollutants are caused by human activities.Ex: open burning

SOURCES

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SCOPE OF DAMAGE

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LOCAL POLLUTION

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Does not extend far from the source and is usually confined to a single
community. An example is urban haze (smog) caused by emissions by local factories

REGIONAL POLLUTION

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Damage from pollution that extends to a larger area that and poses risk
beyond the polluting source. An example is acid rain,

GLOBAL POLLUTION

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Occurs when the damage is widespread and caused implications throughout
the world.

Conventional Solutions to Environmental Problems Command-and-Control Approach

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Types of Environmental Standards

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Ambient standard

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a standard that designates the quality of
the environment to be achieved, typically expressed as a
maximum allowable pollutant concentration

Technology-based standard

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a standard that designates the
equipment or method to be used to achieve some abatement
level

Performance-based standard

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a standard that specifies a
pollution limit to be achieved but does not stipulate the
technology

MSB of Abatement

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Additional social gains as pollution abatement
increases

Measured as reduction in damages or costs caused by
pollution (i.e., reduction in MEC)

Represents society’s D for environmental quality

Implies MSB is negatively sloped

MSC of Abatement

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Sum of all polluters marginal abatement costs plus
government’s marginal cost of enforcement

Two components: MSC = MACMKT + MCE

MACMKT is the sum of all polluters’ individual
marginal abatement cost (MAC) functions

(ΣMACi = MACMKT)

MCE is marginal cost of enforcement

Change in government’s cost of monitoring and
enforcing abatement

MSC is positively sloped

Firm-Level MAC

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Measures the change in cost from reducing
pollution, using least-cost method

Equals forgone Mπ if the least-cost abatement
method is to reduce output

Typically positively sloped and increasing at
increasing rate

For simplicity, it is usually assumed that MAC is
linear

Allocatively Efficient Level of A (AE)

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nAE occurs at the point where:

nMSB of abatement = MSC of abatement

nGraphically where the two curves intersect

Standards May Not Be Efficient

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nLegislative Constraints

nMany standards are benefit-based, i.e., set to improve society’s well-being with no consideration for the associated cost

nImperfect information

nInability to identify MSB and/or MSC

pMSB: due to the problem of nonrevelation of preferences

pMSC: difficulty in identifying each firm’s MAC, including implicit costs
nNonuniformity of pollutants

nChanges in emissions do not have uniform effects on environment

pe.g., if polluters are at different distances from populations or ecosystems, MSB would vary

nRegional differences

nEven if AE is identified at the national level, it is not likely to be efficient at regional level

Modelling Regional Differences

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nConsider two regions, X and Y, with same MSC of abatement

nSuppose their MSB of abatement curves differ, such that MSBX < MSBY

nResult: Allocatively efficient level of abatement for region X (AX) would be lower than for region Y (AY)

Standards to Examine

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Technology-based standard

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nTechnology-based standards specify the type of abatement equipment or method to be used

Uniform standard

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nUniform standards waste economic resources as long as abatement costs differ among polluting sources

MAC CURVE

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nTechnology-based standard

nIf prevented from using the least-cost abatement method, firms would operate above their MAC curve

nPerformance-based standard

nIf allowed to select an abatement method to achieve some performance level, p-maximizing firms will choose the least-cost method and operate on the MAC curve