Table of Contents
1. HISTORICAL CONTEXT, ECONOMY-ENVIRONMENT INTERDEPENDENCE........................................3
1.1 HISTORICAL OVERVIEW.....................................................................................................................3
1.2 ECONOMY-ENVIRONMENT INTERDEPENDENCY.......................................................................................3
1.2.1 SOURCE OF RESOURCE INPUTS: CLASSIFICATION ........................................................................................4
1.3 SUBSTITUTING FOR ENVIRONMENTAL SERVICES......................................................................................4
1.4 THREATS TO SUSTAINABILITY.............................................................................................................5
2. ECONOMIC GROWTH, THE ENVIRONMENT & SUSTAINABILITY.....................................................6
2.1 DRIVERS OF ENVIRONMENTAL IMPACT.................................................................................................6
2.1.1 THE IPAT IDENTITY.............................................................................................................................6
2.2 BEHAVIOURAL RELATIONSHIPS...........................................................................................................6
2.2.1 AFFLUENCE AND POPULATION GROWTH (P).............................................................................................6
2.2.2 AFFLUENCE AND TECHNOLOGY (A T): ENVIRONMENTAL KUZNETS CURVE (EKC)............................................6
2.3 ECONOMIC GROWTH AS THE SOLUTION TO THE PROBLEM OF POVERTY........................................................7
2.4 LIMITS TO GROWTH........................................................................................................................7
2.5 THE PURSUIT FOR SUSTAINABLE DEVELOPMENT: AN ECONOMIC PERSPECTIVE...............................................8
2.5.1 CONSTANT CAPITAL RULE (CCR) OR WEAK STABILITY RULE.........................................................................8
2.5.2 STRONG SUSTAINABILITY RULE...............................................................................................................8
2.6. MEASURING ‘SUSTAINABILITY’.........................................................................................................8
2.6.1 GNP: GREEN NET NATIONAL PRODUCT...................................................................................................8
2.6.2 GENUINE SAVINGS..............................................................................................................................9
3. WELFARE ECONOMICS AND THE ENVIRONMENT.........................................................................10
3.1 EFFICIENCY AND OPTIMALITY...........................................................................................................10
3.1.1 TERMS, FORMULA’S ABOUT UTILITY, PRODUCTION AND SUBSTITUTION........................................................10
3.1.2 ECONOMIC EFFICIENCY (PARETO IMPROVEMENT)....................................................................................11
3.1.3 THE SOCIAL WELFARE FUNCTION AND OPTIMALITY...................................................................................12
3.1.4 RANKING ALTERNATIVES.....................................................................................................................13
3.3 ALLOCATION IN A MARKET ECONOMY................................................................................................14
[1] UTILITY MAXIMISATION.........................................................................................................................15
[2] COST MINIMISATION.............................................................................................................................15
[3] PRODUCT-MIX EFFICIENCY......................................................................................................................15
3.4 MARKET FAILURE, PUBLIC POLICY AND THE ENVIRONMENT......................................................................16
3.4.1 CHARACTERISTICS OF PRIVATE AND PUBLIC GOODS..................................................................................16
3.4.2 ECONOMIC EFFICIENCY OF PUBLIC GOODS..............................................................................................16
3.4.3 EXTERNALITIES.................................................................................................................................17
3.4.4 THE SECOND BEST PROBLEM...............................................................................................................18
4 POLLUTION CONTROL: TARGETS...................................................................................................20
4.1 INTRODUCTION............................................................................................................................20
4.1.1 MODELLING FRAMEWORK...................................................................................................................20
4.1.2 POLLUTION EMISSIONS, STOCKS, AND DAMAGE.......................................................................................20
,4.2 EFFICIENT LEVEL OF POLLUTION........................................................................................................20
4.2.1 FLOW POLLUTION.............................................................................................................................20
4.2.2 STOCK POLLUTION.............................................................................................................................21
4.2.3 VARIABLE DECAY & THRESHOLDS.........................................................................................................24
4.3 OBJECTIVES OTHER THAN EFFICIENCY.................................................................................................25
THE DOUBLE DIVIDEND HYPOTHESIS..............................................................................................................25
5 POLLUTION CONTROL: INSTRUMENTS..........................................................................................25
5.1 CRITERIA FOR SELECTION OF INSTRUMENTS.........................................................................................25
5.2 DIFFERENT INSTRUMENTS...............................................................................................................26
5.2.1 INSTITUTIONAL APPROACHES TO FACILITATE INTERNALIZATION OF EXTERNALITIES..........................................26
5.2.2 COMMAND AND CONTROL..................................................................................................................27
5.2.3 ECONOMIC INCENTIVE INSTRUMENTS....................................................................................................28
5.2.4 POLLUTION CONTROL WHERE DAMAGES DEPEND ON LOCATION OF THE EMISSIONS........................................31
5.2.5 DYNAMIC INCENTIVES (STIMULI) UNDER EMISSION TAX CONTROLS..............................................................31
6TRADE AND ENVIRONMENT..........................................................................................................32
6.1 INTRODUCTION............................................................................................................................32
6.2 THE CASE FOR INTERNATIONAL TRADE................................................................................................32
6.3 DOES FREE TRADE HARM THE ENVIRONMENT? A PARTIAL EQUILIBRIUM ANALYSIS........................................33
6.3.1 PARTIAL EQUILIBRIUM ANALYSIS...........................................................................................................33
6.3.2 OTHER FORMS OF IMPLEMENTING TAXES..............................................................................................38
SUMMARY PARTIAL EQUILIBRIUM ANALYSIS....................................................................................................38
6.4 INTERNATIONAL TRADE AND SUSTAINABLE DEVELOPMENT: SOME CONSIDERATIONS......................................38
6.5 INSTITUTIONS REGULATING INTERNATIONAL TRADE...............................................................................39
6.5.1 GATT-WTO...................................................................................................................................39
7 INTERNATIONAL ENVIRONMENTAL PROBLEMS............................................................................41
7.1 INTRODUCTION............................................................................................................................41
7.2 GAME THEORY ANALYSIS................................................................................................................41
7.2.1 PRISONER’S DILEMMA........................................................................................................................41
7.2.2 CHICKEN GAME................................................................................................................................41
7.2.3 ASSURANCE GAME............................................................................................................................42
7.2.4 EXTRAPOLATION TO MULTIPLE PLAYERS:................................................................................................42
7.3 INTERNATIONAL ENVIRONMENTAL AGREEMENTS (IEA)..........................................................................44
7.3.1 EFFECTIVENESS OF IEA?....................................................................................................................44
7.3.2 MECHANISMS TO SUPPORT INTERNATIONAL ENVIRONMENTAL COOPERATION................................................45
7.4 KNOWLEDGE APPLIED ON REAL LIFE EXAMPLES.....................................................................................46
7.4.1 CLIMATE CHANGE (CC)......................................................................................................................46
7.4.2 COP27..........................................................................................................................................46
7.4.3 OZON DEPLETION..............................................................................................................................47
,1. Historical context, economy-environment
interdependence
1.1 historical overview
18th -19th century: classical economics
1. Development because of industrial revolution
2. Interests: standards of living & growth, institutions for development of trade
3. Determinants of national wealth & growth:
o Natural resources
o Land is fixed: essay on the principle of population ~Malthus
1) stock of land is fixed with diminishing returns: the more labour and capital are
applied, the additional output gained per input diminishes (productivity decrease)
2) if population grows, output per capita will drop: because fixed amount of land with
diminishing returns (population increases amount of food available per person
decreases)
3) result: steady-state with constant population and living standards driven down to
subsistence (levensonderhoud) level
o land is not fixed: principles of political economy and taxation ~David Ricardo
1) land is not fixed: land productivity can be increased intensive (increasing
productivity/unit of land) or extensive (bringing new land into cultivation)
2) convergence towards steady-state: if there is no increase possible
john stuart mill but technological advances can still increase productivity
1870s: neo-classical economics
→ comparison
o CE: labour= output (more labour is more value of a product)
o NCE: value is determined by exchange (cost of production + scarcity/need)
more focus on supply vs demand
focus on efficient allocation of resources
→ 1883-1946: theory of input and output determination ~ John Keynes
o Economy that take resources (input) in account (shift of attention because shortage in/after
the war)
1980s: natural resource & environmental economics became distinct sub-disciplines in economics
1) Resource economics: allocation, use and management of natural resources
o Background environmental processes are taken as given (not explicitly analysed)
o E.g. how much economic value can be derived from a fish stock (fish stock taken as given)
2) Environnemental economics: analyse environmental policies, problems of envrionmental pollution
and degradation
o Consideration between benefits of production (economic activity) vs the pollution it produces
3) Ecological economics: interdisciplinary approach between ecology and economics
o The economic system is a sub system of the environmental system
o Main concern: sustainability of current human activities
Common ground: the economy’s relationship to the environment cannot be left to market forces (free
market) government or policy interventions are needed!
1.2 economy-environment interdependency
System in system: Universe the natural environment economic activity
→ Economy operates within the environmental system
, Environment (red): thermodynamically closed
system
→ Exchanging energy with it’s environment
(universe)
1 Economy: located within the environment
→ Envrionment provides 4 functions to the
economy (complex interaction)
1. Source of resource inputs
2. Source of amenity services (well-being,
recreational)
3. Sink for wastes (*)
4. Sources of life support services
(*) Pollution= stock of material resident in the
natural environment
→ Growth of stock if: flows into the
environment > assimilative capacity of the
natural system
→ Pollution= problem if: waste gives rise to
problems to humans or natural environment
Difference: whether the level of current use affects
1.2.1 source
future of resource
availability
inputs: classification
- Flow: no link
- Stock: level of current use affects future
availability
Renewable resources: (Biotic populations)
→ Have the potential to grow by naturally
→ But will be depleted if over-used
Non-renewable ressources (minerals, fossil fuels)
→ No natural reproduction (except on geological
time-scales)
Fossil fuels: burning is irreversible process
→ Waste emissions
Minerals: can be recycled
1.3 substituting for environmental services
(see dashed lines in graph above)
e.g. Recycling
4) Reduces the demands for the environmental waste sink function (waste sink)
5) Reduces demands of the resource source (resource)
Possibilities for substituting: depending on:
1. Physical capital: equipment, infrastructure (e.g; windmills instead of fossil fuels, waste water
treatment)
2. Human capital: the knowledge, skills and innovation capacity of the society
3. Combination of both: embodiment of new systems in new equipment (that substitutes for
environmental functions)
1. HISTORICAL CONTEXT, ECONOMY-ENVIRONMENT INTERDEPENDENCE........................................3
1.1 HISTORICAL OVERVIEW.....................................................................................................................3
1.2 ECONOMY-ENVIRONMENT INTERDEPENDENCY.......................................................................................3
1.2.1 SOURCE OF RESOURCE INPUTS: CLASSIFICATION ........................................................................................4
1.3 SUBSTITUTING FOR ENVIRONMENTAL SERVICES......................................................................................4
1.4 THREATS TO SUSTAINABILITY.............................................................................................................5
2. ECONOMIC GROWTH, THE ENVIRONMENT & SUSTAINABILITY.....................................................6
2.1 DRIVERS OF ENVIRONMENTAL IMPACT.................................................................................................6
2.1.1 THE IPAT IDENTITY.............................................................................................................................6
2.2 BEHAVIOURAL RELATIONSHIPS...........................................................................................................6
2.2.1 AFFLUENCE AND POPULATION GROWTH (P).............................................................................................6
2.2.2 AFFLUENCE AND TECHNOLOGY (A T): ENVIRONMENTAL KUZNETS CURVE (EKC)............................................6
2.3 ECONOMIC GROWTH AS THE SOLUTION TO THE PROBLEM OF POVERTY........................................................7
2.4 LIMITS TO GROWTH........................................................................................................................7
2.5 THE PURSUIT FOR SUSTAINABLE DEVELOPMENT: AN ECONOMIC PERSPECTIVE...............................................8
2.5.1 CONSTANT CAPITAL RULE (CCR) OR WEAK STABILITY RULE.........................................................................8
2.5.2 STRONG SUSTAINABILITY RULE...............................................................................................................8
2.6. MEASURING ‘SUSTAINABILITY’.........................................................................................................8
2.6.1 GNP: GREEN NET NATIONAL PRODUCT...................................................................................................8
2.6.2 GENUINE SAVINGS..............................................................................................................................9
3. WELFARE ECONOMICS AND THE ENVIRONMENT.........................................................................10
3.1 EFFICIENCY AND OPTIMALITY...........................................................................................................10
3.1.1 TERMS, FORMULA’S ABOUT UTILITY, PRODUCTION AND SUBSTITUTION........................................................10
3.1.2 ECONOMIC EFFICIENCY (PARETO IMPROVEMENT)....................................................................................11
3.1.3 THE SOCIAL WELFARE FUNCTION AND OPTIMALITY...................................................................................12
3.1.4 RANKING ALTERNATIVES.....................................................................................................................13
3.3 ALLOCATION IN A MARKET ECONOMY................................................................................................14
[1] UTILITY MAXIMISATION.........................................................................................................................15
[2] COST MINIMISATION.............................................................................................................................15
[3] PRODUCT-MIX EFFICIENCY......................................................................................................................15
3.4 MARKET FAILURE, PUBLIC POLICY AND THE ENVIRONMENT......................................................................16
3.4.1 CHARACTERISTICS OF PRIVATE AND PUBLIC GOODS..................................................................................16
3.4.2 ECONOMIC EFFICIENCY OF PUBLIC GOODS..............................................................................................16
3.4.3 EXTERNALITIES.................................................................................................................................17
3.4.4 THE SECOND BEST PROBLEM...............................................................................................................18
4 POLLUTION CONTROL: TARGETS...................................................................................................20
4.1 INTRODUCTION............................................................................................................................20
4.1.1 MODELLING FRAMEWORK...................................................................................................................20
4.1.2 POLLUTION EMISSIONS, STOCKS, AND DAMAGE.......................................................................................20
,4.2 EFFICIENT LEVEL OF POLLUTION........................................................................................................20
4.2.1 FLOW POLLUTION.............................................................................................................................20
4.2.2 STOCK POLLUTION.............................................................................................................................21
4.2.3 VARIABLE DECAY & THRESHOLDS.........................................................................................................24
4.3 OBJECTIVES OTHER THAN EFFICIENCY.................................................................................................25
THE DOUBLE DIVIDEND HYPOTHESIS..............................................................................................................25
5 POLLUTION CONTROL: INSTRUMENTS..........................................................................................25
5.1 CRITERIA FOR SELECTION OF INSTRUMENTS.........................................................................................25
5.2 DIFFERENT INSTRUMENTS...............................................................................................................26
5.2.1 INSTITUTIONAL APPROACHES TO FACILITATE INTERNALIZATION OF EXTERNALITIES..........................................26
5.2.2 COMMAND AND CONTROL..................................................................................................................27
5.2.3 ECONOMIC INCENTIVE INSTRUMENTS....................................................................................................28
5.2.4 POLLUTION CONTROL WHERE DAMAGES DEPEND ON LOCATION OF THE EMISSIONS........................................31
5.2.5 DYNAMIC INCENTIVES (STIMULI) UNDER EMISSION TAX CONTROLS..............................................................31
6TRADE AND ENVIRONMENT..........................................................................................................32
6.1 INTRODUCTION............................................................................................................................32
6.2 THE CASE FOR INTERNATIONAL TRADE................................................................................................32
6.3 DOES FREE TRADE HARM THE ENVIRONMENT? A PARTIAL EQUILIBRIUM ANALYSIS........................................33
6.3.1 PARTIAL EQUILIBRIUM ANALYSIS...........................................................................................................33
6.3.2 OTHER FORMS OF IMPLEMENTING TAXES..............................................................................................38
SUMMARY PARTIAL EQUILIBRIUM ANALYSIS....................................................................................................38
6.4 INTERNATIONAL TRADE AND SUSTAINABLE DEVELOPMENT: SOME CONSIDERATIONS......................................38
6.5 INSTITUTIONS REGULATING INTERNATIONAL TRADE...............................................................................39
6.5.1 GATT-WTO...................................................................................................................................39
7 INTERNATIONAL ENVIRONMENTAL PROBLEMS............................................................................41
7.1 INTRODUCTION............................................................................................................................41
7.2 GAME THEORY ANALYSIS................................................................................................................41
7.2.1 PRISONER’S DILEMMA........................................................................................................................41
7.2.2 CHICKEN GAME................................................................................................................................41
7.2.3 ASSURANCE GAME............................................................................................................................42
7.2.4 EXTRAPOLATION TO MULTIPLE PLAYERS:................................................................................................42
7.3 INTERNATIONAL ENVIRONMENTAL AGREEMENTS (IEA)..........................................................................44
7.3.1 EFFECTIVENESS OF IEA?....................................................................................................................44
7.3.2 MECHANISMS TO SUPPORT INTERNATIONAL ENVIRONMENTAL COOPERATION................................................45
7.4 KNOWLEDGE APPLIED ON REAL LIFE EXAMPLES.....................................................................................46
7.4.1 CLIMATE CHANGE (CC)......................................................................................................................46
7.4.2 COP27..........................................................................................................................................46
7.4.3 OZON DEPLETION..............................................................................................................................47
,1. Historical context, economy-environment
interdependence
1.1 historical overview
18th -19th century: classical economics
1. Development because of industrial revolution
2. Interests: standards of living & growth, institutions for development of trade
3. Determinants of national wealth & growth:
o Natural resources
o Land is fixed: essay on the principle of population ~Malthus
1) stock of land is fixed with diminishing returns: the more labour and capital are
applied, the additional output gained per input diminishes (productivity decrease)
2) if population grows, output per capita will drop: because fixed amount of land with
diminishing returns (population increases amount of food available per person
decreases)
3) result: steady-state with constant population and living standards driven down to
subsistence (levensonderhoud) level
o land is not fixed: principles of political economy and taxation ~David Ricardo
1) land is not fixed: land productivity can be increased intensive (increasing
productivity/unit of land) or extensive (bringing new land into cultivation)
2) convergence towards steady-state: if there is no increase possible
john stuart mill but technological advances can still increase productivity
1870s: neo-classical economics
→ comparison
o CE: labour= output (more labour is more value of a product)
o NCE: value is determined by exchange (cost of production + scarcity/need)
more focus on supply vs demand
focus on efficient allocation of resources
→ 1883-1946: theory of input and output determination ~ John Keynes
o Economy that take resources (input) in account (shift of attention because shortage in/after
the war)
1980s: natural resource & environmental economics became distinct sub-disciplines in economics
1) Resource economics: allocation, use and management of natural resources
o Background environmental processes are taken as given (not explicitly analysed)
o E.g. how much economic value can be derived from a fish stock (fish stock taken as given)
2) Environnemental economics: analyse environmental policies, problems of envrionmental pollution
and degradation
o Consideration between benefits of production (economic activity) vs the pollution it produces
3) Ecological economics: interdisciplinary approach between ecology and economics
o The economic system is a sub system of the environmental system
o Main concern: sustainability of current human activities
Common ground: the economy’s relationship to the environment cannot be left to market forces (free
market) government or policy interventions are needed!
1.2 economy-environment interdependency
System in system: Universe the natural environment economic activity
→ Economy operates within the environmental system
, Environment (red): thermodynamically closed
system
→ Exchanging energy with it’s environment
(universe)
1 Economy: located within the environment
→ Envrionment provides 4 functions to the
economy (complex interaction)
1. Source of resource inputs
2. Source of amenity services (well-being,
recreational)
3. Sink for wastes (*)
4. Sources of life support services
(*) Pollution= stock of material resident in the
natural environment
→ Growth of stock if: flows into the
environment > assimilative capacity of the
natural system
→ Pollution= problem if: waste gives rise to
problems to humans or natural environment
Difference: whether the level of current use affects
1.2.1 source
future of resource
availability
inputs: classification
- Flow: no link
- Stock: level of current use affects future
availability
Renewable resources: (Biotic populations)
→ Have the potential to grow by naturally
→ But will be depleted if over-used
Non-renewable ressources (minerals, fossil fuels)
→ No natural reproduction (except on geological
time-scales)
Fossil fuels: burning is irreversible process
→ Waste emissions
Minerals: can be recycled
1.3 substituting for environmental services
(see dashed lines in graph above)
e.g. Recycling
4) Reduces the demands for the environmental waste sink function (waste sink)
5) Reduces demands of the resource source (resource)
Possibilities for substituting: depending on:
1. Physical capital: equipment, infrastructure (e.g; windmills instead of fossil fuels, waste water
treatment)
2. Human capital: the knowledge, skills and innovation capacity of the society
3. Combination of both: embodiment of new systems in new equipment (that substitutes for
environmental functions)
