Environmental economics & policy
Environmental Economics and Policy Lecture Week 1
Environmental Economics Lecture 1 Introduction
Ecosystem services framework
Role of policy (Action) that the pressures do not undermine the habitats of the system.
Pressures
- What are the root causes of pollution
- What is the role of the market? Which policy interventions are needed to make markets part
of the solution, rather than part of the problem
o How to use the power of the market in order to make them part of the solution and
not part of the problem
What is economics – a quantitative social science
- Economics and political sciences often ask the same questions:
o How can we control environmental pollution effectively
o What motivates countries to take climate action
- The difference lies in the methodological approach
o Economists build mathematical models
o And collect quantitative (statistical) evidence
Based on equations
Why maths?
Mathematical critique upon economics: why so much math?
- An example from Norway, oil drilling in the Artic
o Do we want money or nature
Problem: politicians usually want both
To make a more meaningful answer to the debate, mathematic can be of use
- Maths helps you asking better questions:
o How much do we really gain from pumping up more oil (marginal benefits)
o What are the effects of an oil spill on the ecosystem? How do they depend on how
much oil has leaked (marginal costs)
o Do we know all risk/uncertainties? Is it worth taking this gamble
The power of markets
- Markets send signals about value
o Scarcity leads to innovative ideas
- Markets allocate resources and goods in the most efficient way (through this can be
perceived as unfair)
- Markets create value
o Market interactions leaves the buyer and seller happy
But markets often fail, creating losses to social society
o Lacking property rights key (externalities, public goods)
Market failure related to the environment
, - Hidden information
o Moral hazard (taking of excessive risk in expectation of government help)
o Adverse selection (inability to distinguish sustainable from unsustainable products)
- Public goods
o No market for clean air or biodiversity
o Incentives to free ride from contributing to public goods
- Externalities negative
o Pollution emitted by a factory that spoils the surrounding environment and affects
the health of nearby residents
o Noise/smell
- Externalities positive
o Benefit for a consumer or firm
Externalities: private optimum = social optimum
- Private optimum: marginal benefits = private marginal cost
- Social optimum: marginal benefits = social marginal cost
Example:
- Utility is marginal decreasing (inverted U-function)
- At what point is the maximum utility:
o Private optimum
MB(V)=MP
5-0.5X=1
X=8
- At what point is the maximum utility if there are no costs
Social optimum where marginal external and socially cross
Externalities – practical example
- Assume a paper factory emits various pollutants. Neighbours complain about noise, bas
smell, and traffic caused by the paper mill
- Emissions tonnes/day: M
o Private revenues: PB: 200M
o Private costs: PC: 10 + 100M + M2
o External costs: EC: 4M22
, - What is the privately optimal discharge level when the firm ignores the external costs
o MB = MCP
o 200 = 100 + 2M
o M = 50
- What is the socially optimal discharge level
o MB = MC + MEC
o 200 = 100 + 2M + 8M
o M = 10
Coase Theorem: importance of property rights
In the presence of an externality, an efficient allocation can be obtained as an outcome of a bargain.
The efficient allocation is independent of the initial allocation of property rights.
Example
- Consider two firms, a chemical plant and a boat rental company that share a small lake
- The chemical company dumps its waste by-products into the lake, which mell bad but
otherwise harmless
- The company can reduce pollution only by restricting its output
- We can distinguish 3 cases
The cells show that payoffs for the chemical company and the boat rental firm under any possible
strategy.
- The chemical firm would want to produce 2 tons of whatever the boat rental firm does
(dominant strategy)
- Best response for boat rental form to have one boat
- An efficient outcome would be the one where both firms maximize joint payoffs (1 ton, 1
boat = 20$)
- The no-property-rights equilibrium is not efficient
If the boat rental firm has the property rights of clean water, the boat rental company can now
prevent the chemical company from polluting
- the firms could start to bargain
- the chemical firm could compensate the boat rental firm for the pollution externalities, and
this would be worthwhile if it leaves the chemical firm at least with a positive profit
A new equilibrium would be a 1 ton – 1 boat solution:
- property rights are beneficial
, Interpretation of the Coase Theorem
- If externalities occur because of lacking or insufficiently defined property rights, defining
these property rights can bring up an efficient solution
- If property rights are defined, the legal rights can be traded
Problems Coase Theorem
- The new distribution of wealth depends on the allocation of property rights
- An efficient allocation might be considered unjust
o Pollution that is compensated by money (e.g. Shell)
- Transaction costs can hamper the bargaining process
- Strategic bargaining behaviour may result in inefficient outcomes
Environmental Policy Lecture 1 Institutionalisation of Environmental
Policy
Argumentative essay module
- Part of the course and part of a bigger project at WUR
- It helps to improve your writing
- Topics:
o The long-term impacts of covid-19 on environment
o The role of private actors in funding local and global biodiversity
o The war in Ukraine and the implications for global energy transitions
Environmental concern grows in green waves
We have seen that the attention for environmental issues has come and go. A cluster of issue-
attention cycles says that some bits and pieces remain after each wave, and these pieces are
institutionalised. Some parts of environmental policy have remained = post-problem phase. Issue-
attention cycle can also be applied to problems such as Covid-19 or our democratic system.
Defining institutionalisation
- Institutions: formal or informal rules that steer collective behaviour of people, organisations
and governments
o Central concept in the social science
- Institutionalisation: process of anchoring these formal and informal rules into
laws/norms/organisations
- Institutionalisation of environmental issues: attention for the environment is anchored in
environmental laws, organisations every day habits
Four waves of rising environmental concern
1) Around 1900: rise of nature conservation, institutionalisation of species protection and
nature parks (no words of environment)
2) Late 1960s-mid-19070s: the green wave: environment high on the political agenda;
institutionalisation of environmental protest and policy
3) Mid-1980s-earl 1990s: integration of environment and economy: institutionalisation of
sustainable development
4) Late 1990s-mid 2001: globalisation of problems: institutionalisation of global environmental
politics (really global)
Environmental Economics and Policy Lecture Week 1
Environmental Economics Lecture 1 Introduction
Ecosystem services framework
Role of policy (Action) that the pressures do not undermine the habitats of the system.
Pressures
- What are the root causes of pollution
- What is the role of the market? Which policy interventions are needed to make markets part
of the solution, rather than part of the problem
o How to use the power of the market in order to make them part of the solution and
not part of the problem
What is economics – a quantitative social science
- Economics and political sciences often ask the same questions:
o How can we control environmental pollution effectively
o What motivates countries to take climate action
- The difference lies in the methodological approach
o Economists build mathematical models
o And collect quantitative (statistical) evidence
Based on equations
Why maths?
Mathematical critique upon economics: why so much math?
- An example from Norway, oil drilling in the Artic
o Do we want money or nature
Problem: politicians usually want both
To make a more meaningful answer to the debate, mathematic can be of use
- Maths helps you asking better questions:
o How much do we really gain from pumping up more oil (marginal benefits)
o What are the effects of an oil spill on the ecosystem? How do they depend on how
much oil has leaked (marginal costs)
o Do we know all risk/uncertainties? Is it worth taking this gamble
The power of markets
- Markets send signals about value
o Scarcity leads to innovative ideas
- Markets allocate resources and goods in the most efficient way (through this can be
perceived as unfair)
- Markets create value
o Market interactions leaves the buyer and seller happy
But markets often fail, creating losses to social society
o Lacking property rights key (externalities, public goods)
Market failure related to the environment
, - Hidden information
o Moral hazard (taking of excessive risk in expectation of government help)
o Adverse selection (inability to distinguish sustainable from unsustainable products)
- Public goods
o No market for clean air or biodiversity
o Incentives to free ride from contributing to public goods
- Externalities negative
o Pollution emitted by a factory that spoils the surrounding environment and affects
the health of nearby residents
o Noise/smell
- Externalities positive
o Benefit for a consumer or firm
Externalities: private optimum = social optimum
- Private optimum: marginal benefits = private marginal cost
- Social optimum: marginal benefits = social marginal cost
Example:
- Utility is marginal decreasing (inverted U-function)
- At what point is the maximum utility:
o Private optimum
MB(V)=MP
5-0.5X=1
X=8
- At what point is the maximum utility if there are no costs
Social optimum where marginal external and socially cross
Externalities – practical example
- Assume a paper factory emits various pollutants. Neighbours complain about noise, bas
smell, and traffic caused by the paper mill
- Emissions tonnes/day: M
o Private revenues: PB: 200M
o Private costs: PC: 10 + 100M + M2
o External costs: EC: 4M22
, - What is the privately optimal discharge level when the firm ignores the external costs
o MB = MCP
o 200 = 100 + 2M
o M = 50
- What is the socially optimal discharge level
o MB = MC + MEC
o 200 = 100 + 2M + 8M
o M = 10
Coase Theorem: importance of property rights
In the presence of an externality, an efficient allocation can be obtained as an outcome of a bargain.
The efficient allocation is independent of the initial allocation of property rights.
Example
- Consider two firms, a chemical plant and a boat rental company that share a small lake
- The chemical company dumps its waste by-products into the lake, which mell bad but
otherwise harmless
- The company can reduce pollution only by restricting its output
- We can distinguish 3 cases
The cells show that payoffs for the chemical company and the boat rental firm under any possible
strategy.
- The chemical firm would want to produce 2 tons of whatever the boat rental firm does
(dominant strategy)
- Best response for boat rental form to have one boat
- An efficient outcome would be the one where both firms maximize joint payoffs (1 ton, 1
boat = 20$)
- The no-property-rights equilibrium is not efficient
If the boat rental firm has the property rights of clean water, the boat rental company can now
prevent the chemical company from polluting
- the firms could start to bargain
- the chemical firm could compensate the boat rental firm for the pollution externalities, and
this would be worthwhile if it leaves the chemical firm at least with a positive profit
A new equilibrium would be a 1 ton – 1 boat solution:
- property rights are beneficial
, Interpretation of the Coase Theorem
- If externalities occur because of lacking or insufficiently defined property rights, defining
these property rights can bring up an efficient solution
- If property rights are defined, the legal rights can be traded
Problems Coase Theorem
- The new distribution of wealth depends on the allocation of property rights
- An efficient allocation might be considered unjust
o Pollution that is compensated by money (e.g. Shell)
- Transaction costs can hamper the bargaining process
- Strategic bargaining behaviour may result in inefficient outcomes
Environmental Policy Lecture 1 Institutionalisation of Environmental
Policy
Argumentative essay module
- Part of the course and part of a bigger project at WUR
- It helps to improve your writing
- Topics:
o The long-term impacts of covid-19 on environment
o The role of private actors in funding local and global biodiversity
o The war in Ukraine and the implications for global energy transitions
Environmental concern grows in green waves
We have seen that the attention for environmental issues has come and go. A cluster of issue-
attention cycles says that some bits and pieces remain after each wave, and these pieces are
institutionalised. Some parts of environmental policy have remained = post-problem phase. Issue-
attention cycle can also be applied to problems such as Covid-19 or our democratic system.
Defining institutionalisation
- Institutions: formal or informal rules that steer collective behaviour of people, organisations
and governments
o Central concept in the social science
- Institutionalisation: process of anchoring these formal and informal rules into
laws/norms/organisations
- Institutionalisation of environmental issues: attention for the environment is anchored in
environmental laws, organisations every day habits
Four waves of rising environmental concern
1) Around 1900: rise of nature conservation, institutionalisation of species protection and
nature parks (no words of environment)
2) Late 1960s-mid-19070s: the green wave: environment high on the political agenda;
institutionalisation of environmental protest and policy
3) Mid-1980s-earl 1990s: integration of environment and economy: institutionalisation of
sustainable development
4) Late 1990s-mid 2001: globalisation of problems: institutionalisation of global environmental
politics (really global)
