Microeconomics and the Environment

1. Microeconomics and the Environment EVSC 239

2. Two paradigms of Economics and Ecology • 1. the ecological paradigm, based on the science of ecology, stresses the health and survival of ecosystems. • 2. the economic paradigm relies on environmental economics – the application of economic theory to environmental issues – and emphasizes maximizing the welfare of humans, even if this means harming the environment. • Ecological economics – attempts to resolve the differences

3. Some history …

4. John Bellamy Foster - ‘Vulnerable Planet’ • Monopoly capitalism  globalized monopoly capitalism • Synthetic products as basic elements of industrial output • Scale of economic production/economic “progress”

5. From ‘Vulnerable Planet’:economics and environment • Synthetic products as basic elements of industrial output • Advances in five fields: steel, coal-petroleum, chemicals, electricity, and internal combustion engine • Progress in physics and chemistry not accompanied by an equally rapid expansion in the knowledge of how such substances might affect the environment • Scientific management also changed labor’s relation to the production process; worker reduced to status of an instrument of production; moving control of the job from the worker to management • Taylor (1911): dissociation of labor process from skills of the workers; (2) separation of conception from execution; and (3) use of this monopoly of knowledge to control each step of the labor process and its mode of execution • Transform skilled labor to simple, interchangeable parts • Thus: human labor commodified further + human productive and cultural diversity decreased

6. Commodification…. • As labor became more homogeneous  so did much of nature. Examples? • Scientific forester’s goal: • “the maximum amount of nutrients, water, and solar energy into the next cut of timber. S/he cleans up the diversity of age and size classes that are less efficient to cut, skid, process and sell. S/he eliminated slow-growing and unsalable trees, underbrush and any animals that might harm her/his crop. S/he replaces natural disorder with neat rows of carefully spaced, genetically uniform plantings of fast growing Douglas-firs. S/he thins and fertilizers to maximize growth. S/he applies herbicides and insecticides and suppresses fires to protect this crop against the ravages of nature that must be fought and defeated.” • What is the result of this ‘goal’?

7. Synthetic age • After WWII – “productive technologies with intense impacts on the environment have displaced less destructive ones. …counterecological pattern of growth” • Examples? • Artificial fertilizers; pesticides; synthetics fibers; plastics; detergents with high phosphate content • “it is therefore the pattern of economic growth rather than growth (or population) itself that is the chief reason for the rapid acceleration of the ecological crisis in the postwar period.”

8. The 4 laws of ecology and economic production • Everything is connected to everything else • ….dramatic collapse • Everything must go somewhere • 1st law Thermodynamics: no final waste, matter and energy are preserved, and waste produced in one ecological process is recycled in another • Nature knows best • ‘any major man-made change in a natural system is likely to be detrimental to that system’ • Nothing comes from nothing • 2nd law Thermodynamics: energy is ‘used up’ but not destroyed; energy is transformed into forms are not longer available for work

9. 2 paradigms of Economics and Ecology 1. the ecological paradigm, based on the science of ecology, stresses the health and survival of ecosystems. 2. the economic paradigm relies on environmental economics – the application of economic theory to environmental issues – and emphasizes maximizing the welfare of humans, even if this means harming the environment. • Ecological economics – attempts to resolve the differences

10. Dominant pattern of capitalist development • The only lasting connection between things is the cash nexus • Cash nexus has become the sole connection between human beings and nature • It doesn’t matter where something goes as long as it doesn’t re-enter the circuit of capital • externalities • The self-regulating market knows best • For profit, not for nutrition – ‘quality of food is debased, birds and other species are killed, and human beings are poisoned’ • Nature’s bounty is a free gift to the property owner • Kapp: ‘capitalism must be regarded as an economy of unpaid costs, unpaid in so far as a substantial portion of the actual costs of production remain unaccounted for in entrepreneurial outlays’. Who pays?

11. Ecologists vs Economists • Ecologists: Concerned with? • Resilience… • Sustainability • Intrinsic value • Economists: Concerned with? • Efficiency and “material wealth” • Only consider environment that is useful to humans

12. So if money is the guide… • Henry Ford II answered the question- why Detroit automakers prefer to make large, gas-guzzling cars: • “minicars make miniprofits” • “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.” -Milton Friedman 1962 • Capitalism cannot exist without constantly expanding the scale of production: any interruption in this process will take the form of an economic crisis. • “~Resources are infinite and the economy can grow forever” -Julian Simon • Common statement: “There is no conflict between economic growth and environmental protection.” --- “sustainable economic growth.” • “Anyone who thinks you can have infinite growth on a finite planet is either a madman or an economist.” Kenneth Boulding

13. Economics and Environment In economic theory, environmental issues are separated into two main categories: • 1. The generation of wastes and pollutants as unwanted by-products of human activities • How much should be permitted? Is pollution too high/too low? What are tradeoffs with pollution levels? • 2. The management of natural resources, including renewable and nonrenewable resources. • Which resources to use for different tasks?

14. (Correct) Economic theory • 1. The recognition that natural processes provide an essential support to human well-being that needs to be adequately taken into account in all attempts at measuring well-being. • 2. The recognition that this support is finite and that there are limitations both in terms of the inputs which can be extracted from the biosphere and the waste outputs which can be put back into it.

15. Externalities: negative ext. Private costs are the firm’s costs of production. Private benefits go to consumers of the firm’s products, and to the producers as income. Private optimum occurs when marginal private costs equal marginal private benefits, at a quantity produced and consumed equal to Qp.

16. Externalities: negative ext. Market economy: private optimum will be achieved – in a perfect competition (Qp). Add Losses due to water pollution from production to private costs of production = marginal social costs Social optimum: marginal social costs = marginal social benefits (Qs)

17. How to deal with negative externality? • Market failure  when the market process leads to a solution that is not socially optimal • Solution – economically – is to ‘internalize’ the externalities. How? • Pollution tax: • The social cost of pollution now becomes a private cost – a dollar amount that the firm will have to pay for each unit of pollution. • The object of this tax is not just to penalize the firm. • It is to send an economic message: firms that create less pollution will pay less tax. This creates an incentive for the firm to control its pollution.

18. w/ pollution tax • creates a new market equilibrium at which less of the polluting good is produced. • raises the market price of the good; external cost is thus internalized • Consumers will buy less and producers will produce less (w/tax it is now less profitable).

19. Pigovian tax • The British economist Arthur Pigou was the 1st economist to propose this solution in order to “internalize” the total costs of an activity into the market. • A tax of this type is therefore sometimes referred to as a Pigovian tax. • From a theoretical point of view, the Pigovian tax is a fine solution to the problem of externalities. • There is just one problem – how do we know how much the tax should be? • Some costs we can measure; others (ecological costs?) harder to measure

20. Tradable pollution permits • policy-makers decide first on the level of pollution reduction that is needed. A certain quantity of pollution permits is issued. • These permits may be distributed to existing firms, or may be sold at auction to firms that are producing the goods responsible for the pollution. • This system is designed to reach the same overall level of pollution as a traditional system of regulation but at a lower economic cost. • Under the trading system, a firm could even choose to increase its level of pollution as long as it is able to purchase credits from another firm. • the price of a pollution permit will be determined by market supply and demand, not by the government.

21. Positive externalities? -- a subsidy would encourage the provision of open land. It is in the social interest to encourage landowners, through tax rebates or purchase of development rights, to keep land in an undisturbed state.

22. Positive externality: parallel to negative externality

23. Cost-Benefit Analysis • Used when you have to make specific decisions which have economic & environmental implications • Tool used by decision-makers to balance the + / - consequences of a proposed action • Example: large dam. What are the + / - ? • How to put a dollar value on social and ecological losses (or gains)?

24. Different kinds of value • Use value: the values placed on a resource by those who directly use it. • Non-use value: • Option value: value of preserving the option of doing something else by doing nothing • Existence value: value of preserving something for its mere existence • Bequest value: value of leaving an undamaged (less damaged) world to future generations

25. How to measure non-use value? • Contingent evaluation • essentially a survey technique, in which people are asked how much they would be willing to pay to preserve rafting or hiking opportunities. • The resulting estimate of willingness- to-pay can be included in a cost-benefit analysis -- although its reliability is debatable.

26. CBA: benefit/cost ratio • If we can measure all the costs and benefits associated with dam construction, and we find the benefits outweigh the costs, should we then proceed with dam construction? • Should also consider the benefit/cost ratio, obtained by dividing total benefits by total costs. • If ratio is only slightly larger than 1 (i.e. benefits exceed costs, but only slightly)) – maybe some other project will offer a better benefit/cost ratio. • a series of small dams rather than one large one. • Critics of cost- benefit analysis: • difficulties involved in obtaining reliable estimates, • some things, like spiritual value or the value of community, are essentially impossible to estimate in dollar terms. • Should use cost-benefit analysis with caution

27. Public goods and common property resources • Rival: Goods whose use is limited to one user at a time. • Excludable: The right to use or consume the good can be refused to others. • A good that is both rival and excludable is called a private good. • Music at a concert is – non-rival and excludable. Why? • Club-goods: the “access-right” is the membership, which allows the members to enjoy all the club’s facilities in common • Common property resources: rival and non-excludable • Public goods: non-rival and non-excludable • Congestion threshold

28. 4 types of goods

29. readings • Read chapters 6 and 7 (the tragedy of the commons) in ‘Valuing the Earth: Economics, Ecology, Ethics’ – i.e. Reader 1.b

30. Tragedy of the commons • Overuse of non-excludable or open access resources is a phenomenon that has been called the tragedy of the commons • paradox of aggregation: if everyone tries to obtain more for themselves, this behavior results in less for everyone. The pursuit of personal interest leads each individual user to take as much as possible of the resource, which increases the overall level of extraction of the resource and drives it irremediably to its destruction – and to the ruin of all the users. • Global commons: When the scope of a resource is regional or even global (ex: oceans. Atmosphere)

31. Example: Climate Change • What is it? • What are its impacts? • Negative. • Positive. • Less predictable impacts • Positive feedback effects • How to evaluate these impacts? • Economists have employed the tool of cost- benefit analysis. Others have criticized this approach as attempting to put a monetary valuation on issues that have great social, political, and ecological implications, which go far beyond money value.

32. readings • Make sure you’ve read – carefully – the microeconomics and environment module by thursday