Module (2): Environmental (neoclassical) economics:

1. Module (2): Environmental (neoclassical) economics: Traditional paradigm of neoclassical economics: monetary evaluation Cost-Benefit Analysis Techniques of monetary evaluation for the environment. Polluter pays principle Negative externalities and the reality The environmental Kuznet curve

2. Traditional paradigm of neoclassical economics: monetary evaluation Monetary evaluation gives a clear quantitative result (the product)... Based on the model of Pareto efficiency and on Kaldhor-Hicks potential compensation But the latter principle generates distributional issues: if in a project the rich gets richer more than the poor gets poorer, it is then economically feasible to do the project, no matter if the compensation happens. Distributional issues often are not an economist’s problem. The decision-maker should worry about them.

3. Cost-Benefit Analysis Decision making is based on CBA. i.e. for evaluation of alternative projects at the micro level, or for the implementation of a government policy (environmental tax, emission limits) at the macro level. Effective CBA is related to the identification of total economic value; this is expressed only in monetary terms. TEV = Direct use value + indirect use value + option value + existence value USE VALUES + NON-USE VALUE Environmental economics tries to internalize costs that are not present in the market by using methodologies to price them. “Internalization of externalities” ...but the process to get the number has some distorsions...

4. Techniques of monetary evaluation for the environment Willingness to pay/willingness to accept Travel cost method Hedonic pricing Often they simply don’t work: how far can we force the citizen to give a price? Marketcentric view. CBA has more sense in a context where the market is dominant (i.e. a western city) than in a context where market mechanisms are highly absent (i.e. the tropical forest)

5. S’ p S tax p’’ p’ D q’’ q’ q One example of an environmental tax

6. Polluter pays principle and negative externalities Based on the Coase theorem, that is to clarify property rights: example of a factory polluting the waters upstream from a bathing place. Bathers have to travel to another place. Theorem says that Pareto efficiency can be reached by market forces. The task is to define who to give property rights, then compensation of negative externalities will be paid if you have the right. The polluter pays principle says that the rights are given for a clean environment to the users. Firm has to pay for the negative externalities. For example the price of travelling to another place. Two cases: 1. compensation > increased revenues from pollution  stop pollution (no production, or find a clean technology)2. compensation < increased revenues from pollution  people are paid to go bathing to another place Is internalizing negative externalities enough? If bathers are totally compensated but the ecosystem dies is enough? Paying the price in money is a necessary condition but might not be a sufficient condition. This is a marketcentric and anthropocentric approach.A more radical view is an ecocentric approach.

7. But, in the reality A final comment: in the real world, the acceptance of this principle would be an improvement in the ecological crisis. Market forces would reduce the output level of pollution. Polluters do not pay for negative externalities (First problem: the necessary condition is not respected) Sometimes the value of life is closely connected to the ecological value, especially for those people that live directly in contact from the earth, like tribal people, traditional people and rural people: “what is your willingness to accept for losing the right of use of your land?” In other cases more close to us there are problems of quantifying the price. mainly these are issues of ethical nature, but neoclassical economics models do not accept ethics, i.e. the value of life: imagine for example the ethical non-sense of such a question “what is your willingness to accept for the death of a friend or a relative?” Often insurance value of life is a monetary indicator for the price of life, thus discriminating between rich and poor people. Of course there is no price because other values exist. Only the homo oeconomicus would be able to give us an answer, but he is only an invention of economists. Reality is different from the perspective of economics models based on “only money value”. Ecological and human values are not included in the reduccionism of these models Ecological economics tries to address these issues because they are part of the reality

8. Environmental Kuznet Curve Some environmental economists are optimistic about the future, under the Environmental Kuznet Curve hypothesis. What is the relationship between economic growth and environmental degradation? That of an inverted U shaped curve: environmental degradation rises with income, untill a point where, as income grows, willingness to have a cleaner environment grows, which implies a better environment. This issue is connected to the supposed “dematarialization of the economy” and to the consideration of the environment as a luxury good. But in reality there is no evidence yet of dematerialization And the “NIMBY” (Not-in-my-backyard) perception displaces the environmental loads to poorer countries Finally, even if dematerialization will occurr, who guarantees us that the outcome will not be a “The Matrix” like scenario?

9. Environmental Kuznet Curve Paper from EKC Vienna Wuppertal report pag. 66