Chapter 7: Dollars and Environmental Sense: Economics of Environmental Issues

1. Chapter 7:Dollars and Environmental Sense: Economics of Environmental Issues

2. Overview • Overview of Environmental Economics • Public Service Functions of Nature • The Environment as a Commons • Low Growth Rate and Therefore Low Profit as a Factor in Exploitation • Externalities • Valuing the Beauty of Nature • How is the Future Valued? • Risk-benefit Analysis

3. Overview of Environmental Economics • Not simply about money • Involves persuading people and organizations to act in a way that benefits the environment within a democratic framework • Focuses on: • Controlling pollution and environmental damage • Sustaining renewable resources

4. Overview of Environmental Economics • Environmental decision making involves • Tangible factors - one you can touch, buy and sell • Ex: house lost in a mudslide • Intangible factors - one you cannot touch directly, but people value it • Ex: Beauty of the slope before the landslide • Harder to measure economically

5. Public Service Functions of Nature • Public service functions • Services ecosystem provide to humans and the environment • Ex: wetlands clean water • Economists refers to systems that provide these functions as Natural Capital

6. Public Service Functions of Nature • Example: Pollinators • Pollinating animals pollinate $15 billion worth of crops grown on 2 million acres in the US • In general, public service functions of living things are estimated at: • $3 trillion to $33 trillion in benefits to humans and the environment

7. The Environment as a Commons • Often people who use a natural resource do not act in a way that maintains that resource and its environment in a renewable state • They do not seek sustainability • Profit motive does not always lead a person to act in the best interest of the environment.

8. The Environment as a Commons • “The tragedy of the commons.” • When a resource is shared, an individual’s personal share of profit from exploitation of the resource is usually greater than that individual’s share of the resulting loss • A commons is any resource owned publicly with public access for private uses • Each user tries to maximize personal gain

9. The Environment as a Commons • Example commonly used: Pastureland as a Commons • English towns used to set aside land for townspeople to graze their cattle on • Sharing the grazing area works as long as the number of cattle is low enough to prevent overgrazing • Addition of one cow has both a positive and a negative value • Positive value = the benefit when the herder sells the cow • Negative value = the additional grazing by the cow

10. The Environment as a Commons • The benefit to an individual of selling a cow for personal profit is greater than that individual’s share of the loss in the degradation of the commons • The short-term successful game plan, therefore, is always to add another cow

11. The Environment as a Commons • Eventually the common grazing land is so crowded with cattle that none can get adequate food and the pasture is destroyed • In the short run, everyone seems to gain, but in the long run, everyone loses. • Complete freedom of action in a commons inevitably brings ruin to all • The implication seems clear: • Without some management or control, all natural resources treated like a commons will inevitably be destroyed

12. The Environment as a Commons • Examples of commons in nature • US forest, 38% are on publicly owned lands • Ocean fisheries away from coastlines • Deep-ocean seabed, where valuable mineral deposits lie • Antarctica and Arctic sea ice • The atmosphere • Great Chagos Bank in the Indian Ocean

13. The Environment as a Commons • Ex: Making Voyageurs National Park in MN a wilderness area • Recreation is a problem of the commons • Overcrowding of national parks, wilderness areas, and other nature–recreation areas

14. Low Growth Rate and Therefore Low Profit as a Factor in Exploitation • The second reason individuals tend to overexploit natural resources held in common is low growth rate of the resource • Ex: whales and whale oil • How can whalers get the best return on their capital? • We will examine two approaches: • resource sustainability and maximum profit

15. Low Growth Rate and Therefore Low Profit as a Factor in Exploitation • Resource sustainability policy in whaling • Harvest only the number of whales by which the population increased • Maintain the abundance of whales at its current level • Can stay in the whaling business indefinitely • Maximum Profit in whaling • Harvest all the whales now • Sell the oil, get out of the whaling business, and invest the profits

16. Low Growth Rate and Therefore Low Profit as a Factor in Exploitation • Economically speaking the second scenario is more profitable • Whaling on the open seas can be also viewed as a problem of a commons, complicated by low growth rate

18. Externalities • Externality = Indirect cost • An effect not normally accounted for in the cost–revenue analysis of producers • Not recognized as part of their costs and benefits • Costs or benefits that don’t show up in the price tag • Consumers must compare true costs or the price will be wrong

19. Externalities • Good examples- Air and water pollution • Production of nickel • Direct costs include: • Purchasing ore • Energy to run the smelter • Building the plant • Paying employees • Externalities include: • Degradation of the environment from plant emissions

20. Externalities • Problem #1 • Need to get public to value clean air and other environmental benefits as greater than zero • Possible solution- Quantitative evaluation of the tangible natural resources • Air, water, forests, and minerals • Prior to development or management of a particular area

21. Externalities • Problem #2 Who should bare the burden of these environmental and ecological costs? • Possible Solutions • Include it in costs of production through taxation or fees • Costs could be shared by the entire society and paid for by general taxation • Economists generally agree that the “polluter pays” approach provides much stronger incentives for cost-effective pollution reduction

22. Valuing the Beauty of Nature • Called landscape aesthetics • One of the perplexing problems associated with aesthetic evaluation is personal preference • Philosophers differ on what key elements are important to aesthetic quality • Coherence, complexity, and mystery • Unity, vividness, and variety

23. How is the Future Valued • Humans value personal wealth and goods more if they are available now than if they are promised in the future • But we have a debt to future generations • Can we place an economic value on future existence of anything?

25. How is the Future Valued • Economists observe that it is an open question whether something promised in the future will have morevalue then it does today • So in terms of the future, the basic issues are: • (1) We are so much richer and better off than our ancestors that their sacrificing for us might have been inappropriate. • (2) Even if they had wanted to sacrifice, how would they have known what sacrifices would be important to us?

26. Risk-Benefit Analysis • The riskiness of a present action in terms of its possible outcomes is weighed against the benefit, or value, of the action • Some behaviors are far riskier than others • Ultimate fate for everyone is death

28. Risk-Benefit Analysis • Looking at Table 7.1 we can see that death from outdoor environmental pollution is comparatively low • Lowering air pollution is an improvement in the quality of our lives, rather than an increase in the time we are alive • Indoor air pollution is much more deadly than most outdoor air pollution

29. Risk-Benefit Analysis • Generalizations about the acceptability of various risks: • Number of people affected • Novel risks appear to be less acceptable than long-established or natural risks • People’s willingness to pay for reducing a risk also varies with how essential and desirable the activity associated with the risk is

30. Risk-Benefit Analysis • Air pollution’s direct effect on human health • Costs more to increase longevity by a reduction in air pollution than to through the addition of a coronary ambulance system • Should we improve the quality of life for the living or extend life expectancy regardless of the quality of life?