Course focuses mainly on the economic principles

1. POSTGRADUATE INSTITUTE OF AGRICULTUREUNIVERSITY OF PERADENIYA, SRI LANKASecond Semester 2005/06EC 6203: Resource and Environmental Economics II (2)Prof.S.Thiruchelvam & Dr.Ranjith Bandara Course focuses mainly on the economic principles of natural resources & environment. Included are: Adv. analysis on externalities. Allocation of natural resources to max. HW. Market failure, reasons & guidance to correct MF. Core social science knowledge on managing env.

2. REE IICourse Outline 1.Overview of environmental policies. 2. Quantity control and price controls. 3. Command and control methods. Quiz 1. 5% 4. Pigouvian taxes and charges Subsidies. 5. Tradable permits. 6 Liability rules;non-compliance fees, bond, & D funds Mid-term 25% (1 ½ hours).   7.Criteria for policy selection . 8. General equilibrium effects & double dividend. Quiz 2. 5% 9 - 14. Special Assignments Presentations 15% 15. End-term 50% ( 2 hours)

3. L No 1. ENVIRONMENTAL ECONOMICS • grew strongly in 1970s (and again in 1990s; David Pearce & Brundtland) as an extension of mainstream economics to try to include unpriced env. effects into the market logic (Natural) Resource Economics NRE EarlierNRE was concerned mainly with pricing natural resource inputs & identifying optimal rates of depletion (mineral, ag., forestry economics etc) logic = just a special case of other normal factors of production (inputs); focus on the “free” resources provided by nature)

4. THEN environmental economics with its broader concern with the effects of economic activity on environmental quality • originally just waste, pollution and how get markets to take them into account; • to produce equilibrium that maximised community welfare MORE RECENTLY EE more comprehensive integration of NRE and EE because of realisation that environmental resources are the media of waste/pollution eg. acid rain affects forestry; resource degradation = depletion ie. damage from pollution affects value / supplies of environmental resources.

5. ENV ECONOMICS - Extension of Mainstream Economics (neoclassical) • Very reliant on market solutions to address the problem of ....Demand-Supply • MARKET FAILURE (re the environment) EE addresses these unpriced effects and usually attempts to extend the market to cover them ENV EC attempts to convert the unpriced effects of waste and pollution, & resource loss, into market situations (the “internalisation” of Es into a M FW) Internalise: To provide incentives so that externalities are taken into account internally by firms or consumers.

6. Why do we study environmental and resource economics? • This is not as obvious as it seems. A market economy is under certain assumptions optimal. Environmental and resource economics are concerned with what happens when these assumptions fail to hold. In particular: • Externalities and Public goods/bads. • Ambiguous property rights • Intertemporal problems • It is remarkable how many problems fall in these categories

7. Externalities and Public Goods • The economics of unintended consequences. • Occurs when the production or consumption of a good affects e utility or production of other agents • Implies that the price of a good is not a good measure of its value. Property Rights If nobody owns the fish in the sea, the fish in the sea has no value to the fisherman until it is caught. If nobody owns the fresh air, no-one can complain when it is polluted

8. Intertemporal Problems • How to use a resource that has a dynamic existence. • Preferences for distribution across generations. • Tomorrows purchasing power may not be manifest in a market. • Should the value of a resource grow in the bank or in nature? What we do. Standard mode of operations. We calculate how e economy works in e absence of regulations (or in the presence of stupid egulations.) We calculate what the economy should look like. Then we see what kind of policy instruments we can use to make the two solutions coincide

9. Environmental and Resource Economics as an Interdisciplinary Field of Study • For real life problems, the economist must cooperate with natural scientists. • Economics will in general make heavy handed use of assumptions to get nicfe results. • These assumptions are often violated.

10. Fundamental Insights from the Natural Sciences – Physics • Termodynamic laws • Conservation of mass and energy – What you have is what you get. • The entropy law – You always loose some energy • In an economic model these laws are represented as constraints on economic activity

11. Fundamental Insights from the Natural Sciences – Biology • Ecosystems are complex organizations. Some are vulnerable and some are resilient • Biodiversity is important. • Genetic diversity within a population • Species diversity within a geographical area. • Diversity of ecosystems • It is a cause for concern that species are dying out at unprecedented rates.

12. These things bring out the question of sustainability. • If the world is optimal, it does not have to be sustainable. • Some resources exist only in finite amounts. (Non-renewable resources) The exploitation of such resources is per definition not sustainable, but it certainly is not optimal never to use them. • How can the idea of sustainability be incorporated into economics?