Environmental Economics

Section One

Introductory

This first section contains two introductory chapters. Environmental economics builds on the foundations of microeconomic analysis, but introduces a number of key features that make it an important field of study in its own right. The first chapter provides an overview of environmental economics and illustrates key concepts by looking at both the global level - greenhouse gas emissions and climate change, and the local level - vehicle emissions. The second chapter explores a basic environment-economy framework and asks how can we sustain both, then defines a number of environmental terms used throughout the book, and provides a picture of the state of Canada's environment.

Chapter 1

What Is Environmental Economics?

Environmental economics is the study of environmental problems with the perspective and analytical ideas of economics. Economics is the study of how and why people--whether they are consumers, firms, non-profit organizations, or government agencies--make decisions about the use of valuable resources. Economics is about making choices. It is divided into microeconomics, the study of the behaviour of individuals or small groups, and macroeconomics, the study of the economic performance of economies as a whole. Environmental economics draws from both sides, but primarily from microeconomics. The study of environmental economics, like all economics courses, is concerned with the fundamental issue of allocating scarce resources among competing uses. The concepts of scarcity, opportunity costs, trade-offs, marginal benefits, marginal costs, efficiency and equity are key ingredients to understanding environmental problems and what can be done about them.

Environmental economics makes use of many familiar concepts in economics. What is different about environmental economics compared to other economic subjects is the focus on how economic activities affect our natural environment--the atmosphere, water, land, and an enormous variety of living species. Economic decisions made by people, firms, and governments can have many deleterious effects on the natural environment. For example, the dumping of waste products into the natural environment creates pollution that harms humans and other living things, production, and degrades ecosystems - the planet's air, water, and land. It leads to wasteful use of resources and threatens the sustainability of both our environment and economy. We ask:

* Why don't people take into account the effects of their economic activity on the natural environment?

* What inhibits economic systems from using its resources wisely and efficiently to protect the sustainability of our planet and people's livelihoods over time?

Environmental economics examines these questions by focusing on ways society can reduce its degradation of the natural environment. Equally as important, environmental economics investigates and assesses different methods of reaching an efficient and equitable use of all resources (including environmental ones) from the viewpoint of society, not just individual decision makers as is the typical focus in economic analysis.

To accomplish these tasks, a simple but powerful analytical model is developed that builds on, but modifies and extends standard economic principles, in particular, the marginal valuations that involve trade-offs between marginal costs and marginal benefits. While economic efficiency remains the central criterion for evaluating outcomes and policies, environmental economists also examine other criteria for choosing among alternative policies that attempt to improve the environment--for example, equity or fairness. If economic efficiency cannot be obtained, and environmental targets are established using other criteria, an economic approach can still greatly assist decision makers in reaching whatever target is set. This book focuses on how individual actions give rise to environmental degradation and what can be done about these actions. Another branch of economics - natural resource economics - examines ways to achieve efficient use of our natural environment over time - energy, forests, land, and harvested species such as fish stocks. We look more closely at the distinction between environmental and natural resource economics in Chapter 2.

The objective of this chapter is to acquaint you with some of the basic ideas and analytical tools of microeconomics that are used in environmental economics. We will illustrate how environmental economics helps answer important questions about our environment and economy real-world examples. We first consider briefly what we mean by the "economic approach," then turn to two pressing environmental problems; starting first with a local and regional concern --motor vehicle pollution, then turning to a global threat - greenhouse gas emissions. In Chapter 2 we will take a look at the broad linkages existing between economy and environment and define a number of important pollution terms. After that we will be ready to study the economic principles we will need.

CATCH NEW UNNUMBERED BOX (Included Below)

ECONOMIC EFFICIENCY: Economic efficiency is all about using resources wisely. An outcome is said to be economically efficient if all resources are put to their highest value use, or equivalently, the economy reaches a desired outcome using the fewest resources. Chapter 4 provides develops efficiency concepts fully, but for now, consider this illustration.

Should we pick A, B, or C? An economically efficient choice would be to pick 'A'. Good or service A maximizes the value of the end use for which resources are being put. In using economic efficiency as an objective, economists are making a value judgment as well as empirical observation. The value judgment (known as a 'normative' approach - see Chapter 5) is that something has value if someone wants it. That 'something' can be a computer or the ability to always take a walk in a forest - it need not be a good that is produced and sold in the marketplace. Both the computer and the walk in the forest use inputs from the natural environment - minerals for the computer components, the ecosystem supporting the forest environment for the walk. Environmental economics emphatically asserts that if individuals value the forest for taking walks more than the computer, than it is the highest value use, even if there is no explicit market for walks in the forest. The empirical observation behind efficiency is hundreds of years of observing people make decisions that indicate they are looking for maximum value