@ Cesare Dosi - Dept.

of Economics and Management, University of Padova – AY 2019_20

Environmental Economics and Policy
LECTURE I

LECTURE I
INTRODUCTION

OUTLINE:

 How do economists define the Environment?

 Anthropocentrism vs Ecocentrism
 The economic functions of the Environment and the “circular economy”
 Environment, scarcity and the allocation problem
 The roots of environmental problems and the role of environmental politics
 The scope of Environmental Economics and the scope of this course

COMPULSORY READING:
 Pearce D.W. and R.K. Turner (1990), Economics of natural resources and the environment. Baltimore: The Johns
Hopkins University Press (Chapter 2: “The circular economy”)

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

HOW DO WE DEFINE THE ENVIRONMENT?

ANTHROPOCENTRISM VS ECOCENTRISM

 How economists do (usually) define the Natural Environment?

 Siebert (1998): “the set of natural conditions that defines the human living space”

 This definition stems from an anthropocentric view of the Environment

 ANTHROPOCENTRISM : the tendency for human beings to regard themselves as the central
entities in the universe and to assess the reality through an exclusively human
perspective
 Anthropocentrism is deeply rooted in the Western culture.
 For example, Aristotle [The Politics] maintains that:
 “nature has made all things specifically for the sake of man”

 This view is contrasted by “ecocentrism”:

 ECOCENTRISM : a nature-centred, as opposed to human-centred system of values

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

♫ : Homework: Watch and listen carefully

Gary Steiner: “Against anthropocentrism”: http://www.youtube.com/watch?v=JK3kbl75-xc

Corey Anton: “Can we really get rid of anthropocentrism?” http://www.youtube.com/watch?v=iyfERysFYMA

 Within the debate between anthropocentrism and ecocentrism, some confusion emerges when we
address the distinction between “intrinsic” and “instrumental” value
 instrumental value : the value of things as means to some other ends
 intrinsic value : the value of things as ends in themselves (regardless of whether they are
useful means to other ends)
A wild animal species can be perceived as “useful” (i.e., “valuable”) as an aesthetic object or because it provides “raw
materials” (meat, skin, …). But animal species may also have some value in itself (intrinsic value) because humans
(some humans) may wish to conserve wild species for future generations .... or simply because they believe that living
species deserve respect (“existence value”). Clearly, wild species hold an instrumental value when they are used for
food or for other consumption/production uses or as an aesthetic object. But what about when we attach a value to the
existence of wild species in itself? Are we “eco-centric” or “anthropocentric”? – (see the video by C. Anton) ♫

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

A deep analysis of the philosophical dispute between “anthropocentrism” and “eco-centrism” would go
well beyond the scope of this course ….
Here, we will limit ourselves to note that:
1) Economics embraces the anthropocentric view
 that is, from an economic perspective, “the Environment” (“natural resources”, “environmental
services”) matters as long as it directly or indirectly affects humans’ well-being

This may occur:

 either because natural resources (NR) are used as means to some other specific ends,
 or because humans attach a value to their mere existence (that is, regardless of whether
natural resources are (or will be) used to achieve other specific ends)
2) Provided we adopt a sufficiently enlightened understanding of “human-well being”
even the anthropogenic view acknowledges the intrinsic value of the non-human
world, provided the non-human world affects human well-being ............. In the economic
jargon: provided the “non-human world” enters in some way into (some) individuals’
utility functions
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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

Do whales enter (and How?) into humans’ utility functions?

Why whales are “economically valuable”?

Because of the following (“consumptive” or “non-consumptive”) uses

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

But also because humans (at least, some humans) get utility knowing that........

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

THE ECONOMIC FUNCTIONS OF THE ENVIRONMENT

The environment has essentially three economic functions

1. Suppliers of resources (and Location space)
2. Receptacle of waste
3. Consumption goods

 These functions can be better understood by using the model of a Circular Economy which provides a
stylised picture of interactions between the economy (that is, human activities) and the environment

(see compulsory reading: Pearce and Turner – Chapter 2)

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

The circular economy

P C U

K
(P = production of goods; C = consumption goods; U = utility; K = capital goods)

(for convenience, we leave out K and U)

R P C

Natural resources enter as an input to the productive system: this is the first economic
function: “supplier of resources”

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

But the picture is incomplete because it says nothing about waste products:
 the processing of resources (e.g., oil extraction) creates wastes (Wr); production (of gasoline
creates wastes (Wp); final consumers (using gasoline in cars) create waste (Wc)

R P C

Wr + Wp + Wc =W
Some of the waste can be recycled (e.g. some waste paper returns to be pulped for making
further paper ..)

R P C What happen to that proportion of waste flow that we do not

(or we cannot) recycle?
W (Second Law of Thermodynamics:
“the materials used tend to be used
entropically: they get dissipated
within the economic system”
environment as a sink (receptacle of waste)
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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

 What happen to that proportion of waste flow that we do not (we cannot) recycle?

 The environment has an assimilative capacity: this is the second economic

function

 This function can be impaired if the pollutant loading is too great for the capacity of
the natural environment to absorb waste: i.e., a renewable resource (assimilative
capacity) is converted into an exhaustible resource

 Thus, humans get (indirectly) utility by using the environment as a supplier of resources
and by using the environment as a waste sink.

 But the picture is still incomplete, because humans also get utility by directly using the
environment as a “consumption” good , e.g. air to breathe …. or immaterial goods
(aesthetic enjoyment, spiritual comfort)

o This is the third economic function

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

Supplier of resources

 The environment provides raw materials (e.g. fossil fuels, minerals, water, timber, etc.) which are used
as inputs in production activities
o The goods generated by the resources (e.g. electricity produced by using fossil fuels) are then
used as inputs by other production processes (e.g. for manufacturing washing machines) or
supplied for final consumption (electricity used by households for running washing machines)
 Typically, environmental goods used as raw materials are “rival”, that is, the same unit of the good
cannot be used by several individuals (if a power plant uses a ton of coke to produce electricity, another
firm cannot use the same ton of coke)
 Some natural resources, used as raw materials, are not renewable (e.g., fossil fuels), .......
o other resources are renewable (e.g., living organisms, like fishes), that is, they are replaced by
natural processes
 however: since the regeneration of renewable resources can be limited, the renewability can
be compromised if the rate of extraction exceeds the natural world's capacity to
replenish them

 The environment also provides space for location (land for industrial and residential locations,
agricultural land, land for collective infrastructures ..) : the environment as a Location space

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

Receptacle of waste (“waste sink”):

The by-products of the production and consumption activities, which have no further utility, are emitted into
the environment (atmosphere, water, land): wastes (“pollutants”) are(partly) decomposed, or accumulated, or
transported to other areas, and/or or transformed
 Depending on the environmental media (air, water, land), the nature of the emission source, the type of
pollutants, the use of environment as a receptacle of waste can involve different problems (management
issues) :
a. ENVIRONMENTAL MEDIA : It may be easier to find solutions to the environmental problems of small systems (e.g., a
small forest) than for large systems (e.g., the ozone layer of the world)
b. SPATIAL EXTENT OF ENVIRONMENTAL MEDIA : Environmental media can be local (e.g., a pound in a local
neighbourhood), regional (the Venice lagoon watershed), national (the Po river basin), international (the Rhin river
basin), or global (the Earth’s Oceans)
c. TYPE AND LONGEVITY OF POLLUTANTS : Pollutants can be poisonous, damaging (in the short-term or in the long-
run), or neutral (some pollutants can be easily absorbed by environmental media (e.g. organic wastes in water)
d. ORIGIN OF POLLUTANTS : Pollutants may come from stationary (e.g. a power plant) or mobile-diffuse sources (e.g.
cars). Pollutants may come from production activities (e.g. carbon emissions from electricity generation) or
consumption activities (e.g. carbon emissions from home heating). Pollutants may come during the production or
consumption process (e.g. when producing or consuming energy), or at the end of the process (e.g.,
decommissioning of a power plant or scrapping of a car). Pollutants may occur in a continuous fashion (e.g., carbon
emissions from electricity generation), or random fashion (e.g., the 2010 oil spill in the Gulf of Mexico)

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

Consumption good:

The environment also supplies utility directly, in the form of material goods (e.g. air to breathe)
or immaterial goods (“amenities”, aesthetic enjoyment ……… or spiritual comfort)

Many (not all) of these “consumption” goods hold the features of a “public good” (see
LECTURE 2)

that is,

 the good can be used (enjoyed) simultaneously by several individuals without the users
competing with one another (“non-rivalness”)

and

 the good, because of its intrinsic characteristics, does not permit the exclusion of some
users (“non-excludability”)
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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

ENVIRONMENT, SCARCITY AND THE ALLOCATION PROBLEM

Supplier of inputs, location space, receptacle of waste, consumption goods .......

 The environment can be “used” for different purposes

 This is one of the chief reasons for “the environmental problem”

 Why?
 because these functions are often competing with one another , that is:
these functions cannot be simultaneously exploited

A water body (e.g., a river) can be used for irrigation, for drinking water supplies, for generating electricity, as
well as a receptacle of waste (coming from agricultural and/or industrial activities and/or households) and/or
for recreational activities .........

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

 As long as these uses are competing with one another....

 Which use (uses) should be given the highest priority ?
 Irrigation? Electricity? Drinking water? Pollution from agriculture? Pollution from
households? Recreational uses?

 Moreover ....
 individuals do not only extract utility from the environment by using it now
 (some) individuals may attach value to preserve some natural resources regardless of the
current use

 either because they wish to preserve the opportunity to use these resources in the
future

 or simply because they attach an intrinsic value to conservation

 Hence, there may emerge different forms of competition …….

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

 Competition between the role of the environment as a consumption good (e.g., aesthetic value of
forestland) and its function as supplier of raw materials (timber extraction) or as a location for
economic activities (e.g. transforming forests into farmland)

 Competition between the demand to preserve natural resources for the future and the raw-material
function of the environment for the present generation
o This happens when the resources withdrawn from the environment are not renewable (e.g. fossil
fuels) ......
 but it may also happen for renewable resources when the exploitation rate exceeds the natural
world's capacity to replenish them (e.g. extinction of bluefin tuna)

 Competition between the role of the environment as a receptacle of waste (e.g. water pollution) and the
role of the environment as a consumption good (e.g. water pollution of a lake affecting its aesthetic
value), or as a source of raw materials or as a location space for economic activities (e.g.
groundwater contamination affecting the bottled water industry, or sea-water pollution preventing fish-
farming)

From an economic perspective, the “environmental problem” is essentially a question of scarcity:

 How environmental resources should be allocated to the various competing uses?”
 How to manage the conflicting demands for current use, future use and no-use?

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

THE ROOTS OF ENVIRONMENTAL PROBLEMS AND

THE ROLE OF ENVIRONMENTAL POLITICS

 In Economics a distinction is usually made between

 goods that are scarce and
 “free goods” , i.e., goods that are desired (because they provide utility) but are available in such
abundance that all demands can be met even if individuals did not afford any price (cost) to
acquire them

 The economic definition of scarcity is related to the concept of opportunity cost

 free goods : goods whose use does not involve an opportunity cost
 scarce goods : goods whose use involve an opportunity cost

 Opportunity cost: the cost related to the next-best choice available to someone (private opportunity
cost) or someone else (social opportunity cost), among several mutually exclusive choices

If firm A (e.g. a farmer using pesticides) pollutes the river, the opportunity cost is the cost which firm B (bottled water
industry) will need to afford to purify the water in order to make it suitable for human consumption … or to find
alternative water supplies
If we fish beyond the rate that would allow the reproduction of the species, the opportunity cost is the cost that future
generations will need to afford to find alternative food supplies

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

 Typically, people do not pay a price to use free goods (It would be inefficient to price free goods!)

 However, zero-priced goods should not be interpreted as a synonymous of “free goods”

o there are many scarce natural resources – that is, resources whose use involves a social
opportunity cost (a cost for other individuals, now or in the future) – used without paying a
price

 This produces a discrepancy between private and social costs

 that is, a discrepancy between the cost afforded by the user (zero!) and the utility losses
for other individuals

 With a zero price for environmental use, such utility losses are not are not appreciated
 the accounts of the user only include some costs (private costs) but do not include all social
costs that come during the production or consumption process

cost omission
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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

What are the economic consequences of this cost omission?

 If no price is demanded for polluting the environment (that is, if production costs
are calculated at a price that does not account for the social opportunity cost of using the
environment as a receptacle of waste)

 we have two misallocation effects:

a. First, pollution at a zero price leads to an overproduction of environmentally harmful
products: too many resources are employed in the pollution intensive sectors and too
few in the environmentally “friendly” sectors
 “a zero price for environmental use (pollution), then, can be understood to be
an artificial production benefit for the polluting-intensive sector” [Siebert,
1998]

b. Second, natural resources are overused: the consequence is (a socially inefficient)

environmental degradation

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

 From an economic perspective, (a) resource misallocations and (b) environmental degradation
 must be traced back to the failure of the economic system to provide adequate
incentives to use scarce environmental resources in a (more) socially efficient manner

 And the lack of adequate incentives

 must traced back to institutional failures

 Institutional failures:
 scarcity calls for the introduction of prices (or, alternatively, social norms, social rules)
forcing economic agents to fully account for the opportunity cost of private environmental
use
 however, the environment is often treated as a “free good”

 Thus, from an economic perspective

 the main function of Environmental Politics should be .....
 making individuals aware of the environmental scarcity, that is:
 bridging the gap between private costs and
social costs of environmental use

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

 ENVIRONMENTAL PROBLEMS ARE ANCIENT, BUT THEY HAVE BECOME MORE COMPELLING
IN MODERN SOCIETIES

 There is a tendency to believe that environmental problems are modern …….

 Yet, environmental problems (and environmental policies) are ancient

 Issues such as
 “How the environment should be allocated to the various competing uses?”
 “How to manage the conflicting demands for environmental use?”
have long been addressed by societies

 Evidence of environmental concerns can be found, for example, in the Code of Hammurabi (1700 BC):
 (53) “If any one be too lazy to keep his dam in proper condition, and does not so keep it; if then the dam break and
all fields be flooded, then shall he in whose dam in whose dam the break occurred be sold for money, and the
money shall replace the corn which he has caused to be ruin” or
 (55) “If any one open his ditches to water his crop, but is careless, and the water flood the field of his neighbour,
then he shall pay corn for his loss”

 and Aristotle (300 BC), in The Politics, noted that: “an ideal community should take into account of
environmental quality and should set priorities when deciding how to allocate natural resources”

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

 Neither the need to address environmental problems, nor the need to establish appropriate social rules
are specific to modern societies

 What has changed over time

 is the extent, the nature, the perception of environmental problems
 and the processes by which policies are chosen and implemented

 Environmental problems, such as those related to the massive use of fossil fuels (e.g. global warming),
are clearly specific to modern societies. These, as well as other forms of environmental degradation,
have become increasingly more compelling as a result of population growth and economic development

 Moreover, the demand for “environmental quality” has increased over time, as a result of a change in
preferences
 economic growth increases environmental pressures ...... but the (income) growth itself can
push up the demand of environmental quality ! (LECTURE 5)

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

 Because of

 the limited natural supply of environmental goods,

 the progressive resource depletion, the increasing demand for raw materials, location
spaces, and pollution
 and the increasing demand for environmental quality (demand of the environment as a
final consumption good)

 environmental goods have become increasingly scarcer

o and, therefore, the need to manage the conflicting demands for current uses, future uses
and conservation more compelling

A tentative summary

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

price
S

D (raw materials, waste

assimilation, consumption
good)

(no scarcity):

D(0) < S

0 quantity

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

price

S
D’

scarcity:
D(0) > S

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

price S’
S
D’

with P = 0 …… increasing
scarcity

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

price

Prices should increase (to avoid

disequilibria) ….. But …

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@ Cesare Dosi - Dept. of Economics and Management, University of Padova – AY 2019_20
Environmental Economics and Policy
LECTURE I

THE SCOPE OF ENVIRONMENTAL ECONOMICS AND THE SCOPE OF THIS COURSE

 Economics, in general, is mostly concerned with the optimal allocation of scarce goods
 Environmental Economics , in particular, looks at the problems associated with human use and
misuse of natural resources, and how a society could improve resource allocation by managing
the conflicting demands for current use, future use and conservation

 This course will mostly focus on the use of the environment as a receptacle of waste and on environmental
policies addressing environmental quality problems through pollution control

 The course
 begins by reviewing the theoretical foundations of public regulation and environmental
policies (LECTURE 2)
 and continues by comparing alternative policy instruments for pollution control (LECTURE 3)
 Afterwards, we will address the following issues:
 LECTURE 4 - Valuing the environment (Why is valuing the environment useful?)
 LECTURE 5 - The relationship between economic growth and environmental quality (Is economic
growth “good” or “bad” for the environment?) and the spatial dimension of environmental problems
(Focus: Why is so difficult to manage global warming and climate change?)

 LECTURE 6 – The firm and the environment (How and when firms can achieve a competitive
advantage by improving their environmental performance?)
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