*Summary of Environmental Studies Materials*

Meeting 1

Q : What are scopes of environmental economics?

A : It includes many issues and topics within, but one of the most important is economics of
pollution control. This issue relates at least to three dimension:

1. Efficiency: allocative vs. technical. Technical efficiency means finding a way such that our
production process such that the (input) cost is minimized. Meanwhile, allocative efficiency
relates to taking into account non-input cost such as social and environmental cost.
For example, electricity generated using coal is more efficient compared to gas = min cost.
But, cost of pollution arise from coal exceeds the saving cost
2. Optimality. It is a way to find the best way to allocate resources. Resource allocation
cannot be optimal unless its efficient, but efficiency is not the only criteria for optimality
3. Sustainability, which means taking care of future generation

Q : Why should we study environmental economics?

A : There are at least four reasons:

1. Economic activities affect environmental quality. For example, vehicles and manufacturers
produce pollutants that affect air and soil quality
2. Pollution imposes huge costs to many stakeholders, such as healthcare for disease due to
air pollution, cost to rehabilitate polluted water, cost for reforestation.
3. There are seriouse threats for future generation with current trend of environmental
pollution and natural resources exploitation, for example climate changes.
4. Our utility function, which represents our welfare and satisfaction depends on
environmental amenities.

Q : What are differences between market goods and environmental goods?

A : There are at least three differences:

1. Since market goods have “market”, then there is price as signal for customers and firms on
their valuation. Meanwhile, such “market” is not available for environmental goods, thus
no price signal exist as proxy for environmental goods (monetary) value, although we
cannot deny that environment has a value.
2. With regard to property right, market goods entitle the owner certain degree of property
right or ownership. In other words, nobody can intervene an owner on what he/she does
with the goods. Meanwhile, environmental goods are non-excludable and non-rivalrous. In
other words, individuals cannot be effectively excluded from use and where use by one
individual does not reduce availability to others.
3. Government intervention is limited with regard to “market goods”, while for
environmental goods, government should take more roles and even take initiatives.
Q : What is externality?

A : Externality is a non-transaction cost or benefit to third party due to certain

activities/transaction. For example, societies which do not involve in manufacturing process
suffered from pollution emitted by manufacturers.

Q : What are fundamental issues in environmental economics?

A : There are some fundamental issues in this field:

1. Property right, which relates to ownership and roles of individuals/parties involved.

2. Efficiency, especially related to allocation of resourses.
3. Government intervention, on what fields and up to what degree
4. Valuation of environment, which is not necessarily equal to the price.

Q : What are concepts within time dimension of environmental economics, especially on the
usage of resources?

A : With regard to effect on future availability, there are two concepts:

1. Stock: current use affects future availability. Example: flora population and mineral
deposits
2. Flow: current use does not affect future availability. Example: solar radiation, wind power,
flowing water

With regard to generation capability, there are also two concepts:

1. Renewable: have capacity to grow. However, this kind of resources can be depleted if its
harvested rate > generating rate. Example: trees on the forests
2. Non-renewable: does not have capacity to grow except on geological time scale. Example:
fossil fuel that needs millions of years to be generated.

Q : What are considerations when looking at efficiency and optimality of resource

allocation/usage?

A : When we analyze efficiency and optimality, we should consider two types of analysis:

1. Static usage or usage rate at a point of time

2. Dynamic usage or the pattern of usage over time

Q : What is issues within substitutability and irreversibility?

A : If the usage of a resource is irreversible and there is no close substitute, then there will be
policy implication related to its sustainability.

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