Unit 1-Basic Environmental Issues

1.5
* Economics of global warming and climate change
The economic impacts of climate change are the part of the economics of climate change
related to the effects of climate change. Climate change is a long-term change in the average
weather patterns that have come to define Earth’s local, regional and global climates. In 2017,
climate change contributed to extreme weather events causing at least $100 billion in
damages.
Increasing temperature will lead to accelerating economic losses. A 2017 survey of
independent economists looking at the effects of climate change found that future damage
estimates range "from 2% to 10% or more of global GDP per year."
The Stern Review for the British Government also predicted that world GDP would be
reduced by several percent due to climate related costs; among the factors they considered
were increased extreme weather events and stresses to low-lying areas due to sea level rise.

* The Positive analysis of Climate Change Policies:

● Energy efficiency investments can provide up to one-half of the needed greenhouse

gas emissions reductions most scientists say are needed between now and the year
2050.

● Investments in more energy-productive technologies can also lead to a substantial net

energy bill savings for the consumer and for the nation’s businesses.
● Non-energy expenditures within the U.S. tend to be more labor-intensive and provide
a greater rate of contribution to the nation’s Gross Domestic Product compared to
expenditures on energy. Instead of taking jobs away from the economy, the diagnostic
assessment here suggests a small but net positive gain in the economy.
● Hence, shifting away from the production and consumption of conventional energy
resources, in favor of more productive investments in energy-efficient technologies,
can lead to a more robust economy and to a greater level of overall employment
opportunities

* Economics of global warming

Global warming is the long-term heating of Earth’s climate system observed since the
pre-industrial period (between 1850 and 1900) due to human activities, primarily fossil fuel
burning, which increases heat-trapping greenhouse gas levels in Earth’s atmosphere. The
term is frequently used interchangeably with the term climate change, though the latter refers
to both human- and naturally produced warming and the effects it has on our planet. It is most
commonly measured as the average increase in Earth’s global surface temperature.
* Nordaus Dice Model
The 'DICE' Model: Background and Structure of a Dynamic Integrated
Climate-Economy

Model of the Economics of Global Warming

The Dynamic Integrated Climate-Economy model, referred to as the DICE model or Dice
model, is a neoclassical integrated assessment model developed by 2018 Nobel Laureate
William Nordhaus that integrates in the neoclassical economics, carbon cycle, climate
science, and estimated impacts allowing the weighing of subjectively guessed costs and
subjectively guessed benefits of taking steps to slow climate change. The carbon cycle
describes the process in which carbon atoms continually travel from the atmosphere to
the Earth and then back into the atmosphere. ... Carbon is released back into the
atmosphere when organisms die, volcanoes erupt, fires blaze, fossil fuels are burned, and
through a variety of other mechanisms.

The DICE model is one of the main integrated assessment models used by the United States
Environmental Protection Agency, and it provides estimates intermediate between the other
two models. Integrated assessment modelling (IAM) or integrated modelling (IM) [a] is a
term used for a type of scientific modelling that tries to link main features of society and
economy with the biosphere and atmosphere into one modelling framework.

William Nordhaus and Paul Romer shared the 2018 Sveriges Riksbank Prize in Economic
Sciences in Memory of Alfred Nobel for their work on long-run macroeconomic analysis.
Nordhaus adapted the neoclassical growth model to study climate change, while Romer
developed a model of innovation-based growth.
● Nordhaus was among the first economists who wanted to integrate insights from
natural and climate science into long term macroeconomic models in the 1970s.
In order to do so, he created the DICE model (Dynamic Integrated Climate
Economy model) which is part of the Integrated Assessment Models (IAM) using a
Cost-Benefit-Analysis (CBA). The starting points of his analysis were the
uncertainties of climate change and the market failure CO2 emissions represent.
● The DICE model (Dynamic Integrated model of Climate and the Economy) is a
simplified analytical and empirical model that represents the economics, policy, and
scientific aspects of climate change.
● It is a model that attempts to use the tools of modern economics to determine an
efficient strategy for coping with the threat of global warming. The fundamental
premise behind this study is that societies should undertake environmental policies
only when their benefits, broadly construed, exceed their costs and that the level of
environmental control should be at that point where the incremental benefits of
additional controls no longer exceed the incremental costs.
● The DICE model is an example of a neoclassical energy-economy-environment
model. The central assumption of this type of model is that market externalities create
costs not captured in the price system and that government must intervene to assure
that these costs are included in the supply price of the good creating the externality.
● The Dynamic Integrated Climate Change (DICE) model assumes a single world
producer must chose levels for three simultaneously determined variables: current
consumption, investment, and greenhouse gases reduction
● The DICE model views the economics of climate change from the perspective of
neoclassical economic growth theory. In this approach, economies make
investments in capital, education, and technologies, thereby reducing consumption
today in order to increase consumption in the future
● Nordhaus DICE Model uses a common neoclassical Ramsey growth model in which
he integrated a damage function, an abatement function and equations to relate GDP
growth to the increase in CO2 levels as well as the impact of that increased CO2 on
the average global temperature.
● DICE– the Dynamic Integrated model of Climate and the Economy – combines a
simple economic model with a simple climate model. The aim is not to fully cover all
details of economic and climate processes, but rather to provide a model that is
sufficiently simple to be used by non-specialists, including policy makers. Figure 1
shows a simplified structure of the DICE model.
The heart of DICE is an economic growth model (dark blue arrows in fig. 1).
Economic production occurs when labour and capital is available. Labour is proportional to
the world population, which is homogenous and grows according to externally prescribed
data. Part of the economic production is invested to create capital for the next time step, while
the remaining part is consumed. It is assumed that the “happiness” (called utility in the
jargon) of the population depends exclusively on consumption, in a sublinear fashion: The
more you consume, the happier you are. However, if you are already rich, then one extra
Euro will not increase your happiness as much as when you are poor.
In this purely economic model, the only decision the world population has to take is to
determine the saving rate – the fraction of economic production to invest for the next period.
If we invest too much, we reduce our current happiness; if we invest too little, we have too
little to consume next period. Therefore, the aim is to find an optimal pathway to be
reasonably happy now and in the future. However, there is a twist: observations suggest that
we, humans, value the present more than the future. If there is an economic growth (which is
the case in DICE), there is an additional reason to prefer being paid now rather than later: In
the future, you will be richer, so one additional Euro will mean less to you than now while
you are still relatively poor.

Nordhaus derived various warming pathways. As you can see in the Nobel Prize lecture, the
result of the DICE model draws different warming pathways. The cost-benefit optimum
would be a global temperature rise of 4-degree Celsius by 2150. 4-degree warming will cause
damages of 15$ trillion and the abatement costs related to this rise in temperature are 3$
trillion. Nordhaus was one of the first who advocated for a prize on carbon emissions
(Pigouvian tax) to internalise the external effects of climate change.

The impact of climate change

To bring climate change into play, Nordhaus assumed that apart from labour and capital,
economic production also requires energy. However, energy production causes CO2
emissions. Part of the CO2 ends up in the biosphere or in the ocean, but another part remains
in the atmosphere, leading to global warming.
Practically, everyone agrees that substantial warming will have damaging effects on the
economy. Although there may not be “good” or “bad” temperatures a priori, ecosystems and
human societies are adapted to the current climate conditions, and any (rapid) change away
from what we are accustomed to will cause severe stress. For example, there may not be an
“ideal” sea level, but strong sea level rise – or fall – will cause severe strain on coastal
communities who are adapted to the current level[4].

These damages are extremely hard to quantify. First, we obviously have no reliable empirical
data – we simply have not yet experienced the economic damages associated with rapid
warming by several degrees. Second, there could be “low chance, high impact” events [5], e.g.
events that even under climate change are deemed unlikely to our current knowledge, but
would have dramatic consequences if they occur – for example, a collapse of large parts of
the Antarctic ice sheet. Third, there are damages, like the loss of a beautiful glacial landscape
or the human suffering inflicted by famine, which cannot be quantified in terms of money.

When formulating his Nobel prize-winning DICE model, William Nordhaus tried to solve the
first problem by performing an extensive review of the (scarce) existing studies on
climate-induced damages and greatly extrapolating the results. E.g. if data was available on
reduced wheat production in the Eastern US during a heat wave, Nordhaus might assume that
damage for all food crops in Africa is, say, twice as big (as Africa is more dependent on
agriculture than the US). This may still be quite ad-hoc, but one might argue that even rough
data is better than no data at all. The second and third of the above points where largely
circumvented with the “willingness-to-pay” approach people were asked how much they
would pay to prevent the extinction of polar bears or the collapse of the Antarctic ice sheet,
for example, and the price they names was used as substitute for damages associated to these
events.

Finally, Nordhaus came up with an estimate for climate damage:

D=k1T + k2T2

where D is the damage in % of the GDP, T is the global mean temperature change, and k are
constants (k1 = -0.0035 K-1 and k2=+0.0045 K-1) .Note that the k1<0 implies that for small T,
global warming is actually beneficial. 2.5 degree and 5 degree warming yield damages of
1.1% and 6.5% of the GDP, respectively.

To reduce global warming, humanity can reduce their carbon emissions. In other words, part
of the global economic production is sacrificed to pay for greener energy. This will leave less
money to spend on consumption and/or investment in capital, but it also diminishes future
climate damages. Therefore, in order to maximise the “happiness”, two control variables
must now be chosen at each time step: the saving rate and the emission reduction fraction. We
want to reduce carbon emissions enough to avoid very dangerous climate change, but also
avoid unnecessary costs.

* Theory of Krutilla
Environmentalism in the United States historically has been divided into its utilitarian
and preservationist impulses, represented by Gifford Pinchot and John Muir,
respectively. Pinchot advocated conservation of natural resources to be used for
human purposes; Muir advocated protection from humans, for nature’s own sake.
In the first half of the twentieth century, natural resource economics was
firmly on Pinchot’s side of that division. That position began to change as the
postwar environmental movement gained momentum. In particular, John Krutilla, an
economist at Resources for the Future, pushed economics to the point where it could
embrace Muir’s vision as well as Pinchot’s. Krutilla argued
that if humans preferred a preserved state to a developed one, then such
preferences were every bit as “economic”—either way, opportunity costs exist and
economic choices must be made.
In popular discourse, one often hears about a trade-off between economics and the natural
environment. Historically, defining their discipline in terms of the science of material wealth
and
welfare, economists have spoken in these terms as well, generally resisting economic analysis
of
the natural environment well into the 1950s. By the 1960s, however, as economists came to
redefine their discipline in terms of opportunity costs and as environmentalism became
wrapped
up in a new aesthetic consumerism, the tension of economics versus the environment gave
way
to a new economics of the environment. More than any other economist, John Krutilla forged
this intellectual development. In contrast to earlier work by natural resource economists,
which
focused on developing resources, Krutilla argued that preserving resources also had value.
Because development came at the opportunity cost of those preservation values.
Krutilla’s most fundamental point in making this case was that there was a trade-off
between developing a resource and preserving it. In other words, developing a resource came
at
the opportunity cost of preservation, potentially meaning the loss of a unique or special
landscape

* The Economics of Environmental preservation

Fisher equation for preservation or development
Anthony Fisher Professor of the Graduate School in the Department of Agricultural and
Resource Economics at the University of California Berkeley, where he has researched,
taught, and consulted in the field of environmental and resource economics since 1977.  His
areas of specialization have included the theory and practice of environmental resource
valuation, theory of exhaustible resource extraction and exploration, energy/economy
modeling, and the allocation of ground and surface water, especially under drought
conditions.  His recent research focuses primarily on aspects of the economics of climate
change.
* Environmental Kuznets curve

Definition:

The Kuznets curve expresses a hypothesis advanced by economist Simon Kuznets in the
1950s and 1960s. According to this hypothesis, as an economy develops, market forces first
increase and then decrease economic inequality.

Simon Kuznets described the relationship between per capita income and income inequality
as an inverted-U for which he won the Nobel Prize in 1971.The environmental Kuznets curve
suggests that economic development initially leads to a deterioration in the environment, but
after a certain level of economic growth, a society begins to improve its relationship with the
environment and levels of environmental degradation reduces.

From a very simplistic viewpoint, it can suggest that economic growth is good for the
environment.

However, critics argue there is no guarantee that economic growth will lead to an improved
environment – in fact, the opposite is often the case. At the least, it requires a very targeted
policy and attitudes to make sure that economic growth is compatible with an improving
environment.

Diagram of Kuznets Curve

Causes of Environmental Kuznets curve

1. Empirical evidence of declining pollution levels with economic growth. Studies

found that higher economic growth in the US led to increased use of cars, but at the
same time – due to regulation, levels of air pollution (in particular sulphur dioxide
levels declined).
2. Spare income with growth. With higher rates of economic growth, people have more
discretionary income after paying for basic necessities; therefore, they are more
amenable to paying higher prices in return for better environmental standards.
 3. Focus on living standards as opposed to real GDP.
4. Improved technology. The primary driving force behind long-term economic growth
is improved technology and higher productivity. With higher productivity, we can see
higher output, with less raw materials used. For example, since the 1950s, the
technology of car use has significantly improved fuel efficiency. In the 1950s, many
cars had very low miles per gallon. In recent years, car manufacturers have made
strides in reducing fuel consumption and have started to develop hybrid technology.
5. Solar and renewable energy. A good example of how improved technology has
reduced potential for environmental damage is the progress in solar technology. In
recent years, the cost of solar energy has significantly fallen – raising the prospect of
clean technology.
6. De-industrialisation. Initially, economic development leads to shifting from farming
to manufacturing. This leads to greater environmental degradation. However,
increased productivity and rising real incomes see a third shift from industrial to the
service sector.. The service sector usually has a lower environmental impact than
manufacturing.
7. Role of government regulation. Economic growth and development usually see a
growth in the size of government as a share of GDP. The government are able to
implement taxes and regulations in an attempt to solve environmental externalities
which harm health and living standards.

1.4 Different perspectives on development and growth

* Simon Julian’s thesis of ultimate resource
The Ultimate Resource is a 1981 book written by American economist Julian Lincoln Simon
challenging the notion that humanity was running out of natural resources. It was revised in
1996 as The Ultimate Resource 2. the term Ultimate resource refer to not any particular
physical object but the capacity for humans to invent and adapt.
People are a nation's greatest resource. Nature's bounty becomes significant only when people
find it useful. It is people with their demands and abilities that turn them into 'resources'.
Hence, human resource is the ultimate resource. He argued that supply of natural resources
are infinite.
The overarching thesis on why there is no resource crisis is that as a particular resource
becomes more scarce, its price rises. This price rise creates an incentive for people to
discover more of the resource, ration and recycle it, and eventually, develop substitutes. The
"ultimate resource" is not any particular physical object but the capacity for humans to invent
and adapt.
The work opens with an explanation of scarcity, noting its relation to price; high prices
denote relative scarcity and low prices indicate abundance. Simon usually measures prices in
wage-adjusted terms, since this is a measure of how much labor is required to purchase a
fixed amount of a particular resource. Since prices for most raw materials (e.g., copper) have
fallen between 1800 and 1990 (adjusting for wages and adjusting for inflation), Simon argues
that this indicates that those materials have become less scarce.
An aluminum can, for example, weighed about 3 ounces in 1959. Today, it weighs less than
half an ounce. In other cases, we have replaced scarce resources with those that are more
plentiful. Instead of killing whales for lamp oil, for instance, we burn coal, oil, and gas. In
fact, humanity is yet to run out of a single nonrenewable resource.
There is only one scarcity human brain power-the ultimate resource.

* Environmental skepticism
It is the belief that statements by environmentalists, and the environmental scientists who
support them, are false or exaggerated. The term is also applied to those who are critical of
environmentalism in general. It can additionally be defined as doubt about the authenticity or
severity of environmental degradation. Environmental skepticism is closely linked with
anti-environmentalism and climate change denial. The popularity of the term was enhanced
by Bjørn Lomborg's 2001 book The Skeptical Environmentalist.
In the opening of his book, Lomborg states that the general view people have of the
environment is not correct. He calls this view “the Litany of our ever deteriorating
environment” (Lomborg 2001a, p. 3). He regards it as being created by environmental
organizations and the media, both of which he suggests have an interest in promoting bad news.
He thinks that this will stimulate people to act out of fear, leading to a misallocation of resources.

Lomborg uses most of his book to measure “the real state of the world” and to show that the
responses is false. Data are presented on a wide range of environmental and developmental
topics, including human welfare (health, food, and prosperity), natural resources (agriculture,
forests, energy, non-energy resources, and water), pollution (air, acid rain, water, and waste),
and “tomorrow's problems” (chemicals, biodiversity, and global warming). In his opinion,
these data do not only show what the current state of human welfare is, but they also indicate
whether observed trends are unsustainable, whether human welfare will be undermined by
pollution of the environment, and whether welfare might be endangered by future threats.
After having presented and analyzed all the data, he concludes that “mankind's lot has vastly
improved in every significant measurable field” (Lomborg 2001a, p. 351), while noting that
this does not mean things are good enough.
Lomborg approached environmental claims from a statistical and economic standpoint, and
concluded that often the claims made by environmentalists were overstated. Lomborg argued,
on the basis of cost–benefit analysis, that few environmentalist claims warranted serious
concern.
most important problems should be addressed first, before public resources are spent on
problems that involve “lower costs”. In Lomborg's opinion, this means that, in practical
terms, we should spend our money on access to safe drinking water rather than on a stringent
climate policy. In addition, he advises countries to stimulate economic growth, because he
believes that this is the only way to solve environmental problems.
UNIT 2
Welfare Economics, social sector and Envionment

# Hardin's thesis -Tragedy of Commons (TOC)

Garrett James Hardin (April 21, 1915 – September 14, 2003)

Garrett Hardin, an evolutionary biologist by education, wrote a scientific paper titled "The
Tragedy of the Commons" in the peer-reviewed journal Science in 1968. The paper addressed
the growing concern of overpopulation, and Hardin used an example of sheep grazing land,
taken from the early English economist William Forster Lloyd when describing the adverse
effects of overpopulation. In Lloyd’s example, grazing lands held as private property will see
their use limited by the prudence of the land holder in order to preserve the value of the land
and health of the herd. Grazing lands held in common will become over-saturated with
livestock because the food the animals consume is shared among all herdsmen.
The tragedy of the commons is an economics problem in which every individual has an
incentive to consume a resource, but at the expense of every other individual -- with no way
to exclude anyone from consuming. Initially it was formulated by asking what would happen
if every shepherd, acting in their own self-interest, allowed their flock to graze on the
common field. If everybody does act in their apparent own best interest, it results in harmful
over-consumption
Essence of Hardin’s parable of tragedy is that herdsmen sharing a common pasture are led, by
the inexorable logic of individually
rational decisions for optimizing personal gain, to ultimately overstock their herds and
destroy their shared resource. Although Hardin’s argument was originally made with the
problem of human population growth in mind, it has become widely accepted as a general
theoretical framework to explain diverse cases of resource over-exploitation, and has had a
considerable influence on resource policy around the world.
HARDIN'S KEY ASSUMPTIONS
1. The world is biophysically finite.
• The more people there are, the less each person's share must be.
• Technology (ie, agricultural) cannot fundamentally alter this.
2. Over-population is an example of the tragedy of the commons (ToC).
• Commons are un-owned or commonly-held "pool" resources that are "free," or not
allocated by markets.
• Hardin's ToC model assumes that individuals are short-term, self-interested "rational"
actors, seeking to maximize their own gains.
• Such actors will exploit commons (have more babies, add more cattle to pastures,
pollute the air) as long as they believe the costs to them individually are less than the benefits.
3. The "commons" system for breeding must be abandoned In other words, something must
restrain individual reproduction. . .
• The tragedy of the commons is a problem in economics that occurs when individuals
neglect the well-being of society in the pursuit of personal gain.
• This leads to over-consumption and ultimately depletion of the common resource, to
everybody's detriment.
● the free-rider problem is a type of market failure that occurs when those who benefit
from resources, public goods (such as public roads or hospitals), or services of a
communal nature do not pay for them or under-pay.
• For a tragedy of the commons to occur a resource must be scarce, rivalrous in
consumption, and non-excludable.
• Solutions to the tragedy of the commons include the imposition of private property
rights, government regulation, or the development of a collective action arrangement.
Hardin's point was if humans faced the same issue as in the example with herd animals, each
person would act in his own self interest and consume as much of the commonly accessible
scarce resource as possible, making the resource even harder to find.

# The Economics of Tragedy of the Commons

In economics terms, the tragedy of the commons may occur when an economic good is both
rivalrous in consumption and non-excludable. These types of goods are called common-pool
resource goods (as opposed to private goods, club goods, or public goods).
A rival good means that only one person can consume a unit of a good (i.e. it cannot be
shared like watching a TV show alone vs. with friends); and, when someone consumes a unit
of the good that unit is no longer available for others to consume. Put differently, all
consumers are rivals competing for that unit of the good, and each person’s consumption
subtracts from the total stock of the good available. A good that is non-excludable means that
individual consumers are unable to prevent others from also consuming the good before you
get your hands on a unit of it.
It is this combination of properties (common-pool, scarce, rivalry in consumption, and
non-excludability) that sets the stage for the tragedy of the commons. Each consumer
maximizes the value they get from the good by consuming as much as they can as fast as they
can before others deplete the resource, and no-one has an incentive to reinvest in maintaining
or reproducing the good since they can not prevent others from appropriating the value of the
investment by consuming the product for themselves. The good becomes more and more
scarce and may end up entirely depleted.
# The Logic of Collective Action
Mançur Lloyd Olson Jr January 22, 1932 – February 19, 1998) was an American economist
and political scientist who taught at the University of Maryland, College Park. His most
influential contributions were in institutional economics, and in the role which private
property, taxation, public goods, collective action, and contract rights play in economic
development. The Logic of Collective Action: Public Goods and the Theory of Groups is a
book by Mancur Olson, Jr. published in 1965.

Collective action refers to action taken together by a group of people whose goal is to
enhance their condition and achieve a common objective. For example, if you choose to
walk instead of drive, then you are taking an individual action. ... Collective action often
involves larger scales, since there are more people involved.
The Collective Action Theory was developed mainly through the assumptions of two authors,
Mancur Olson, with the publication of the book Logic of Collective Action, in 1965, and
Elinor Ostrom, with the book Governing the Commons - The Evolution of Institutions for
Collective Action, in 1990
A collective action problem or social dilemma is a situation in which all individuals would
be better off cooperating but fail to do so because of conflicting interests between individuals
that discourage joint action. The collective action problem has been addressed in political
philosophy for centuries, but was most clearly established in 1965 in Mancur Olson's The
Logic of Collective Action.
Problems arise when too many group members choose to pursue individual profit and
immediate satisfaction rather than behave in the group's best long-term interests. Examples of
phenomena that can be explained using social dilemmas include resource depletion, and
overpopulation. The collective action problem can be understood through the analysis of
game theory and the free-rider problem, which results from the provision of public goods.
the free-rider problem is a type of market failure that occurs when those who benefit from
resources, public goods (such as public roads or hospitals), or services of a communal nature
do not pay for them or under-pay.
Its central argument is that concentrated minor interests will be overrepresented and diffuse
majority interests trumped, due to a free-rider problem that is stronger when a group becomes
larger.

1. if everyone in a group (of any size) has interests in common, then they will act
collectively to achieve them; and
2. in a democracy, the greatest concern is that the majority will tyrannize and exploit the
minority.
Olson's theory of collective action
Difficulty of collective action
A single individual barely has influence on an organization's situation, but every individual is
able to rejoice in every improvement, regardless of whether he/she has contributed to it, a
"conflict between collectively and individually best action" is existing. 
Group size
Concerning the optimal group size it has to be stated that small groups possess the tendency
of suboptimal provision with public goods. But large groups often fail to provide themselves
with a collective good at all. The smaller the single share of a member is the less is the
optimality. This means that larger groups are less efficient. Moreover, it is important to
consider not only the number of members of a group but also the size of each individual. The
individual with the highest gain will most likely pay for the most part of the public good.
Incentives for collective action
There might be some sort of social incentives in small groups with close contact (friendships
within the group, the desire to gain prestige, etc.), which lead to an individual obtaining a
public good. However, such altruistic behavior cannot be recognized in large groups.

● Efficiency of the group: Olson mentioned several observations made in practice

concerning the optimal size of groups. Small groups are more efficient than bigger
groups, whereas small groups are defined as groups between four and seven members.
● Incentives: Participants of various type of groups behave in different ways when
incentives are used. Referring to the above chapter social incentives in a positive or
negative way are only possible in smaller groups, where members are knowing each
other.
● Public goods:  Also it is possible to share the public good in a fair way by calculating
members activities within the system for the common welfare.

# Ostrom’s Cooperative solutions to Common Pool Resources

Elinor Ostrom won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred
Nobel 2009 for her work in economic governance of the commons space sustainability a
reality. In this pursuit, it is necessary to understand fully the problems inherent to CPRs and
how they have already been solved in other domains.

In 2009, Elinor Ostrom, along with Oliver E. Williamson, was awarded the Nobel Prize in
economics. She was the first and only woman to win the Nobel Prize in Economics for her
groundbreaking research on the ways that people organize themselves to manage resources.
Ostrom, the only woman to ever win the prize, received it “for her analysis of economic
governance, especially the commons.” She demonstrated “how local property can be
successfully managed by local commons without any regulation by central authorities or
privatization.”

In her research, Ostrom applied rational choice theory and insights from development
economics to ecological preservation. Rational choice theory states that individuals use
their self-interests to make choices that will provide them with the greatest benefit.
People weigh their options and make the choice they think will serve them best. The theory
postulates that an individual will perform a cost-benefit analysis to determine whether an
option is right for them

Most economists are familiar with the late Garrett Hardin’s classic article, “The Tragedy of
the Commons. Hardin’s idea was that when no one owns a resource, it is overused because no
one can control its usage and each person has an incentive to use it before others do. This
insight has helped us understand much human behavior and has led people to advocate either
having the resource privately owned or having it controlled by government.
Ostrom’s work suggested, contrary to conventional thinking, that communities are able to
self-organize in ways that punish those who free ride on the common resource.
Examining dozens of real-world arrangements, she found instances of communal ownership
that worked—that is, that did not lead to the tragic outcomes envisioned by Hardin—as well
as ones that did not.
Ostrom proposed several guidelines, which the Nobel committee highlighted, for managing
common-pool resources. Among them are
Who has access and usage rights? how much to withdrawn? how to monitor use? How to
treat defaulters? Who decides the rules? How to resolve the conflict?
that rules should clearly define who gets what, good conflict resolution methods should
be in place, people’s duty to maintain the resource should be proportional to their
benefits, monitoring and punishing is done by the users or someone accountable to the
users, and users are allowed to participate in setting and modifying the rules.
State control and privatization are not the only way to solve the problems

Solutions-Bottom-up strategies
8 design principles
 1. Boundaries of the service area and the individuals or households with rights to
use the resource system are clearly defined
2. Proportional equivalence of cost and benefits-those who receive the highest
benefit from the resources are also required to pay the highest cost for
maintenance.
3. Participation-individuals who get affected by the rules in the governance
system must also having a say in making the rules.
4. Monitoring-actively audit the physical conditions and irregular behaviour
within the resource system.
5. Graduated sanctions-users who violate the rules graduated sanctions from
other users or from officials accountable to the users.
6. Conflict resolution-users must have rapid access to low cost arenas to resolve
conflict between users or between users and officials
7. Recognition of rights-the rights of users to devise their own institutions are not
challenged by the external government authorities.
8. Nested enterprises

Rules operating within a community

1. Formal rules by law
2. Informal
Resource systems and communities also constantly change with
time
Social pressure-migration,
Environmental change-natural dissasters, climate change
Technological change-
What is Pigouvian Tax?
The Pigouvian Tax is named after British economist Arthur C. Pigou, who was one of the
most prominent contributors to the externality theory in the early 1900s.Pigouvian taxes can
be imposed to challenge the following activities:

● Environmental pollution
● Harmful substances (tobacco and alcohol)
● Congestion 

Pigouvian Tax is a tax on economic activities that generate negative externalities, which
create costs that are borne by unrelated third parties. The main purpose of Pigouvian taxes is
to oppose market inefficiencies by increasing the marginal private cost by the amount
generated by the negative externality. The costs arising from negative externalities are not
reflected in the final cost of a product or service. Therefore, the market becomes inefficient.

The main purpose of Pigouvian taxes is to oppose market inefficiencies by increasing the
marginal private cost by the amount generated by the negative externality. In such a case, the
final cost (original cost plus tax) will reflect the full social cost of the economic activity.
Subsequently, the negative externality will be internalized.

How does a Pigouvian Tax Work?

Under free market conditions, a negative externality establishes a market equilibrium when the
social marginal benefit (SMB) is equal to the personal marginal cost (PMC), which is lower
than the social marginal cost (SMC) due to the additional costs created by the economic
activity. Such a market equilibrium is not efficient.

In the ideal world, the Pigouvian tax will be imposed at an amount equal to the costs
associated with the negative externality. When Pigouvian taxes are imposed, the supply of the
economic activity producing the negative externality will decrease.

Therefore, the quantity demanded will decrease, while the price will increase. Therefore, the
market equilibrium will become socially efficient because the social marginal cost will
become equal to the private marginal cost.

Advantages of Pigouvian Tax

In some cases, Pigouvian taxes can effectively deal with the problem of negative
externalities. Some of the advantages include:

1. Fosters market efficiency

Pigouvian taxes promote market efficiency by incorporating the additional costs imposed by
negative externalities.
2. Discourages harmful activities

In certain cases, Pigouvian taxes may effectively discourage the activities that lead to
negative externalities. For example, the introduction of a carbon tax may place a significant
burden on a company that produces substantial emission gases. Therefore, a company may
decide to transfer to operations that produce fewer emission gases.

3. Generates additional government revenue

Pigouvian taxes generate additional revenues for the government. The additional funds may
be used to subsidize initiatives and programs that will further challenge negative externalities

# Optimal Quantity of a Public Good

The government is providing an efficient quantity of a public good when its marginal benefit
equals its marginal cost.

The optimal quantity of the public good occurs where MB (society’s marginal benefit) equals
MC (provider’s marginal cost), or where the two curves intersect. When MB = MC, resources
have been allocated efficiently.

The public good provider uses cost-benefit analysis to decide whether to provide a particular
good by comparing marginal costs and marginal benefits. Cost-benefit analysis can also help
the provider decide the extent to which a project should be pursued. Output activity should be
increased as long as the marginal benefit exceeds the marginal cost. An activity should not be
pursued when the marginal benefit is less than the marginal cost. An activity should be
stopped at the point where MB equals MC. This is the MC=MB rule, by which the provider
of the public good can determine which plan, will give society maximum net benefit.

# Market-based environmental policy instruments

In environmental law and policy, market-based instruments (MBIs) are policy instruments
that use markets, price, and other economic variables to provide incentives for polluters to
reduce or eliminate negative environmental externalities. MBIs seek to address the market
failure of externalities (such as pollution) by incorporating the external cost of production or
consumption activities through taxes or charges on processes or products, or by creating
property rights and facilitating the establishment of a proxy market for the use of
environmental services. Market-based instruments are also referred to as economic
instruments, price-based instruments, new environmental policy instruments (NEPIs) or new
instruments of environmental policy.

Command and control instruments involve a government issuing a command, which sets a
standard and then controlling performance by monitoring and requiring adherence to that
standard. A few examples are the limits set on the volume of timber that could be harvested,
bans on the cutting of trees, and maximum levels legally allowed for pollution emissions.

# Common property resources (CPRs):

Resources accessible to and collectively owned held managed by an identifiable community
and on which no individual has exclusive property rights are called common property
resources. Common property represents common property for the group. The underlying
norm here is that members of the group have both rights and duties with respect to the nature,
levels of uses and the maintenance of a given resource. Commons are those resources which
are not owned by anyone but rather shared by community. They include a wide range of
natural environments like village pastures, bushland, uncultivable fields, community forests,
waste lands, village ponds, the inter-tidal zone, marine waters, rivers, river-bedsetc.
 Unit- 3: Environmental Valuation

Environmental Valuation
 It refers to the assignment of money values to non-marketed assets, goods and services,
where the money values have a particular and precise meaning.  Non-marketed goods and
services refer to those which may not be directly bought and sold in the market place. 
Examples are scenic views, coral reefs, mountain vistas, biodiversity.  Accident prevention
would be an example of a service which is sometimes marketed (purchase of safety
equipment) and sometimes not (good driving behavior).  If a good or service contributes
positively to human wellbeing, it has economic value
Two types of value or TEV approach

Conceptually, the total economic value (TEV) of a resource consists of its use value (UV) and
non-use value (NUV)  
TEV = UV + NUV  

The value of an environmental good can be divided into two groups: use value and existence
value.
1. The use value or Instrumental corresponds to the value that people gain from the direct
use of the product, for example, walking in a national park or swimming in a clean lake.
2. The existence value or nonuse value corresponds to the value that an individual may
assign to an environmental good, despite that he/she is not directly using the good;
for example, how much would someone be willing to pay for the giant panda to continue
to exist in the wild, despite the fact that the person does not expect to ever see a giant
panda in the wild?
Existence value represents the value which an individual is willing to pay for the
environmental amenity, even though that person receives no direct value. The existence
value is often termed as non-use value

for example, how much would someone be willing to pay for the giant panda to continue to
exist in the wild, despite the fact that the person does not expect to ever see a giant panda in
the wild? Existence value represents the value which an individual is willing to pay for the
environmental amenity, even though that person receives no direct value. The existence value
is often termed as non-use value 

Existence value attributed to the pure existence of an ecosystem. Existence values are a class
of economic value, reflecting the benefit people receive from knowing that a particular
environmental resource, such as Antarctica, the Grand Canyon, endangered species, or any
other organism or thing exists 

3. Option value refers to willingness of the people to keep the option of post ponding the
decision on the use of the resources.
4. Altruistic value based on the welfare the ecosystem may give other people. Altruism is
the principle and moral practice of concern for happiness of other human beings or
animals, resulting in a quality of life both material and spiritual.
5. Bequest value based on the welfare the ecosystem may give future generations

Neoclassical approach to the environmental Valuation

Economics as applied to environmental issues can then be characterized by the application of
mainstream neoclassical theory to the environment. The emphasis is on identifying
circumstances in which the market is likely to fail in its task of allocating resources
efficiently between different uses and in designing policies to enable the government to
intervene to 'correct' the market failure.
The neoclassical approach to the environmental valuation
there are three standards of value in neoclassical economics:
Consumer surplus (CS), Willingness to pay (WTP) and Willingness to accept (WTA). Each
can be expressed in terms of money.
1. Consumers surplus
Economic value of goods and services
The economic value of goods and services is defined as the sum of consumer surplus
and producer surplus. (For convenience, hereinafter, the term “good[s]” includes both
“good[s]” and “service[s]”.) The “consumer surplus is the difference between what a
consumer is willing to pay for a good and what the consumer actually pays when
buying it” (Pindyck & Rubinfeld, 1995, p. 113). The producer surplus is “the
difference between the cost of producing a commodity [good] and the revenue received by
selling the commodity [good]” (Grigalunas et al., 1995, p. 25). Graphically, the
consumer surplus is an area between the demand curve and the market price for the
good. Meanwhile, the producer surplus is an area above the supply curve up to the
market price for the good (Figure 1
For example, let's say that you bought an airline ticket for a flight to Disney World during
school vacation week for $100, but you were expecting and willing to pay $300 for one
ticket. The $200 represents your consumer surplus.

The economic value is maximised if goods are provided at the price and quantity
when the demand curve and the supply curve for goods intersect; Figure 1 depicts
such a condition. When the economic value is maximised, a society is well-off; in
other words, social welfare is maximised, at least in terms of economy.
2. Willingness to Pay (WTP and willingness to accept (WTA
The basic concept of economic valuation underlying all these techniques is the Willingness to
Pay (WTP) of individuals for an environmental service or resource. Environmental values are
measured in money terms through the concept of individual’s willingness to pay (WTP) or
willingness to accept (WTA) compensation for alterations in environmental conditions.
WTP is the maximum sum of money the individual would be willing to pay rather than do
without an increase in some good such as an environmental amenity. This sum is the amount
of money that would make the individual indifferent between paying for and having the
improvement and forgoing the improvement while keeping the money to spend on other
things. WTP is constrained by the individual’s income; but there is no upper limit on what
that person could require as compensation for forgoing the improvement.
For example, legality, packaging, and brand name might matter as well.” When a customer
has an urgent need that your product or service can address, they may be willing to pay a
higher price than when their need is less urgent.
 WTA is measured by the minimum amount of money that that person would be willing to
accept as compensation for incurring the cost. it is a measure of what an individual would
have to be given to cause him/her to accept a loss in welfare caused by, for example, a decline
in the level of resources or environmental quality,pollution.
Both value measures are based on the assumption of substitutability in preferences, but they
adopt different reference points for levels of well-being. WTP takes as its reference point the
absence of the improvement, while WTA takes the presence of the improvement as the base
level of welfare or utility. In principle, WTP and WTA need not be exactly equal.
 Anthropocentric versus Bio centric Viewpoints about environment valuation
● Terms in Environmental Ethics
Environmental ethics is the discipline in philosophy that studies the moral relationship of
human beings to and also the value and moral status of the environment and its non-human
contents. Environmental ethics are a key feature of environmental studies that establishes the
relationship between humans and the earth.
Environmental Ethics and Its Principles
There are several approaches or principles to determine how each individual are to value our
environment. It is such a huge field, and it is so vast that it is difficult for one principle to
cover all the ground. Many theories have emerged over the years, and each one has stressed
on various principles of environmental ethics. The list below states all the principles that have
been predominantly found in those theories.
1. Anthropocentrism
● Anthropocentrism is believed to be found at the root of the Western
Philosophy and Culture. It is seen in the views of some western philosophers such as
Aristotle, Descartes, Kant, and 20th century philosopher such as John Passmore.
Apart from these philosophers, it is necessary to present the Judeo-Christian
belief which many consider it as presenting a strong view on anthropocentrism and
this will be discussed along with Aristotle.
● A “centrism” is a worldview or way of looking at things that places some particular
value or group at the center.
● Anthropocentrism. The view that humans are the most important beings on Earth.
Typical of Western Judeo-Christian culture.
● Anthropocentrism: "Human-centered" ethic or world view where human well-being
or interests are considered to be all that matters, everything else being valued only as
a means.
● humans to be the most important thing in the Universe, or at least on the planet Earth.
● here are two further divisions of anthropocentrism. They are weak anthropocentrism
and strong anthropocentrism.
● While weak anthropocentrism believes that human beings are the centre because it is
only through their perspective that environmental situations can be interpreted.
● Strong anthropocentrism, however, believes that human beings are at the centre
because they rightfully deserve to be there. Peter Vardy made this distinction.
● it considers the world only in terms of its utility, and the value here is that
of the use value or resource value or rightly referred to as the instrumental
value.
● It upholds the view that everything that exists is at the disposal of man, that man is
superior hence man can do everything and anything, and apart from human
beings, anything that exist, exists more or less for the benefit of human beings.
●

Biocentrism:
● The Life Approach or the Bio-centric individualism is the approach which holds that
all and only living beings are having moral standing.
● Here apart from humans and animals, it also includes trees, bacteria, etc. This
criterion of fundamental value which advanced in the environmental philosophy
gives serious consideration to life itself.
● Paul Taylor and Albert Schweitzer are those non-anthropocentrists who supports
this view. Albert Schweitzer‟s book Reverence for life is but a representation of
this approach. He points out that one must recognise any living thing as
something that possesses value in itself and that it is an intrinsic worth.
● His work is now carried out in the contemporary philosophy in the works
such as Kenneth Goodpaster and Paul Taylor. This approach holds that though
the non-human world such as plants is not capable of feeling, we are to
consider the actions we carry out as that might affect them. It upholds the
view that living things of any kind have a particular interest in maintaining their
own integrity, whether sentiement or not.
● Biocentrism is most commonly associated with the work of Paul W. Taylor,
especially his book Respect for Nature: A Theory of Environmental Ethics (1986).
Taylor maintains that biocentrism is an "attitude of respect for nature", whereby one
attempts to make an effort to live one's life in a way that respects the welfare and
inherent worth of all living creatures.
● One subset of ecocentrism is the philosophy of biocentrism.
● Biocentric philosophies do not state that all things within nature have equal inherent
value. Instead, only living things have equal inherent value.
● Living things compose ecosystems, mutually supportive systems of life, in which
each thing plays an important role. Therefore, a tree and a human would be of equal
inherent value, but both would be more morally valuable than a rock or water.
Living things matter more, and our moral obligations extend to protecting the living
parts of nature over the non-living parts.
● The term biocentrism is sometimes used to indicate views in which focus and value
are placed on living organisms (animals and perhaps plants), while ecocentric
views tend to include abiotic factors such as rivers and systems that include
abiotic elements, such as ecosystems and watersheds
● Biocentrism (from Greek βίος bios, "life" and κέντρον kentron, "center"), in a
political and ecological sense, as well as literally, is an ethical point of view that
extends inherent value to all living things.
● It is an understanding of how the earth works, particularly as it relates to its biosphere
or biodiversity. It stands in contrast to anthropocentrism, which centers on the value
of humans. The related ecocentrism extends inherent value to the whole of nature.
● Biocentrism does not imply the idea of equality among the animal kingdom, for no
such notion can be observed in nature. Biocentric thought is nature-based, not
human-based.
● Advocates of biocentrism often promote the preservation of biodiversity, animal
rights, and environmental protection.
 ● "Life-centred" where the well-being of each living thing is considered to be all that
matters, everything else being valued only as a means to that end. The term is also
used for ethics that value life itself, or biosphere, where the interests of individuals are
valued largely or solely for the sake of the biosphere. Example: Thus, biocentrism
may be individualistic or holistic.
● In contrast, the biocentric worldview considers humans to be a particular species
of animal, without greater intrinsic value than any of the other species of organisms
that occur on Earth.
● The ecocentric world view incorporates the biocentric one, while additionally
proposing that humans are a natural component of Earth’s ecosystem and that
humans have a right to the products and services of ecosystems in order to sustain
themselves and their societies.

The four main pillars of a biocentric outlook are:

● Humans and all other species are members of Earth's community.

● All species are part of a system of interdependence.
● All living organisms pursue their own "good" in their own ways.
● Human beings are not inherently superior to other living things

There are a number of implications of the anthropocentric view, which strongly influence
the ways in which humans interpret their relationships with other species and with nature
and ecosystems. Some of these are as follows:

1. The anthropocentric view suggests that humans have greater intrinsic value than other
species. A possible result of this attitude is that any species that are of potential use to
humans are a “resource” to be exploited. This has, historically, usually occurred in an
unsustainable fashion that results in degradation, sometimes to the point of extinction, of
nonhuman species, as has occurred with the dodo, great auk, and other animals.

2. The view that humans have greater intrinsic value than other species also influences
ethical judgments about interactions with other organisms. These ethics are often used to
legitimize treating other species in ways that would be considered morally unacceptable if
humans were similarly treated. For example, animals are often treated cruelly in medical
research and agriculture. This treatment of other species has been labeled “speciesism” by
some ethicists.

3. Another possible implication or assumption of the anthropocentric view is the belief

that humans are the height of the natural evolutionary progression of species and of life. This
belief is often said to be in contrast to the modern biological theory of evolution, which does
not find any scientific use for ranking some species as “higher” than any others .

Methods Used for the Environmental Valuation

Non market valuation
how much people would be willing to pay for them- is not revealed in market prices.
There are two main groups of economic valuation methods:
Revealed preferences methods (RP) and Stated preference methods (SP)
1. Revealed preference methods are based on actual market behaviour of users of
ecosystem goods and services. However, their applicability is limited only to a few
ecosystem goods and services. These involve examining the value of an
environmental good based on the existing relationship between the quality of the
environment and market-priced goods (The demand for environmental goods can be
revealed by examining the purchases of related goods in the private market place. for
example, rich fishing water and the price of fishing licenses.
2. Expressed or stated Preference Methods: Direct methods
Direct valuation methods. A value for an environmental good is proposed by asking
individuals about how much they are willing to pay to obtain a certain quality of environment
or to avoid a particular change in the environment.
Stated Preference Methods seek to measure individuals' value for environmental goods
directly, by asking them to state their preferences for the environment.
Stated preference methods or direct valuation methods- can be applied to all types of
ecosystem goods and services. expressed preference techniques ask individuals explicitly
how much they value an environmental good. The two most important of these methods is the
Contingent Valuation Method (CVM) and Choice Experiments (CE).
1.Contingent Valuation Method
Step5:
The final step is to compile, analyze and report the results. The data must be entered and
analyzed using statistical techniques appropriate for the type of question. In the data analysis,
the researchers also attempt to identify any responses that may not express the respondent’s
value for the services of the site. In addition, they can deal with possible non-response bias
in a number of ways
# Merits and Demerits of Contigent valuation Method

2.The Contingent Choice Method/Conjoint Analysis

Much like the contingent valuation method, the contingent choice method is a very
multipurpose method, which can be applied to valuation of almost any kind of environmental
goods and services irrespective of their being marketed or not marketed. It can be used to
estimate use value, non-use (passive) value, option value (reserved for one’s future use) or
bequest value (reserved for the use by the future generation).
Contingent choice method is also referred to as the conjoint analysis. It was developed in the
fields of marketing and psychology to measure individual’s preferences for different
characteristics or attributes of a multi-attribute choice problem. This method is similar to the
contingent valuation. Like the contingent valuation method, it is based on asking people to
state their willingness to pay, contingent on a specific hypothetical scenario and description
of various environmental goods and serviced of which they have to make a choice. Making
choice among different alternatives (environmental goods and services) in a simulated or
artificial scenario – rather than directly assigning economic values to the goods/services as
done in the contingent valuation method – is the characteristic feature of this method. From
the data on contingent choices or tradeoffs made by the people, values of different
(alternative) environmental goods/services are inferred by using different methods.
The method elicits information from the respondent on preference between various
alternatives of environmental goods and services, at different price or cost to the individual.
Suppose, there are five alternative baskets/bundle of characteristics – A, B, C, D and E. They
are available at prices P (A), P (B), P(C), P(D) and P(E). The prices may be single or
multiple valued. The alternative commodity/service baskets may vary in quantity, quality,
structure, coverage or a mix thereof. The full details on these baskets or combinations are
given to the respondents. The respondent is made to choose A, B, etc. at different prices.
This exercise provides the preference structure of the respondents and associates that
structure with the prices.
**Choice Experiments
In environmental issues, experimenters often use choice experiments, especially concerning
ecosystem management and environmental evaluations. The choice experiment method is
a questionnaire based technique that seeks to discover individual preferences for
simultaneous changes in the attributes that compose an environmental good or service. States
preference methods are the only methods that can assess non-use values of ecosystems but
can also be used to estimate use values generated by the ecosystems. In addition, due to their
hypothetical nature, these methods can be used to assess social preferences ex-ante, i.e., for
changes that have already not taken place.
The basic premise of the choice experiment is that a forest good or service can be
decomposed in a bundle of attributes or features and that individuals are sensitive to
changes in these attributes. Therefore, individuals are asked through a survey to state their
willingness to pay to undergo these changes.
The method can be used to estimate the economic benefits or costs resulting from an
environmental change that has an impact on (i) non-use values, such as existence values
people hold for biodiversity, (ii) use-values such as recreational values or landscape values
people hold for a given natural site.
Main steps of application
1. Define the valuation objective – defining the objective of the valuation study
2. Select the survey type - defining the way the survey will be implemented (e.g., in person,
mail, phone, web)
3. Questionnaire elaboration – preparation of a draft questionnaire, which includes the
definition of the attributes, their levels and structuring of the choice sets
4. Define the target population – who will be surveyed
5. Define the sampling – the sampling strategy is selected (e.g., random sampling or stratified
sampling)
6. Test the questionnaire in focus groups and in pilot surveys – to test the consistency and
respondents’ awareness
7. Launch the survey and collect the data from your sample
8. Statistical analysis – calculating the attributes’ coefficients and implicit prices
● Merits
● Demerits
There are several alternative formats to carry out the contingent choice analysis. Some of
them are:
(a) Contingent Ranking –
in the survey’s individuals are asked to compare and rank alternative action outcomes with
various characteristics, including costs,
(b) Discrete Choice - respondents are simultaneously shown various alternatives and their
characteristics, and asked to identify the most preferred alternative in the choice,
(c) Paired Rating -- respondents are asked to compare two alternate situations and are asked
to rate them in terms of strength of preference.
The choices made by the respondents are statistically analyzed using discrete choice
statistical techniques, to determine the relative values for the different characteristics or
attributes. Discrete choice models theoretically or empirically model choices made by people
among a finite set of alternatives. The models have been used to examine, e.g., the choice of
which car to buy,where to go to college,which mode of transport (car, bus, rail) to take
to work among numerous other applications .Since price is one of the characteristics of
the alternatives, the choice is tagged with the monetary measure. It is possible, therefore,
to compute the respondent’s willingness to pay for the other characteristics.
The contingent choice method is perhaps the most effective method to elicit the expressed
willingness to pay for environmental goods and services that may or may not be traded in the
market.

3. Attribute Based Models

New class of stated preference methods has been developed, generically refer to as
attribute-based methods (ABMs) - The objective of an ABM stated preference study is to
estimate economic values for a technically divisible set of attributes of an environmental
good.
Forest ecosystems produce a wide variety of goods and services that are valued by people.
Rather than focusing attention on the holistic value of forest ecosystems as is done in
contingent valuation studies, attribute-based valuation methods (ABMs) focus attention on a
set of attributes that have management or policy relevance (Adamowicz et al. 1998a, Bennett
and Blamey 2001). The attribute set might include, for example, measures of biological
diversity, areas designated for timber production or set aside for conservation, size of timber
harvesting gaps, or watershed protection measures. If human-induced changes in forest
ecosystems can be meaningfully represented by a set of attributes, choices made by survey
respondents among sets of alternatives can provide resource managers and policy makers
with detailed information about public preferences for many potential states of the
environment.
Responses to survey questions regarding versions of an environmental good that vary in
levels of its attributes can provide resource managers and policy makers with detailed
information about public preferences for multiple states of the environment.
ABMs can offer several advantages relative to other valuation methods:
The experimental stimuli are under the control of the researcher
This includes the introduction of new attributes and attributes associated with passive uses
that cannot be observed in the marketplace.
The use of statistical design theory yields greater statistical efficiency

4. Production Function Approaches or Production Factor Method PF)

Attempts to break up an ecosystem into their component functions and put a monetary value
on each of these. This looks at the impact of pollution externalities upon the production
function i.e. Value of the environmental impacts on inputs and subsequent output levels.
The method values negative impacts on the environment as the value of resources needed to
treat the effects of some impact. An example is the reduction in fish catch as a result of
deterioration in water quality caused by a factory not cleaning its wastewater sufficiently
before discharging it into the river a reduction in tourism related expenditure attributed to
declining environmental quality in a destination.

(B) Revealed Preference Methods:

The demand for environmental goods can be revealed by examining the purchases of related
goods in the private market place.
Revealed preference methods are based on actual market behaviour of users of ecosystem
goods and services. However, their applicability is limited only to a few ecosystem goods
and services.
In revealed preference methods, by infer the value of ecosystem services from observing
people’s behavior. There are two common methods: 1.Travel cost Method 2. Hedonic Pricing
Method

● Travel cost Method

● Hedonic Pricing Method
● Hedonic wage Values
● Dose response Function
● Averting Expenditure and Avoided cost Method
(1) Travel-Cost Method:-----indirect Method
The travel-cost method is a widely used indirect market approach that relies on information
on time and travel costs to derive a demand curve for a recreational site. This curve is in turn
used to estimate the consumers’ surplus or value of the site to all users. This approach is
widely used to value the recreational benefits of public parks and other natural areas.
This method seeks to determine the demand for a recreational site (i.e. number of visits per
year to a park) as a function of variables like price, visitors’ income, and socio-economic
characteristics. The price is usually the sum of entry fees to the site, cost of travel, and
opportunity cost of time spent. The consumers’ surplus associated with the demand curve
provides an estimate of the value of the recreational site in question.
The most common forecasting technique for a specific site is the Clawson- Knetsch-Hotelling
method. It is a technique commonly associated with benefit estimation in recreation
cost-benefit analysis. This method uses information on travel costs to generate a final demand
curve for a recreation outlet. Hence it is most appropriate for those outlets where travel cost is
a major component of total visit costs typically to free countryside outlets.
According to Clawson and Knetsch, outdoor recreation activities satisfy individual needs,
such as physical, social or psychological. It is necessarily a kind of package deal involving
anticipation, travel to the site, the activity itself, the return travel and finally recollection.
# Criticism:
(2) The Hedonic Price Method: (HPM)
The underlying assumption of the hedonic price method is that the price of a property is
related to the stream of benefits to be derived from it. The method relies on the hypothesis
that the prices which individuals pay for commodities reflect both environmental and
non-environmental characteristics. The implicit prices are sometimes referred to as hedonic
prices, which relate the environmental attributes of the property.
Therefore, the hedonic price approach attempts to identify how much of a property
differential is due to a particular environmental difference between properties, and how much
people are willing to pay for an improvement in the environmental quality that they face and
what the social value of improvement is.
The hedonic price method is based on consumers which postulates that every good provides a
bundle of characteristics or attributes. Again, market goods can be regarded as intermediate
inputs into the production of the more basic attributes that individuals really demand.
The demand for goods, say housing can, therefore, be considered as a derived demand. For
example, a house yields shelter, but through its location it also yields access to different
quantities and qualities of public services, such as schools, centres of employment and
cultural activities etc. Further it accesses different quantities and qualities of environmental
goods, such as open space parks, lakes etc.
The price of a house is determined by a number of factors like structural characteristics, e.g.
number of rooms, garages, plot sizes etc. and the environmental characteristics of the area.
Controlling the non-governmental characteristics which affect the demand for housing,
permits the implicit price that individuals are willing to pay to consume the environmental
characteristics associated with the house to be estimated.
The hedonic price function describing the house price Pi of any housing unit is given below:
Pi = f [S1i…………Ski, N1i,…………….Nmi, Z1i………….Zni]
Where, S represents structural characteristics of the house i i.e. type of construction, house
size and number of rooms; N represents neighbourhood characteristics of house i, that is
accessibility to work, crime rate, quality of schools etc. It is assumed that only one
environment variable affects the property value i.e. air quality (Z).
The hedonic price method has become a well-established technique for estimating the
disaggregated benefits of various goods attributes. In the case of housing, these attributes
include not only basic structural and amenity characteristics but also environmental
characteristics such as clean air, landscape and local ecological diversity. Thus, when a
particular policy is implemented which will have a very great effect on the local environment,
the hedonic method offers a useful way of estimating the change in amenity benefits.
# Criticism:

(3) Wage-differential Approach: The hedonic wage approach

The wage-differential approach is a surrogate market approach that uses information on
differences in wage rate for similar jobs in different areas to estimate monetary values for
different levels of environmental quality. This approach has been used to estimate values for
such environmental variables as different levels of congestion, air pollution and aesthetics.
Wages also vary in response to various factors such as education and training, natural
dexterity, experience, demand and supply in each labour market area, occupational risks to
health, probability of death, and associated living conditions including environmental
ambience etc.

The hedonic wage approach has also been used in the wage-risk analysis to determine the
value of life and limb in relation to the hazards faced at work. The general hedonic wage
equation can be expressed as
P = P (J, R, S)
Where, P is the payment rate for a given job, J is a vector of another job- related attributes
e.g. working hours, holiday, sickness benefits etc., R is the risk of death and S is a vector of
skills required to do the job.
The hedonic wage approach has traditionally been used to measure employment attributes,
principally risk of death or injury in particular labour markets. However, by observing
variations in wage levels over space, and netting out the influence of other attributes, they
have also been used to value the quality of life over large areas such as countries or
continents. Upward sloping. Gives the wage increase offered by a slightly riskier job.
(4) Dose-Response Method
This method requires information on the effect that a change in a particular chemical or
pollutant has on the level of an economic activity or a consumer’s utility. For example,
ground levels of air pollution, such as ozone, affect the growth of various plant species
differentially. Where this results in a change in the output of a crop, the loss of output can be
valued at market or shadow (adjusted or proxy) market prices.
Dose-response relationships or production function approaches, are perhaps the most familiar
valuation techniques. Essentially, a link is established between say, a pollution level and a
physical response, for example, the rate at which the surface of a material decays. The decay
is valued by applying the market price (costs of repair) or by borrowing a unit valuation from
non-market studies.
Notable examples include the valuation of health damage. Once air pollution is linked to
morbidity and morbidity is linked to days lost from work, the days lost can be valued,
perhaps using a market wage rate. The main effort of the analysis is devoted to identifying
the link between dose and the response.

Averting Behavior Method (ABM)

ABM is especially suited for valuing natural qualities.  This is done by looking at
expenditures made to avert or mitigate negative effects from the reduction of a natural
quality.  ABM relies on the assumption that people perceive the negative effects of
environmental deterioration on their welfare and that they are able to adapt their behavior to
avert or reduce these effects.  This means, that people experience the negative effects of
ozone depletion and that they will buy products such as hats and sun-cream to prevent
damage to their health.  The willingness to pay for a clean environment is deducted from
people’s purchases of products and services to avert the negative effects of pollution.
ABM is a cost-based method, since the costs of purchasing these items are used to value
environmental qualities, even though the social preferences for a healthy environment may be
much greater than the expenditures on these products.  Buying such products actually
means that they have less money to spend on the environment .  people may not react to
small changes in environmental quality. They may only react when a certain threshold has
been passed.

*Tradable Pollution Permits

● Pollution permits involve giving firms a legal right to pollute a certain amount e.g. 100 units
of Carbon Dioxide per year.
● If the firm produces less pollution it can sell its pollution permits to other firms.
 ● However, if it produces more pollution it has to buy permits from other firms or the
government.
● This creates a market for pollution permits with the price set by demand and supply.
● The aim of pollution permits is to provide market incentives for firms to reduce pollution and
reduce the external costs associated with it. For example, it is argued carbon dioxide
emissions contribute towards global warming.
● Pollution permits can also be a way for the government to raise revenue, by selling firms
these permits to allow pollution.
Diagram for pollution permits with increased demand

A very simple diagram showing the fixed supply of pollution permits. Suppose there is rapid
economic growth and the demand for producing pollution increases, the cost of tradeable permits
rises from P1 to P2.

Pollution permit scheme with cut in supply of permits

In this case, the government reduces the number of permits over time. This means the price will
steadily increase and create a growing incentive to reduce pollution over time. The idea is that it
gives firms time to try and invest in different technology which creates less pollution.

Permits reducing demand over time

Over time, the existence of pollution permits should reduce demand for pollution. Firms wish to
avoid paying the cost and find a way to reduce pollution. As demand for permits falls, the price of
permits will fall.
In this case of falling price of permits, it may be necessary for the government to respond by steadily
reducing the supply of permits. By steadily reducing the amount of permits, the government can
steadily reduce the quantity of pollution.

In the long-term a fall in demand and fall in supply of permits leads to a decline in pollution.

Pollution permits and social efficiency

If firms produce carbon as a side-effect of production, it is classed as a negative externality. In this

case, the social marginal cost of the polluting industry is greater than private marginal cost. In a free
market, we get over-production of pollution and social inefficiency.

Pollution permits are a method to try and reduce output to a more socially efficient level. The aim is
to make the price of pollution permits as close as possible to the social marginal cost

Pollution permits vs carbon tax

● Pollution permits have a similar goal to carbon tax. They both aim to increase the cost of
producing pollution and create an incentive to reduce the quantity of pollution.
● The diagram on left shows how a tax can shift supply to the left and make firms pay the full
social marginal cost of pollution. It raises the market price to P2.

● The diagram on the right shows how pollution permits have a similar effect. If the quantity of
permits is set to Q2, the market price rises to P2
Unit- 5: Environmental Governance and Management

* Global Environmental Governance

Global Environmental Governance is the title of a book written by Adil Najam, Mihaela Papa
and Nadaa Taiyab. Global environmental governance (GEG) is the sum of organizations,
policy instruments, financing mechanisms, rules, procedures and norms that regulate the
processes of global environmental protection. The efficacy of global environmental
governance will ultimately depend on implementation at global and domestic levels.
National implementation is the ultimate key, both to the efficacy of the GEG system and to
meaningful environmental improvements. Since environmental issues entered the
international agenda in the early 1970s, global environmental politics and policies have been
developing rapidly. The first global conference on the environment, held in Stockholm in
1972, set in motion three decades of discussion, negotiation and ratification of a whole
series of international environmental agreements. The Stockholm Conference spawned the
United Nations Environment Programme. The Earth Summit, held in Rio 20 years later,
brought with it the Conventions on Biological Diversity, Climate Change and Desertification
and created another UN political institution, the Commission on Sustainable Development.
Major institutions, such as the World Bank as well as the World Trade Organization, claim
sustainable development as their overarching goal. A similar growth of interest is also seen
within non- UN international and regional institutions in terms of environmental and
sustainable development concerns.

* International Environmental Treaties and Institutions

Environmental organizations operate around the world in an effort to analyze, track, and
conserve the global environment. These organizations may be nonprofits, governmental,
trusts, or non-governmental. Additionally, environmental organizations work at different
levels around the world, including international, national, regional, or local
1. World Nature Organization (WNO) -
Planning for the World Nature Organization began in 2010 by the developing countries
which are most threatened by climate change. These nations are located around the Pacific
Ocean and the Caribbean as well as a few countries in Africa. The Preparatory Commission
published the WNO Treaty in June of 2012, but lack of interest left the agreement unsigned.
This organization did not come into effect in May of 2014 as planned. Its goal was to
promote economically friendly businesses, technology, energy, and activities.
2. United Nations Environment Programme (UNEP) -
The United National Environment Program was founded in June of 1972 after the UN
Conference on the Human Environment. It is responsible for a number of environmental
issues concerning various UN agencies. Some of these responsibilities include: developing
international environmental agreements, encouraging environmental science, and creating
development policies with national governments. Experts of the UNEP have contributed to
guidelines of treaties and policies in terms of potential contaminants.
3. International Union for Conservation of Nature (IUCN) -
The International Union for Conservation of Nature was established in 1948 and is
comprised of over 1,200 government and non-government members. Its mission is
promoting nature conservation and sustainable use of natural resources around the globe.
This environmental organization also focuses on issues such as poverty, gender equality, and
sustainable business practices in order to achieve its objective. This organization is
responsible for publishing the IUCN Red List which categorizes biological species by their
conservation status.
4 . Intergovernmental Panel on Climate Change (IPCC) -
The IPCC works under the UN as an intergovernmental and scientific organization,
established in 1988 by the World Meteorological Organization and the previously mentioned
UNEP. Its purpose is to offer the world an unbiased, scientific assessment of climate change
and its effects. The IPCC reports are based on published literature by non-IPCC scientists on
a voluntary basis. In 2007, this organization, along with Al Gore, received the Nobel Peace
Prize.
5. Global Environment Facility (GEF) -
The GEF was established in 1991 as a collaboration among 183 nations, civil organizations,
private businesses, and international institutes. This organization finances projects
concerning climate change, land degradation, international water, biodiversity, and the
ozone layer.
Currently, it is the largest public funder of these types of projects in the world. In total, the
GEF has provided $12.5 billion, $58 billion in shared financing endeavors, and $653.2 million
in small grants. Together, these funds have contributed to 3,690 projects in 165 countries
6. Earth System Governance Project (ESGP) -
The ESGP began in January of 2009 out of the International Human Dimensions Programme
on Global Environmental Change, a research project that focused on the human impact on
global change. This project is a network of around 300 active and 2,300 indirectly involved
academics from around the world. The goal of the ESGP is to publish research on the science
concerning the difficulties of regulating global environmental change. By doing this,
researchers hope to better understand the roles and responsibilities of governments,
institutions, and organizations in issues of global commons and pollution.

* Ecological Footprints Measure (EFM):

Ecological foot print Analysis
The impact of all our activities can be likened to an imprint or ‘footprint’ on Earth. This
imprint is referred to as our 'Ecological Footprint'. Just as we say that a computer has a big or
small ‘footprint’, depending on how much space it takes up on our desktop, we can say that
the lifestyle choices we make have a footprint on the Earth. Our Ecological Footprint is a
measure of the human impact on nature – it shows how much productive land and water we
use to produce all the resources we consume and to take in all the waste we make.

Ecological Footprint Analysis is an innovative and rigorous way of measuring whether the
impacts of our lifestyle choices are sustainable.

Increasingly, we are coming to realise that we are using up more resources than nature can
replace and producing far more waste than nature can safely absorb. So, it is sometimes said
that the human Ecological Footprint is too large.

The ecological footprint was first proposed and developed by Rees and Wackernagel (1994)
and Wackernagel and Rees (1996). Its objective is “to translate all the ecological impacts of
human activity into the area required to produce the resources consumed and to assimilate
the wastes generated under the predominant management and production practices in any
given year” (Neumayer, 2004). The ecological footprint is a physical indicator of
sustainability expressed in land units. It compares human consumption of natural resources
with planet Earth's ecological capacity to regenerate them and absorb the corresponding
waste. The ecological footprint is defined as the amount of biologically productive land area
required to support the consumption of a given population. If the ecological footprint is
higher than the existing land area, current consumption is not sustainable since the carrying
capacity of the land is exceeded. In other terms, economic activity, responsible for the
ecological footprint, is unsustainable. Empirically, energy, food and timber consumption per
capita are transformed in terms of land area needed to produce these amounts. The sum is
then compared with the amount of available productive land area per capita.

An ecological footprint is the total area a person occupies in terms of land used for
agricultural purposes, wood consumption and to absorb polluting emissions. Further, these
are aggregated at the country level to show the relative impact on the planet of land
consumed and compared to population levels.

Objectives

purpose of ecological footprint?

The Ecological Footprint as defined by the Ecological Footprint standards calculates how
much biologically productive area is required to produce the resources required by the
human population and to absorb humanity's carbon dioxide emissions.

Methods of ecological foot print analysis

Researchers have combined footprint analysis with measures of human development to assess
whether countries are on track toward sustainable development—defined as a per capita EF
lower than the available per capita biocapacity with a high rating (above 0.8) on the United
Nations Human Development Index (HDI). (The HDI is a metric that combines a country’s
average life expectancy, educational attainment, and income into a measure of economic and
social progress.)

Environmental educators and activists have used the EF to raise awareness of unsustainable
consumption patterns, often with the goal of encouraging a change in lifestyles and, less
frequently, to promote awareness of wider structural forces driving such patterns. Many
online footprint calculators have appeared on nongovernmental organization Web sites with
such goals in mind. Those calculators allow people to calculate their personal EF and to make
comparisons with estimates of available biocapacity or to average footprints of other people
locally and globally. Meanwhile, social scientists have used the EF as a comprehensive
indicator of the ecological impacts of humans on the planet in order to test empirically
different social theories of the forces driving those impacts.

Although EF analysis can lead to a radical critique of the current economic and social order,
it has found increasing mainstream acceptance among businesses and governments.
Multinational corporations such as Wal-Mart introduced programs to shrink their EFs, and the
World Business Council for Sustainable Development began exploring pathways toward
achieving a “one-planet economy” by 2050. A number of national governments—such as
those of Wales, Switzerland, the United Kingdom, Japan, the United Arab Emirates, and the
European Union as a whole—as well as metropolitan areas have also considered or embraced
the concept.

For Participants:
● Understand that, consciously or unconsciously, everyday actions leave a footprint on
the earth, and that there are things that can be done to reduce this footprint, both in
their own lives, and in how their world operates
● Develop a list of individual personal lifestyle changes to reduce their footprint
● Develop ideas for changing the community to make it easier for more people to leave
less of a footprint in their daily lives

DESIRED OUTCOMES

1. Participants gain experience with Ecological Footprint Analyses (EFAs)

2. Participants seek out more sophisticated versions of EFA’s online and complete them
3. Participants encourage their friends and family to do EFA’s
4. For those participants in schools, they actively engaged with get their school class to do
an EFA (and possibly do an EFA on their school – Powerhouse Museum online tool)
5. Participants make changes in their personal lives to reduce their individual footprint
6. Participants initiate changes in their homes to reduce the footprint of their dwelling and
occupants
7. Participants – as individuals or groups – initiate projects to change their communities
(schools, workplaces, wider community).

ENGAGING OTHERS

Other things that could reduce your footprint will require others to do things too.

● Identify 3 things that would enable you to reduce your footprint, but would require
others to be involved and change as well.
 ● For each item, identify who the people are that would need to change, what would
need to change, what barriers there might be to them changing, and how you could go
about overcoming those barriers.

Have people complete the above task as individuals, and then discuss in groups of 3 or 4.
Have each group share a few ideas with the whole group.