Environmental

Economics:Visions of
the Future
Lecture 1
Learning objectives
 The focus of environmental economics.
 Understanding the economic approach to the
analysis of environmental problems.
 Example and the role of incentives
 Major environmental challenges
 Meeting the challenges
 Ecological economics vs. Environmental Economics
 Environmental economics
 Is the study of environmental problems with the
perspective and analytical tools of economics.
 Econ studies how and why people make
decisions about the use of scarce resources.
 There are 2 branches of economics:
 Macroeconomics;
 Microeconomics.
 Environmental economics draws mainly from
microeconomics.
The focus of environmental
economics
 Environmental economics focuses on how
economic activities affect our natural
environment – the atmosphere, water, land,
living species, etc.
The focus of environmental
economics
 Economic decisions made by firms, people,
and governments can have negative effects
on the natural environment.
 Why do people behave in ways that cause
environmental destruction?
 Why don’t people take into account the effects of
their economic activities on the environment?
Why do we cause environmental
destruction?
 Why do people behave in ways that cause
environmental destruction?
 Unethical or immoral human behavior?
 Absence of an economic (and social) incentive
structure to efficiently dispose waste which
arises from our production and consumption
decisions?
 Other answers?
Why does this occur in economic
systems?
Economists’ view:
 People pollute because it is the cheapest

way to dispose the waste products remaining

after production and consumption.
 Why don’t people account for the
environmental impact?
Economists’ View:
 The absence of ownership rights to
environmental resources means that there
are a few incentives to take the
environmental consequences of our actions
into account.
 Institution lacks an incentive structure.

 There is a missing market that can price

these resources.
Incentives
 An incentive is something that attracts or repels
people and leads them to modify their behavior
in some way
 An economic incentive leads people to channel
their efforts at production and consumption in
certain directions
 Economic incentives are often viewed as
consisting of payoffs in terms of material wealth
 But there are also non-material incentives that
lead people to modify their economic behavior:
can you name some examples?
Highway Littering
 An illustration: Smog & motor vehicle
 Each year Canada’s automobiles discharge
approximately
 11% of total carbon dioxide emissions

 17% of nitrogen dioxide

 20% of volatile organic compounds

 47% of carbon monoxides

An illustration: Smog & motor vehicle
 These compounds contribute to urban smog,
acid precipitation and global warming
 These environmental conditions adversely
affect the health of people and other species
as well as our ecosystem.
 Environment Canada estimates that 6000
Canadians die prematurely each year due to
air pollution.
Future Environmental Challenges

 Climate changes is an enormously complex

and challenging international issue that will
require a coordinated international response
 Water accessibility is causing stress
worldwide
 40% of the world’s population lives in areas
with “moderate to high water stress (UN)
 Groundwater withdrawal and contamination
of water sources are also of concern
Meeting the Challenges

 Policies must incorporate our obligation to

future generations
 Global environmental problems have different
effects in different countries thus making the
negotiation of solutions more complex (see
Islam, T (2005), Chapter 1)
Focus of Environmental Economics
 Environmental economics investigates and
assesses different methods of reaching a socially
optimal use of environmental resources.
 Economic efficiency is one of the main criteria
for evaluating environmental issues and
policies.
 Benefit Cost Analysis is one of the main analytical
tool used by Economists to evaluate and decide on
environmental issues.
Ecological Economics
 A new field called Ecological Economics
examines the interaction of the economy
with the natural environment more fully.
Ecological Economics and
Sustainability
 A Sustainable Economy:
One which investment in social capital (physical,
human, natural and environmental) allows the
economy to grow so that people are at least as
well off in the future as they are in the present,
while sustaining the health of the ecological
system.
Ecological Economics
 Objective of the new field is to find sustainable
paths of economic development without
destroying ecological systems but allowing
increases in real income.
 Given that there is a trade-off between the
output of goods and services produced and
environmental quality is this possible?
In summary this course is about
 How economists analyze environmental
issues.
 How incentives operate to correct
environmental issues.
 How to change existing incentives so that
environmental resources are used
efficiently.
 Examining environmental issues and
policies in Canada and the world.