Economics and Environment Intro Quiz

Introduction to Economics and Environment

• The course is titled "Topics in Economics and Environment (Jour)"
• The course is offered by IHEC Brussels Management School
• The course dates are 2024-2025

Economics and the Environment

• This section introduces the intersection of economics and environment

Where is the Environment? (Part 1)

• A circular flow diagram illustrates the economy (Mankiw, 2017, p. 23)
• Households and firms interact in markets for goods/services and factors of production.
• The outer set of arrows reflects dollar flow, while the inner shows input/output flow.

Where is the Environment? (Part 2)

• A diagram shows the relationship between various economic concepts including: Monopolistic Competition, Oligopoly, Game Theory, Public Goods, etc and Foundational Consumer Theory

The Conventional View of the Economy

• A diagram illustrates a simple view of the US economy in 1990
• Capital: $3015
• Labor: 2000 hours
• GDP: $23,195 (average per person)
• Source: Hall et al. (2008)

From Classical to Neoclassical Thought

• The first economists, like William Petty (1623–1687), considered labour and land as fundamental factors/mothers of wealth.
• The Physiocrats, led by Francois Quesnay (1694–1774), stressed the role of nature (land) and the net product in wealth creation.
• David Ricardo (1772–1823) focused on labour, differentiating between rent, and profits based on marginal returns versus subsistence wages.
• Classical theory presented land as the framework for wealth distribution & profit, but this notion was simplified from reality, overlooking land degradation.

Classical Economists and Labour

• Land, in classical theory, is the structure within which the economic process operates.
• Nature encompasses the economy.
• The notion of nature is simplified, ignoring concrete reality.
• Physiocrats regarded land as having its own life, while Ricardo treated it as a technical characteristic.

Political Economy in the 19th Century

• Figures include Karl Marx (1818–1883) and William S. Jevons (1835–1882)

Karl Marx

• He expanded Ricardo's labor theory of value to highlight exploitation.
• He analyzed surplus value (difference between produced value & value needed to produce)
• He noted the impact of rural-urban shifts on land use & agricultural practices (Soil erosion, Liebig).
• He recognized the connection between exploitation and ecological degradation

William Stanley Jevons

• Jevons analyzed the relation between economic activity and the depletion of resources, particularly coal.
• He examined costs of production, prices, and quantities.
• Coal extraction is both expansionist and progress driver (steam engine).
• He predicted limits to production related to resource limits & growing exploitation and stagnation costs.

Conservation vs Preservation: Pinchot vs Muir

• G. Pinchot (1865–1946), the first head of the United States Forest Service, advocated for the responsible use of resources (e.g. forestry as tree farming).
• John Muir (1838–1914) emphasized wilderness preservation, influencing the creation of national parks.

The Neoclassical Turning Point

• Classical economics focuses on production costs, material determinants of production, and relationships between social classes.
• Neoclassical economics highlights utility received from production and consumption and psychological aspects of value.
• There's a shift away from empiricism to theoretical speculation.
• Nature is excluded from economic analysis.

Hotelling (1885-1973)

• Hotelling analyzed the exploitation of natural resources from a capital management perspective, but without considering environmental impact.

Realities of Nature Disappear

• Neoclassical economics neglects nature's specifics due to its emphasis on equilibrium conditions, and psychological value theory.
• The economic process is considered autonomous, independent from material conditions.

The Keynesian Turning Point

• Keynesian thought dematerializes economic theory, emphasizing aggregated monetary flows and disregarding material production.
• The economy is seen as a network of monetary flows; the material aspect is unimportant.

Mid-20th Century: Is Nature Back?

• Economists like Arthur C. Pigou (1877–1959) and Ronald Coase (1910–2013) reintroduced environmental concerns into economics, particularly regarding externalities.

Arthur C. Pigou

• Expanded on Marshall's work focusing on market failures and externalities.
• Introduced Pigovian taxes as a policy tool.

Ronald Coase

• Argued that well-defined property rights can mitigate externalities, highlighting transaction costs.
• The ultimate outcome (optimal use/distribution) is not affected by legal framework, if the price system works without cost.
• Coase recognized limits of market-based bargaining

Limits of Coasian Bargaining

• Difficulties with coordinating large groups/multiple polluters hinder market solutions for pollution.
• Special regulations may be more suitable than market transfers in situations of multiple actors or environmental harm.

From First Best to Second Best

• Pigovian taxation and Coase negotiation lead to socially optimized balances.
• The optimal pollution level is determined by economic reasoning in a 'first-best' world.

Second-Best Solutions to Pollution Issues

• Alternative resource and pollution control models are introduced to address complexities and uncertainties involved in cost-effectiveness.
• These include predetermined standards and negotiated permits systems.

Environmental Economics

• Environmental economics applies general neoclassical economic theory to natural resources.
• In classical theory, nature acted as the framework for economic activity.
• Subsequently, nature becomes a component within the economic system.

Economics and the Environment: Very Brief Clarification

• Environmental economics uses neoclassical methodology to address pollution issues.
• Natural resources economics is a separate aspect focusing on resource depletion.
• Ecological economics transcends the conventional framework, encompassing relationships between economics and ecology.

Environmental Economics (Continued)

• Environmental economics primarily focuses on market-based assessment of environmental regulation.
• O. Godard considers market failure necessary for environmental problems.
• Two sides to the market: identification of anomalies, and solution to these anomalies based on a perfect market assumption.

How do Environmental Problems Come into Existence?

• The mechanisms yielding environmental problems are identified as market failures.
• Current environmental policy issues and solutions are considered as aspects of sustainable society.

The Ecological Economics' View

• The perspective depicts the economy within the framework of bio-geo-chemical cycles in which the economy is embedded.
• Nature is the source of economic flows and a lens for their analysis.
• Measures favoring physical aspects over monetary ones are prioritized.

Ecological Economics: A Few Research Streams

• Research streams investigate measures for accounting for ecosystem value.
• Macro-level modeling of economy and ecosystems is considered.
• Strategies for achieving sustainability are explored.

Alternatives to Environmental Economics

• The Limits to Growth model (Club of Rome) questions the ability of current economic activities to sustain population growth without triggering societal collapse.

Modelling the Energy Transition

• The MEDEAS model incorporates factors like energy availability, consumption, and climate impacts.

Some ‘Heterodox’ Approaches

• The critique of 'successful cost transfers', the pervasive nature of externalities, and the role of capitalism in generating them are discussed.
• Production, thermodynamics, and the finite nature of resources are considered.

Ostrom and the Commons

• Ostrom's work challenges the common resource tragedy.
• Ostrom highlights the potential for community-based resource management.
• Important principles of community-based resource management including clear boundaries, participation of affected parties, rule-respect, graduated sanctions, etc.
• The dynamic interrelationships between institutions, communities, and resources are emphasized.
• Nature's role in local contexts and maintaining sustainability is highlighted.

Ecological Economics: Some Basic Tenets

• The economy is inherently intertwined with biophysical cycles.
• Nature acts as the fundamental framework for economic flows.
• Methodological critiques of mainstream economics are offered.

Ecological Economics: A Few Research Streams

• Research concerning ecosystem valuation, macro-level modeling, and strategies for sustainability are examined.

Concluding Discussion

• Overall assessment of the different perspectives.