Environmental Economics Chapter 1

Natural Resources and Climate Change

• This is a study of how economists view the environment, specifically focusing on Chapter 1 (Part II).
• The presentation was given by Ariane Salem on September 24, 2024.
• The presentation covers the interplay between the environment and the economy, a historical overview of environmental economics, and the economic nature of environmental goods and services.

Contents

• Section 1: Discusses the interplay between the environment and the economy, as well as environmental services, economic activity, and crises. It also covers how to set a direction in this area.
• Section 2: Explores the history of environmental economics thought. Analyzes the relationship between the environment and the economy and how they are intertwined.
• Section 3: Focuses on the economic nature of environmental goods and services.

History of Environmental Economics Thought

• The presentation highlights a triple concern of efficiency, sustainability, and justice in classical economic thought.
• In the 19th century, the focus shifted towards efficiency, with market-based tools becoming prevalent in environmental economics. This approach often focuses addressing market failures and restoring efficiency.
• Recent challenges, like climate change, have led economists to adapt their approach, recognizing that the scale of the economy may be the core issue, not just its efficiency.
• The presentation emphasizes a fundamental shift from a classical to an ecological economic approach, which prioritizes sustainable scale, equitable distribution, and efficient allocation.

Physiocrats: The Government of Nature

• Physiocrats, active from 1750 to the French Revolution, contributed to Enlightenment thought.
• They believed the economy should follow natural laws, focusing on freedom and property rights, especially concerning natural resources, particularly agriculture.
• Their ideas emphasized that wealth generation was regulated by natural laws and didn't need government intervention.
• They are relevant because they highlight the interlinkages of natural resources, political power, and economic activity.
• The presentation links the French Revolution to modern geopolitical struggles over natural resources, like rare earths, minerals, and fossil fuels.

Transhumant Pastoralism, Climate Change, and Conflicts

• This section addresses the relationship between pastoralism (transhumance), climate change, and conflict in Africa.

Classical Economists: Nature's Limits to Growth

• Classical economists (mid-18th century, following the industrial revolution) were interested in understanding the source of wealth for nations.
• Land and natural resources were considered essential inputs to production, but their availability was limited.
• Ricardo's theories on land quality and diminishing returns highlighted that increasing productivity had limits.
• There's a focus on the eventual stationary state.
• Mill's views on the eventual limitations of growth and the need for a new focus on human improvement within a stationary state are stressed, raising concerns about a desirable balance between humans and nature.

Mill and the Amenity Value of Nature

• Mill disagreed with placing the main focus solely on maximizing production.
• Instead, he argued that maintaining nature's beauty and amenity value is worthwhile, even in the presence of species for human consumption
• He cautioned against over-exploitation of natural resources for economic gain without considering the long-term consequences on human well-being and the degradation of the environment.

Lessons from Malthus' Prophecy

• Malthus's 1798 theory focused on population growth outpacing resource growth leading to a subsistence crisis.
• However, industrial and agricultural revolutions showed this did not always occur.
• The 20th century saw another desynchronization: CO2 emissions and economic growth. Increases in the GDP and development often mask environmental degradation, sometimes leading to crises like climate change.
• Recent evidence demonstrates that climate change is curbing well-being in various parts of the world.

Climate Change Curbs Economic Growth

• Studies show a strong correlation between temperature and economic output at a micro-level.
• This relationship isn't as clear at a macro-level for wealthy countries, suggesting potential substitution between different types of capital.
• Evidence across 166 countries from the 1960s to 2010 reveals a non-linear response of productivity to temperature, particularly with impacts varying between rich and poor countries.
• Global income will decrease by 23% globally by 2100 if climate change continues unabated. Climate change is increasing income inequality.

Uneven Impact on Well-being of Climate Change

• The distribution of economic consequences related to climate risk exacerbates existing inequalities.
• Countries in the south are disproportionately affected by climate change-related mortality, leading to economic losses.
• Climate change-related disaster occurrences are impacting wealthier districts in the US, leading to outmigration to other areas.

Neoclassical Economists: A Theory of Exchange

• Economic value is primarily determined by exchange rather than labor or land inputs.
• The focus is on microeconomics and the structure of economic activity (such as supply and demand), rather than its aggregate level.
• Neoclassical economics led to the development of welfare economics, focusing on efficient allocation of resources and maximizing overall well-being.
• In the mid-20th century, natural resources were gradually integrated into economic growth models, with concern for the efficient and optimal use of these resources becoming central during the following decades.

Welfare Economics: Efficient and Optimal Allocations

• Welfare economics is studied to rank and consider socially desirable allocations.
• There is a need to use ethical criteria from utilitarian philosophies to rank potential outcomes.
• An efficient allocation is one where no individual can have greater utility w/o reducing the utility for another individual.
• Markets and externalities are discussed with respect to these concepts.
• This laid the foundation for environmental economics, emphasizing the corrections for market failures.

From Sustainable Development to Ecological Economics

• The 1970s oil crisis brought attention to the Limits to Growth.
• The Brundtland Report (1987) presented the triple pillars of development: economic, environmental, and social.
• Ecological economics emerged, highlighting the integral relationship between economies and natural systems to solve this problem. This interdependence results from the fact that the economy relies on the environment for resources.
• The need to consider natural resource limitations is emphasized as a change in the perspective of economic productivity in the long-run.

Ecological Economics

• Ecological economics is a field of study resulting from interactions between natural and social sciences, aiming to address environmental issues.
• It explicitly models economies as parts of larger systems where economies and the environment are connected, taking a broader systemic approach.
• Economists and scientists interact to shape this perspective, reflecting different scientific fields and disciplinary approaches, leading to new methods of economic analysis.
• This view leads to the need for paradigm shifts to address Earth's constraints and the limitations to growth, including the shift from "cowboy" economics to "spaceman" economics.
• Moving from GDP to considering the accumulation of wealth and the state of natural capital to evaluate economic performance.

Environmental Services and Market Failures

• Idealised market conditions don't reflect the complexity of actual economies. The departure of actual economies from these idealized conditions are known as market failures.
• Externalities: Interactions where an individual or entity's activities affects those of another without compensation being given for the consequence. This is relevant in an environmental context because people and firms engage in activities which negatively or positively impact others (and the environment) without taking appropriate account of those consequences.
• Public good: goods where consumption by one person does not diminish the quantity available for others (air, water). The provision of these goods is traditionally handled by governments as there are free rider problems.
• Imperfect information: Lack of complete information about the market (e.g. long-term consequence of climate change).

Externality

• Externalities occur when an individual's actions affect another without direct compensation, and their occurrence alters the natural equilibrium in economic marketplaces.
• Externalities create inefficiency in market outcomes where one party's activities result in benefits or costs for another party not considered in market prices.
• If there are missing feedbacks, such as compensations (from a polluter to the polluted), there is a need for other arrangements to achieve a market efficiency.
• Property rights are important for dealing with situations such as "right to pollute" vs "right to a clean environment".

Simple Model of Externality

• This models the case of two individuals living together one of whom smokes. It evaluates the costs and benefits of smoking and whether individuals have an incentive to negotiate with each other (such as compensation) if there is non-specified property rights.

Simple Model of Equilibrium Choice

• Individuals make choices to maximize their utility in environments where factors like Externalities are involved.
• The need for legal property rights or other mechanisms to create incentive compatibility to ensure that exchanges and market conditions allow for Pareto efficiency is implied in the section.
• The use of different approaches in economics, including Coase Theorem, is suggested to highlight the complexities of these concepts.

Public Goods

• Public goods are characterized by non-rivalry (one person's use does not diminish others) and non-excludability (difficult to prevent others from consuming).
• Examples include clean air, water, and fisheries in shared resources (not fully private).
• Public goods often face the free rider problem and are typically managed by government intervention or other collective mechanisms.
• Many environmental services exhibit this character (up to a threshold where consumption rates do not exceed regeneration rates).

Problems with Public Goods

• The non-excludability of public goods leads to a lack of market mechanisms to balance the trade between the overall amount of the good and the marginal willingness-to-pay for that good.
• Such goods are usually provided by a tax to fund the provision and prevent free-riding.
• Efficiency in consumption is achieved when the marginal benefits of all users equal the marginal cost of production.

Explore the intricate relationship between the environment and the economy in this quiz based on Chapter 1 (Part II) of the study on natural resources and climate change. Delve into the historical context of environmental economics and the economic nature of environmental goods and services. Understand the pressing issues of efficiency, sustainability, and direction in environmental economic thought.