Environmental Economics: Key Concepts

• BGEC113: Introduction to Environmental Management is a degree program for the first semester of the 2024/2025 academic year
• The lecturers are Dr. Ampem Darko-Aniapam, Dr. Edward Koomson, Dr. Jennifer Ayamga, Dr. Michael Mensah, Dr. Bernie Asher, Dr. Erika Mamle Osae, Mr. Lawrence Offei Asare, Ms. Razeena Mohammed Siita, and Mr. Joseph Fleischer.

Introduction to Environmental Economics(Week 4)

• Environmental economics is defined and explained
• Some key concepts in environmental economics are explained
• Examples of common property resources are discussed

Learning Outcomes

• Defining and explaining environmental economics
• Explaining key concepts in environmental economics
• Discussing examples of common property resources

Economics

• Economics is how and why individuals and groups decide on using and distributing valuable human and non-human resources
• Economics is divided into microeconomics and macroeconomics
  • Microeconomics studies the behavior of individuals and small groups
  • Macroeconomics studies the economic performance of economies as a whole

Introduction to Environmental Economics

• Environmental economics studies the relationship between the economy and the environment
• Focus is on how economic activities affect the natural environment and natural resources
• It also looks at how environmental policies can influence economic decisions
• Environmental economics applies economic principles to managing environmental resources
• The field analyzes people's decisions that impact the natural environment
• It explores how economic policies can balance human desires with ecosystem needs

Key Concepts: Markets

• Markets are systems where buyers and sellers exchange goods and services
• Environmental economics uses markets to allocate resources like land, water, or clean air
• Markets determine prices and quantities of goods/services based on supply and demand

Characteristics of an Ideal Market

• Competitive: Many buyers and sellers participate
• Perfect information: All parties know the full costs and benefits of transactions
• Well-defined property rights: Ownership of resources/commodities is clearly defined
• No externalities: Only participants bear the costs and benefits of transactions

Market Failures

• Market failures lead to inefficient resource allocation and negative environmental outcomes
• Key types of market failures include:
  • Externalities
  • Public goods
  • Tragedy of the commons

Externalities Explained

• Externalities occur when market transactions affect third parties not involved in the exchange
• Costs and benefits of economic activities are not reflected in market prices (e.g., pollution)
• Activities of one party impose unpriced costs or benefits on others
• Externalities can be positive or negative

Negative Externalities

• Negative externalities impose costs on third parties without compensation
  • Air pollution, water pollution, resource depletion, and climate change are examples

Positive Externalities

• Positive externalities provide benefits to third parties without compensation to the producer
  • Environmental conservation, urban green spaces, and afforestation are examples

Public Goods

• Public goods are non-excludable and non-rivalrous
  • Non-excludable means individuals can't be prevented from using the good, even if they don't pay
  • Non-rivalrous means one person's use doesn't reduce availability for others
• Examples of public goods include clean air, public parks, and a stable climate

Problems with Public Goods

• Free-ridership occurs when individuals benefit without contributing to the good's provision or maintenance
• Public goods are often under-provided due to lack of incentive to pay
• Public goods are frequently underfunded

Common Property Resources (CPR)

• Common property resources are natural or man-made resources shared by a group and subject to rules
• They are shared or public resources that are rivalrous but non-excludable
• Unrestricted access to CPR often leads to the tragedy of the commons

Tragedy of the Commons

• Tragedy of the commons happens when individuals acting in self-interest overuse and deplete shared resources
• This leads to the degradation and exhaustion of the resource

Examples of CPRs

• Community forests: Overharvesting can lead to deforestation
• Community grazing lands: Overgrazing can lead to soil erosion and land degradation
• Fisheries: Overfishing can lead to fish stock depletion
• Groundwater: Excessive extraction can lead to depletion

Week 5 Objectives

• Explain the management of common property resources
• Discuss economic instruments for environmental management
• Explain the link between the environment and the economy

Week 5 Learning Outcomes

• Discuss managing common property resources
• Discuss economic instruments for managing the environment
• Explain the connection between the environment and the economy

Management of CPR

• Proper management of CPR is crucial to balance individual needs with collective welfare and ensure long-term resource availability
• CPRs can be managed through
  • Privatization
  • Community-based management
  • Government regulation

Privatization

• Privatization assigns ownership/property rights to incentivize sustainable use
• There is a clearly defined ownership of the resources
• Private owners have a direct interest in maintaining and efficiently using the resource

Features of Private Property

• Universality: Resources are privately owned, and entitlements are specified
• Exclusivity: Benefits and costs go to the owner
• Transferability: Property rights can be transferred through voluntary exchange
• Enforceability: Property rights are secured from involuntary seizure

Benefits and Drawbacks of Privatization

• Privatization benefit includes private owners have an incentive to use resources efficiently
• Downsides for privatization may lead to exclusion and is unsuitable for some resources
• Some argue privatization encourages self-interest and over-exploitation

Community-Based Management (CRM)

• Community-based management involves local communities taking collective responsibility for the resource
• The management is based on traditional knowledge, customs, and locally agreed-upon rules

Features of CRM

• Community members have a long-term interest in sustaining the resource
• The community group size is known and enforced
• Management strategies are evolved over years and collectively enforced

CRM Continued

• Resources and their use are actively monitored to discourage overuse
• Local conflict resolution mechanisms are in place
• Incentives and sanctions are used to encourage compliance

Government Regulations

• Government regulations play a key role in regulating access and usage of CPR through laws and policies
  • Licenses and permits: Government issues quotas for fishing, logging, or water extraction.
  • Protected areas: National parks and marine reserves are established.
  • Fines and Penalties: Sanctions regulate illegal use and overexploitation.

Economic Instruments (EIs)

• Economic instruments are policy tools to achieve environmental objectives
• They influence behavior through economic incentives/disincentives
• EIs aim to change behavior by internalizing environmental costs through incentives

Subsidies

• This describes financial support for environmentally beneficial behavior
• The goal is encouraging sustainable practices

Subsidies Examples

• Subsidies for importing waste management equipment
• Subsidies for electric/hybrid vehicles and public transport systems
• Pollution control technology and recycling programs subsidies
• Energy-efficient bulbs and gadgets subsidies
• Agricultural subsidies for organic farming

Tax Credits and Levies

• Tax credits grants tax exemptions for environmentally good behavior
• Levies are payments by polluters for resource usage that leads to pollution; payment increases with usage
• The United Kingdom introduced a landfill levy to discourage waste disposal, encouraging waste minimization, recycling, and reuse in the early 1990s

Quota Systems

• It relies on permitted release of a maximum pollutant quantity within an area
• Quotas can be bought and sold, subject to supply and demand as market commodities
• The quota system, although it needs strict regulation, can work

Pricing Mechanisms

• Pricing mechanisms influence behavior by altering the cost of harmful or beneficial activities
• The goal is placing an economic value on environmental assets, with polluters paying the equivalent value
• The use of pricing mechanisms is is fraught with danger because many of the assets prices are attached to are by necessity priceless or not tangible.

Effluent and Emissions Fees

• Effluent relates to liquid waste, emission to gas waste
• Effluent and emission fees are imposed on the discharged amount of liquid or gas waste
• More waste means higher fees, deterring excessive release

Performance Bonds/Deposit-Refund Systems

• Money to guarantee compliance organizations deposit with regulatory authority
• The money is refunded if compliance is achieved
• The money is forfeited if the organization pollutes

Product Charges

• Product charges are taxes on products that pollute when manufactured, consumed, or disposed of
• The charges are intended to change prices to reduce usage and use the money for environmental management
• Examples are fertilizers, pesticides, packaging, batteries, bottles, etc.

Economy and Environment

• The economic system depends on the environment for survival
• The biotic and abiotic environment provides raw materials and energy Without inputs, production and consumption cant take place Therefore the productions and consumption produces residuals that end up back in the environment in both long term & short term

The Material Balance Model

• The material balance model illustrates these relationships

1st Law of Thermodynamics

• Resource flow from nature = residual flow from economy
• M = Rdp + Rdc

Material Balance Model

• Recycling and reuse can delay the disposal of waste but eventually they are released back into the environment
• Finding ways to exploit sustainably from the environment and reducing residuals from the economy should be the aim and target of environmental policy
• Reduce waste by considering the quantity of materials taken from the environment

Driving Forces of Global Environmental Decline

• Increase in population growth
• Resources on Earth has been put under pressure because the Earth's population has more than doubled since 1950 (for example there has been a decrease in the per capita of arable land)
• Powered by increase in extraction and consumption of gas, timber, water, minerals, and other resources is increase in Global economic growth

Environmental Predicament

• Sandra Postel stated the earth's bottom line & Carrying capacity during the carrying capacity, In: Carol F. Verburg, The Environmental predicament: four issues for critical analysis, pg. 286301.

Income Inequality

• Growing inequality in income between the rich and the poor

  • The richest few (about 20%) account for over 80% of global income while the poorest 20% of the world's population account for less than 20% of global income

• This fosters overconsumption at the top of the income ladder and persistent poverty at the bottom

• People at either end of the income ladder are far more likely than those in the middle to damage the earth’s ecological health -Richest: high consumption of energy, raw materials, and manufactured goods -Poor: cut down trees, grow crops, or graze cattle in ways harmful to the earth just to survive one day to the next

• This has led to disparities in asses to clean and portable water, sanitation, food consumption, etc between the rich and the poor