The environment is valuable
More salient when quality is poor
Essential inputs to many processes
Pollution exposure is often very costly
What does this have to do with economics?
Everyone agrees the environment is valuable
- But environmental protection entails tradeoffs
- preservation vs construction
- clean air vs cheap energy
- Economics is the study of how to best allocate scarce resources (ie manage tradeoffs)
How much environmental quality should we have?
The answer is not “as much as possible”
The optimal environmental policy maximizes NET benefits
- Achieved by equating benefits and costs on the margin.
- MB = MC
- Rest of module discusses how policymakers might identify this point.
We’ll answer important questions like:
- how do you put a price on the environment?
- how do we value lives lost or saved?
- what should we do about the “losers” from environmental protection?
- how do we incorporate benefits which occur far in the future?
- to what extent should we save natural resources for future generations?
Review why markets are unlikely to get us to the economically efficient level of environmental protection
- Environmental bads (and goods) are typically externalities
- something that enters into the utility function of one agent but is chosen by another agent
- In these situations all economists agree markets will generally not maximize social welfare
Common misconception: Economists always advocate free markets
- Environment canonical example of when economists this is not true. [Capitalism and Freedom]
- Markets: private MB = private MC
- Externalities $\rightarrow$ private benefits $\neq$ social benefits
When US environmental movement took off in US in 1960s, economists had been teaching as much to grad students for decades.
- Relatedly, hyperpartisan split on environment a recent phenomenon.
How should we design environmental policy?
Example: US lead standards
EPA’s science panel recommends airborne lead be limited to 0.15 micrograms per cubic metre
How should we craft a policy to hit that goal?
- regulation: close smelters, mandate cleaner processing, limit metals consumption, etc
- tax lead emissions
- cap (-and-trade) emissions
We’ll learn the benefits of “market”-based approaches
- economists believe incentives drive outcomes
- show that using incentives, rather than “command-and-control” likely to be much more “cost-effective”
- meaning that we’ll be able to achieve the same environmental outcome at lower cost
Environmentalists: Cost-effectiveness is important!
Economists know that demand slopes downward
Implication: the cheaper it is to protect the environment, the more protection people will “demand”
Learn the difference between key environmental policy tools
- what are the differences between a carbon tax and cap-and-trade?
- is it just as good to promote “green” products as it is to tax “dirty” ones?
- why don’t we just ban polluting activities outright? (ie plastic straws)
We’ll discuss several real world applications / policies
- particulate matter
- acid rain program
- local Boston issues
Part 3: Global climate change
“The mother of all externalities”
Larger, more complex, and more uncertain than any other environmental problem. (Tol 2009)
Two major challenges:
Emissions stay in atmosphere for a long time.
Implication: costs today, benefits far in the future.
Impacts from local emissions felt globally. Implication: countries can’t solve this problem on their own.
What we’ll cover
- basic science and current work on costs
- how global stock pollutant fits in market based famework
- how should international commitments be structured?
- if states or nations can’t implement a first best approach, how good are second best options
- can we “subsidize” our way out of the problem?
- can states act alone?
What I hope you’ll take away from this course
- Environmental economics is not an oxymoron!
- Economics is a powerful tool to understand and address environmental challenges
- Policy influence to date great example of economics in action
- Lessons and tools relevant for other policy and business settings