Econ 2277

Prof. Richard L. Sweeney

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The environment is valuable


More salient when quality is poor



Essential inputs to many processes



Pollution exposure is often very costly


Source: Currie, Greenstone and Meckel (2017)

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)

Part 1:

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.

Part 2:

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
  • over-fishing

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:

  1. Emissions stay in atmosphere for a long time.
    Implication: costs today, benefits far in the future.

  2. 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