Course Outline

Key points from each module.

Intro

  • Econ is the study of how to efficiently use scarce resources. Scarcity implies that we must make tradeoffs.
  • Markets are capable of of efficiently allocating private resources in incredibly complex systems. But when it comes to the environment, free markets are not efficient.

Efficiency

  • Review difference between net and gross benefits. Economic efficiency maximizes net benefits.
  • Be able to relate total and marginal benefits and costs (equimarginal principle). Know the shape of these curves and the intution behind it.
  • Under conditions of perfect competition, perfect information, and no externalities, markets will maximize net benefits. Be able to identify market outcomes and welfare loss when these conditions are not met.
  • When benefits and costs span time, we need to put them in present value terms in order to compute net benefits.
  • You should be comfortable using the PV formula, translating benefits and costs occurring at different times into comparable units.

Coase Theorem

  • Coase provided a seminal challenge to the idea that externalities necessarily imply markets won't work.
  • In the end, ended up illuminating more clearly the critical role of property rights and transaction costs in markets.
  • Know how to find a Coasean equilibrium under these assumptions.

Benefits

  • How to place a value on environmental benefits? Concept is same as in micro (WTP). Challenge is that we don't see prices.
  • Stated preference methods instead try to recover WTP from highly structured surveys. Know the pros and cons.
  • Revealed preference methods try to infer what people would pay from their actions (ie travel cost method, averting expenditure).
  • Value of Statistical Life

Costs

  • Engineering vs opportunity costs
  • Statutory vs economic incidence
  • Net vs gross job losses, and long vs short run employment effects
  • Generally speaking, jobs are a "cost" not a "benefit"

Benefit-Cost Analysis

  • Kaldor-Hicks vs Pareto
  • Review evidence of correlation between pollution, race and poverty.
  • Case study -- Mercury
  • Common mistakes and misapplications of BCA

Pubic Goods and the Tragedy of the Commons

  • Taxonomy of goods
  • Incentives to under supply public goods
  • Tragedy of the Commons

Climate Change - International Cooperation

  • Public good problem
  • Leakage
  • History of international climate negotiations -- from top down to bottom up

Managing Renewable Resources

  • Basic economics of a fishery
  • Maximum sustainable yield vs efficient yield
  • Free entry condition and response to regulation
  • Example from US halibut fishing

Nonrenewable resources

  • Exhaustible resources rarely exhausted
  • But fact that they are not replaceable imposes an intertemporal externality.
  • The Hotelling Rule describes the optimal extraction path in light of this.
  • Understand when the market extraction path will and won't be optimal.

Sustainability

  • Economic concept of sustainability
  • What is and isn't captured in GDP
  • Hartwick Rule
  • Alternative measures across countries

Market Based Policies and Cost-Effectiveness

  • Cost effectiveness provides a more modest goal for policy design. Know what it is, compared to efficiency, and what the properties of a cost-effective outcome are.
  • Command and control policies are unlikely to be cost-effective. Be able to explain why.
  • Taxes achieve cost-effectiveness by construction. Understand how they work and why they are cost-effective.
  • An alternative approach is to define a property right over the pollutant and allow polluters to trade.

The Social Cost of Carbon

  • An efficient carbon tax would be set equal to the marginal external damages.
  • Computing this number involves simultaneously modeling carbon emissions, the climate impacts, the physical and biological response and the economics impacts, over the course of centuries...
  • In 2009 the US IAWG undertook an important first step in calculating the SCC

Lessons from the Acid Rain Program

  • History and original motivation
  • Ex post evaluation
  • Legacy and lessons as discussed in reading

Uncertainty

  • With no uncertainty, a tax is equivalent to an equally stringent cap-and-trade program
  • In a seminal paper, Marty Weitzman demonstrated that the two are not equivalent if costs are uncertain, but are equivalent if only benefits are uncertain.
  • The "Weitzman" rule says that if MB is steeper than MC, a quantity instrument will be preferred; and if MC is steeper than MB, a price instrument will be preferred.

Policy Choice

  • Additional benefits of incentive based instruments include innovation and public revenue
  • Categorizing pollutants -- stock vs flow; uniformly mixing vs not
  • Hot spots and environmental justice may favor more prescriptive measures.

Domestic and Subnational Climate Policy

  • Overview of the history of US climate policy.
  • Taxes vs subsidies
  • Overlapping state regulations
  • Overlapping industry regulations