2_Environment and Economics

Question 1

Characterize the whole economy by a production function

Answer 1

Y = A * F(L, K, H, N)

• Y = Output: Quantity of all goods and services produced
• A = Technology (level): shift variable (Malthus story)
• F = Function
• L = Labour (measured in number of workers or hours)
• K = Capital (machinery, buildings, …)
• H = Human capital (knowledge, skills)
• N = Natural resources (renewables, non-renewables, …)

Question 2

Obtain GDP per person

Answer 2

the GDP per person (Y/L)

• GDP per person is obtained by dividing both sides by L

→ Y/L = AF (1, K/L, H/L, N/L)

Labour productivity (GDP per capita) is thereby determined by

• K/L = capital per unit (capital intensity)
• H/L = Human capital per labour unit
• N/L = Utilized natural resources per labour unit
• A = technology

→ To influence GDP/capita we must influence one of these factors

Question 3

GPP

Answer 3

Gross primary productivity (GPP) of plants: total amount of solar energy that is fixed by photosynthesis

Question 4

NPP

Answer 4

Net primary productivity (NPP):

• GPP less the amount of energy lost to the environment by respiration
• Measure of energy that is potentially available to humans and animals (which eat plants)

Question 5

HANPP

Answer 5

human appropriation of NPP (HANPP)

• One way to measure the impact of humans on the ecosystem
• HANPP measures essentially 2 processes

1. changes in productivity induced by human land use
   
   • e.g. impacts on NPP of the conversion of natural ecosystems to agro-ecosystems or other kinds of land cover
   • 2. the reduction of energy availability in ecosystems caused by human harvest of biomass

HANPP = NPP₀ - NPP_t

• NPP₀ is the NPP of potential vegetation (e.g. the vegetation that would prevail in the absence of human intervention)
• NPP_t the fraction of NPP remaining in ecosystems after human harvest has taken place

Question 6

Four important interactions between economy & environment

Answer 6

1. (natural) resource extraction used for production
2. waste insertion arising from production and consumption

• Ultimately this comes from resource flow into the economy
• “Law of conservation matter”: mass of wastes inserted to the environment must be the same as the mass of resources extracted from it
• Environment provides the service of waste sink
  3. amenity services: sunbathing, swimming in oceans, hiking in mountains,…
  4. basic life support services: (ecosystem services) including things like climate, plant primary production, energy, water,….

Question 7

Stocks and flows

Answer 7

• Stocks and flows are fundamental to the operation of both economic and natural systems

Closing stock = Opening stock + Inflow – Outflow (dynamic process)

• stock is a quantity existing at a point in time
• flow is a quantity per period of time

Inflow –> STOCK –> Outflow

Denotations:

• S_t = size of the stock at the end of period t
• S_t-1 = size of the stock at the end of period t-1 = beginning of t
• A_t = inflow in period t
• O_t = outflow in period t
• S₁ = S₀ + A₁ - O₁ (stock at the end of the first period)
• S₂ = S₁ + A₂ - O₂ (stock at the end of the second period)
• S_t = S_t-1 + A_t - O_t (stock at the end of the period t)

Change in stock

S_t - S_t-1 = A_t - O_t

• Accumulation: At > Ot inflow exceeds outflow
• Decumulation: At < Ot outflow exceeds inflow

Question 8

Consumption

Answer 8

Use by human individuals of goods and services to satisfy needs and it is the end to which economic activity is directed. But not all consumption is consumptive in the material sense, e.g. services such as art galleries

Question 9

Production

Answer 9

Firms use inputs

• L = flow of labour from consumers/households to firms
• N = natural resources (raw material)
• K = capital services

…to produce outputs (production function: Y = f(K, L, N, …))

Outputs can be used twofold (Y = C + I)

• C = flow of produced goods and services to consumers (consumption)
• I = flow of produced investment goods to the capital stock (investments)

Question 10

Amenity services

Answer 10

• Are consumed directly without being transformed by a productive activity
• Do not necessarily involve direct physio-chemical impact, e.g. pleasure derived from walking on a hillside
• Use/consumption can be in situ or ex situ, e.g. TV shows about nature and wildlife
• Sometimes there is joint consumption of produced commodities and emissions (and pollution)
  
  • E.g. travelling to the hillside by motorcycle
  • Flying to Australia and staying in a hotel for snorkeling a coral reef
• Economic challenge is to measure/quantify the value of nature to human beings
  
  • Contingent valuation and other valuation methods

Question 11

Life support services

Answer 11

Services that make human life (and hence economic activity) possible:

• purification of air and water
• stabilization and moderation of our climate
• nutrient cycle
• Pollination of plants etc.