Environmental economics: Chapter 1 & 2

Question 1

What are the main issue of implementing strict environmental regulations and how can it be resolved?

Answer 1

• Risk of loosing competitiveness.
• Market systems can offer resilience through innovation.
• Market incentives may also worsen environmental degradation, creating self-reinforcing “positive feedback loops.

Question 2

What is positive feedback loops?

Answer 2

Positive feedback loops are processes in which the effects of a particular action or change amplify or intensify that action or change, leading to a self-reinforcing cycle. In the context of environmental issues, positive feedback loops can worsen problems by making initial changes more extreme.

Methane - As natural gas production increases due to favorable market incentives, methane emissions also rise. This contributes to the warming of the planet since methane has a strong heat-trapping effect.

Question 3

What is negative feedback loops?

Answer 3

Negative feedback loops are processes in which a change in a system triggers mechanisms that counteract or reduce the impact of the initial change, helping to maintain stability or equilibrium. In other words. Example:

When carbon dioxide levels in the atmosphere rise, some plants grow more rapidly because they use CO₂ for photosynthesis.

Question 4

Environmental economics

Answer 4

• Environmental economics
  Focuses on integrating environmental concerns into traditional economic frameworks.
  It aims to address market failures (such as pollution and overuse of resources) by incorporating the costs of environmental damage into economic decision-making.
  Assumes that economic growth can be compatible with environmental protection if appropriate policies (like taxes, subsidies, or regulations) are implemented.

Question 5

How are the optimistic and pessimistic future of sustainable development described?

Answer 5

Optimists like Bjørn Lomborg believe that human ingenuity will continue to solve environmental problems, citing historical progress, while pessimists like researchers from the Worldwatch Institute warn that current development paths are unsustainable, threatening ecological collapse.

Question 6

What is the role for environmental economics in sustainable development?

Answer 6

Environmental and natural resource economics offer tools to balance market forces with sustainability, helping craft solutions to global challenges like climate change and biodiversity loss.

Question 7

What is the economic perspective on environmental issues?

Answer 7

The economic perspective on environmental issues, providing a conceptual framework to address them. It emphasizes that the environment is an asset that offers life-supporting services, and economic activities depend on it for raw materials and energy.

Question 8

What is positive and normative economics?

Answer 8

POSITIVE
Focuses on describing, explaining, and predicting economic phenomena. It deals with objective statements that can be tested and validated against real-world data.
Answers questions about “what is” or “what will be” based on factual information, without making value judgments or prescribing policies.
For example, “An increase in the minimum wage will lead to a higher rate of unemployment among low-skilled workers” is a positive economic statement because it can be tested with data.
NORMATIVE
Involves value judgments and opinions about what the economy should be like or what policies should be implemented to achieve a desired outcome.
It is subjective, based on ethical, cultural, or political beliefs, and cannot be proven true or false using data alone.
For example, “The government should increase the minimum wage to reduce income inequality” is a normative statement because it is based on a judgment about what is desirable.

Question 9

An example of positive analysis

Answer 9

The U.S. Environmental Protection Agency’s economic impact study on reducing hazardous pollutant emissions from iron and steel foundries.

Question 10

An example of normative economics

Answer 10

Useful in more complex questions, such as determining the optimal level of greenhouse gas emissions or forest conservation.

Question 11

What is static efficiency?

Answer 11

Static efficiency refers to the optimal allocation of resources at a particular point in time, maximizing the net benefits from the use of those resources in the present. Static efficiency ensures that resources are used in a way that maximizes total welfare

Question 12

When is effiency achieved?

Answer 12

This efficiency is achieved when the economic surplus, the combined consumer and producer surpluses, is maximized. Consumer surplus is the value consumers gain from a product minus its cost, depicted as the area under the demand curve in economic graphs.

Question 13

What is consumer surplus?

Answer 13

It’s the extra value or benefit that consumers receive when they purchase a product for less than the maximum amount they would be willing to pay.

• The difference between what consumers are willing to pay and what they actually pay.

Question 14

What is the demand curve showing?

Answer 14

the demand curve (D) shows the maximum price each consumer is willing to pay for a certain quantity of goods. For instance, for the first unit, a consumer might be willing to pay a high price, but as they buy more units, their willingness to pay decreases (this reflects the downward slope of the demand curve).

Question 15

What is producer surplus?

Answer 15

Producer surplus is the extra benefit that producers receive when they sell a product for more than the minimum amount they would be willing to accept.

Question 16

What is the total economic surplus?

Answer 16

The total economic surplus is the sum of consumer surplus and producer surplus.

Question 17

What is Pareto effiency?

Answer 17

Economic efficiency is achieved when this total surplus is maximized. In a perfectly competitive market, where supply and demand intersect, we typically assume that the allocation of goods is efficient, meaning that no additional trades could make anyone better off without making someone else worse off (a concept known as Pareto efficiency).

Question 18

What does property rights mean in terms of economics?

Answer 18

Refers to the owner’s entitlements, which include the rights, privileges, and limitations for using a resource.

Property rights can be held by individuals, groups, or the state, and understanding how these rights work helps explain environmental issues arising from market and government decisions.

Question 19

Which three key characteristics must be present for property rights to lead to efficient market allocations?

Answer 19

These three characteristics—exclusivity, transferability, and enforceability—are essential for property rights to contribute to efficient market allocations. Together, they create an environment where resources can be effectively allocated to their highest-valued uses, promoting economic efficiency and encouraging investment and innovation.

Question 20

What does the three different property rights characteristics mean?

Answer 20

Exclusivity: All benefits and costs related to the resource must belong to the owner.

Transferability: Property rights should be freely transferable through voluntary exchanges.

Enforceability: Property rights must be legally enforceable, meaning that the law protects the owner’s rights against infringement or theft by others.

Question 21

Why are exclusivity, transferability and enforceability important?

Answer 21

• When these conditions exist, owners are motivated to use resources efficiently, as any decline in resource value represents personal loss.
• For example, farmers who own land have incentives to increase productivity, such as fertilizing or rotating crops. Similarly, consumers and producers in a market with well-defined property rights maximize their own surplus, which results in an overall efficient allocation of resources.
• The market can achieve efficiency (maximizing total economic surplus) when property rights are well-defined, meaning they have exclusivity, transferability, and enforceability.
  This leads both producers and consumers to maximize their individual surpluses, which results in an overall efficient market outcome.

Question 21

What is Scarcity rent?

Answer 21

Scarcity rent refers to the additional income that a resource owner earns because a resource is in limited supply. This often occurs in industries that rely on fixed resources, such as land or natural resources

• Consider a desirable piece of land in a city. The owner can charge a higher rent for that land compared to less desirable land because the supply of prime locations is limited. The extra amount earned due to this limited availability is the scarcity rent.

Question 21

What does David Ricardo’s theory explain?

Answer 21

David Ricardo’s theory explains how land rent is based on its fertility and location. He noted that the price and rent of land are influenced by the least fertile (or least productive) land in use:

Least Fertile Land: The return on this land sets the baseline for rent prices. It’s the price producers need to cover their costs, including a normal profit.

High-Quality Land: More fertile or better-located land will yield more produce (higher profits) than the least fertile land. However, because this land is limited, the higher economic profits cannot be competed away because there simply isn’t enough of it to meet demand.

Thus, owners of higher-quality land receive economic profits (or scarcity rent) because they have a resource that is more productive and limited in supply.

Question 22

What is externalities? and what can it lead to?

Answer 22

Costs or benefits that affect third parties who are not directly involved in a particular economic transaction. These are side effects of economic activities that are not reflected in the market prices, and they can be either positive or negative.

• Pollution: A factory that emits air pollution affects the health of nearby residents. The costs of health problems and environmental damage are borne by society, not by the factory itself.

Can lead to - Negative externalities can lead to market failures because the full social costs are not included in the price of goods or services. This often results in overproduction, leading to an inefficient allocation of resource

Question 23

The connection between property rights, surplus and externalities

Answer 23

• Crucial role in determining the efficiency of resource allocation in a market.
• When property rights are well-established, markets can function more efficiently.
• With secure property rights, resources are more likely to be allocated to those who value them most, thus increasing total consumer and producer surplus (i.e., total economic welfare.
• Externalities can lead to market failures because the costs or benefits are not fully captured in the market price.

Question 24

What is negative externalities?

Answer 24

Negative Externalities (e.g., pollution) often arise when no one owns or controls the rights to a common resource (such as air or water). Without property rights, there is little incentive for individuals or firms to consider the negative impact on others, leading to overuse or degradation of the resource.

Question 25

Positive externalities

Answer 25

can occur when the benefits of an action extend beyond the person undertaking it, and there are no mechanisms (such as intellectual property rights) to allow the provider to capture these benefits fully.

Question 26

What is Pecuniary Externalities?

Answer 26

These occur when price changes affect third parties (e.g., higher land rents), but they do not represent market failures as they reflect true resource scarcity.

Question 27

Different types of property rights

Answer 27

State property: Owned and managed by the government; can face issues if bureaucrats’ incentives diverge from societal interests.

Common Property: Shared ownership with varying success. Successful examples include Switzerland’s grazing rights system, where trust and collective rules prevent overgrazing. Failures arise when population pressure undermines traditional systems.

Open Access (Res Nullius): Resources like bison, where unrestricted access leads to overexploitation (the “tragedy of the commons”). Without regulation, resource depletion occurs as individuals over-harvest for personal gain.

Question 28

Describe Overexploitation at the Open-Access Effort Level (EOA)

Answer 28

Open-Access Effort Level (EOA): When a resource is open access, individuals will continue to exploit it as long as their personal benefits exceed their personal costs. They will hunt, fish, or use the resource until the total benefits equal the total costs (where profits are zero). This effort level is typically much higher than the efficient level (E*), leading to overuse.

Question 29

Scarcity Rent and Its Absence in Open Access

Answer 29

Because anyone can use the resource, there is no incentive for individuals to conserve or limit their use to capture this extra value. If one hunter decides to hunt fewer bison to conserve the population, another hunter will simply take advantage of the opportunity to hunt more. As a result, the potential scarcity rent that could be earned if hunting was restricted to a sustainable level is lost.

Question 30

What is public goods?

Answer 30

such as clean air, water, and biodiversity

Question 31

Nonexcludability VS
Indivisibility

Answer 31

Nonexcludability: means that once the good is provided, even those who don’t pay can benefit.

• Street lighting: Once streetlights are installed, everyone in the area benefits from the light, regardless of whether they helped pay for it.

Indivisibility: implies that one person’s consumption doesn’t reduce the amount available for others.

• Scenic views: Enjoying a beautiful landscape doesn’t prevent others from enjoying it as well.

Question 32

Public goods theory

Answer 32

På en fri marknad kan public goods skapa problem för privat aktörer, eftersom individer kan ha liten motivation att betala för något som de kan använda gratis. Detta leder till ett problem som kallas för fripassagerarproblemet. This is due to Nonexcludability & Indivisibility

Question 33

Government failure

Answer 33

Government failure happens when government intervention in the economy results in outcomes that are inefficient or less beneficial for society as a whole. Just like market failure, where free markets don’t allocate resources optimally, government failure occurs when policies or actions by the government cause a misallocation of resources or reduce overall societal welfare.

Question 34

Voters ignorance

Answer 34

Voters rationally remain uninformed on many issues given the high costs of staying informed and the low likelihood that a single vote will be decisive.

Question 35

Rent seeking

Answer 35

Rent seeking can take various forms, such as producers seeking protection from competition (e.g., tariffs or price floors) or consumer groups advocating for price ceilings or subsidies. –> the government loses control, higher costs for others maybe?

Question 36

Inefficient Government Policies Due to Lack of Information:

Answer 36

Sometimes, government policies may be poorly designed because decision-makers lack complete or accurate information. This can result in regulations that have unintended negative consequences:

Question 37

Coase Theorem

Answer 37

Addresses how externalities and property rights affect economic efficiency.

Coase-teoremet säger att om det inte kostar mycket att förhandla om hur resurser ska användas, så spelar det ingen roll vem som har rättigheterna till resurserna.

Låga kostnader för att förhandla: Om det är enkelt och billigt för parterna att prata med varandra, kan de hitta en bra lösning.

Question 38

Coase Theorem and wealth effects

Answer 38

If property rights are assigned to a wealthier party, they may have more resources to negotiate and enforce their rights, potentially leading to outcomes that favor the wealthy at the expense of others. For example, if a factory polluter has the right to pollute, they might have the financial means to negotiate lower compensation to victims of pollution.

Question 39

Coase Theorem and Asymmetry of Information

Answer 39

n negotiations regarding externalities, one party (like a polluter) may have more information about the costs and benefits of pollution than the affected parties. This can lead to inefficient bargaining outcomes, as the less informed party might not fully understand the extent of the damages or the potential for negotiation, resulting in suboptimal agreements.

Question 40

Coase Theorem and transaction costs

Answer 40

Transaction costs in negotiations are high. Costs can include legal fees, the time spent in negotiation, and the difficulty of organizing large groups of affected parties. For instance, if a community is affected by pollution, organizing all residents to negotiate effectively with a polluting company can be logistically challenging and costly.

Question 41

What is liability rules?

Answer 41

When negotiation is impractical, liability rules can be applied, requiring polluters to compensate affected parties after the fact. This internalizes external costs, aligning profit-maximizing decisions with overall efficiency.

Question 42

If negotiation isn’t possible

Answer 42

In situations where negotiation and liability rules are inadequate, government intervention through regulation may be necessary. This can take the form of emissions limits, taxes, zoning laws, or specific mandates for pollution control equipment.

Question 43

Three different decision-making processes

Answer 43

Predefined Options: Choosing among options that have already been established.

Optimal Choices: Seeking the best option from all possible alternatives.

Benefit-Cost Analysis (BCA): This is a framework for evaluating proposed actions by comparing their benefits and costs.

Question 44

Green solow model

Answer 44

Include environmental resources (natural capital) alongside physical capital (K) and labor (L). in the production

Sustainability: It emphasizes the importance of maintaining natural capital for long-term economic growth. Environmental degradation can reduce productivity and harm overall well-being.

Substitutability: The model examines how physical capital can substitute for natural resources, acknowledging that this substitutability has limits.

Technological Progress: Innovations can improve resource efficiency and reduce environmental impacts, promoting sustainable growth.

Policy Implications: It highlights the need for policies that balance economic growth with environmental protection, encouraging sustainable practices and green technologies

Answer 45

h

Question 46

Private markets are perfectly efficient only if there are NO:

Answer 46

Public goods
Externalities
Monopoly buyer or sellers
Information problems
Transaction costs
Taxes, common property