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Environmental Economics

Environmental Economics 43
Environmental Economics Lecture 1 Economics and the Environment Florian K. Diekert January 22, 2015 Perman et al (2011) ch 14 ECON 4910, L1 1/ 20ECON 4925, spring 2015 I 13 Lectures (Thursdays, 10:1512:00, in Auditorium 5.) I Seminars are on Fridays; 10:1512:00 in HH 301 and 12:1514:00, in room HH 101 I Exam is on May 26, at 14:30 I Teachingteam: Florian Diekert (f.k.diekertibv.uio.no), Michael Hoel (m.o.hoelecon.uio.no), Eivind Olsen (e.h.olsenecon.uio.no) I Course webpage: http://www.uio.no/studier/emner/sv/ oekonomi/ECON4910/v15/ ECON 4910, L1 2/ 20I Economic activity environmental problems I Environmental problems economic loss Why study environmental economics Environment: \The surroundings of, and in uences on, a particular item of interest" wiktionary.org I Natural and social environment are two sides of the same coin I Environmental conditions constrain economic activity I Economic activity has environmental impact ECON 4910, L1 3/ 20Why study environmental economics Environment: \The surroundings of, and in uences on, a particular item of interest" wiktionary.org I Natural and social environment are two sides of the same coin I Environmental conditions constrain economic activity I Economic activity has environmental impact I Economic activity environmental problems I Environmental problems economic loss ECON 4910, L1 3/ 20Two examples Figure: Santiago de Chile and the Redcockaded woodpeckerwikepdia.en ECON 4910, L1 4/ 20This course Applying economic theory for systematic analysis of environmental problems and policy Emphasis is on: I Markets, incentives and policy (rather than ecology) I Intuition and analytical tools (rather than factual knowledge) ECON 4910, L1 5/ 20This course I Students should have good prior skills in basic microeconomic theory and noncooperative game theory. I Familiarity with dynamic optimization methods, for example through ECON4140 Mathematics 3: Di erential equations, static and dynamic optimization/ECON4145 is an advantage. I Students not familiar with dynamic optimization methods must be prepared to put in extra e ort. As a minimum, students must be able to set up and solve simple optimal control problems (lecture note on this topic will be provided). I Exam may have any of these: essay, modeling exercise, multiple choice (most likely all) I At least 1 exam question will be close to 1 seminar problem I Contact student will help evaluate the course ECON 4910, L1 6/ 20This course Overview lectures Jan 22 L1 Economics and the Environment (FKD) Jan 29 L2 Emission control: Targets (FKD) Feb 5 L3 Emission control: Instruments (FKD) Feb 12 L4 Regulation under imperfect information (FKD) Feb 19 / No lecture Feb 26 L5 Valuation and CostBene t Analysis (FKD) Mar 5 L6 CBA and Uncertainty (FKD) Mar 12 L7 Voluntary contributions (FKD) Mar 19 L8 Environmental RD (MH) Mar 26 L9 Stock pollution problems (MH) Apr 2 / No lecture Apr 9 L10 Climate policy: taxes and quotas (MH) Apr 16 L11 Climate policy: Subsidies and renewable portfolio standards (MH) Apr 23 L12 International Environmental Agreements (MH) Apr 30 L13 Supplyside climate policy (MH) ECON 4910, L1 7/ 20Preview this lecture 1. Ecient and optimal allocation of goods 2. Public goods and the Freerider problem 3. Externalities and the Coase theorem ECON 4910, L1 8/ 20Ecient and optimal allocation of goods Notation: I Two persons A and B, I two produced goods X and Y , I and two inputs K and L. A A A B B B Utility from consumption: U (X ;Y ) and U (X ;Y ) Production: X =f (K;L) and Y =g(K;L) Eciency requires: A B MRUS =MRUS ECON 4910, L1 9/ 20Ecient and optimal allocation of goods Notation: I Two persons A and B, I two produced goods X and Y , I and two inputs K and L. A A A B B B Utility from consumption: U (X ;Y ) and U (X ;Y ) Production: X =f (K;L) and Y =g(K;L) Eciency requires: A B X Y MRUS =MRUS MRTS =MRTS ECON 4910, L1 10/ 20Ecient and optimal allocation of goods Notation: I Two persons A and B, I two produced goods X and Y , I and two inputs K and L. A A A B B B Utility from consumption: U (X ;Y ) and U (X ;Y ) Production: X =f (K;L) and Y =g(K;L) Eciency requires: A B MRUS =MRUS =MRT (1) ECON 4910, L1 11/ 20I Given a social welfare function, nd the optimal allocation I Do we agree on the social welfare function I Note: Welfare maximization implies allocative eciency, but moving towards allocative eciency does not necessarily imply welfare improvement I Compensation tests are void of welfare comparisons Ecient and optimal allocation of goods I An ecient allocation of resources is not unique ECON 4910, L1 12/ 20I Note: Welfare maximization implies allocative eciency, but moving towards allocative eciency does not necessarily imply welfare improvement I Compensation tests are void of welfare comparisons Ecient and optimal allocation of goods I An ecient allocation of resources is not unique I Given a social welfare function, nd the optimal allocation I Do we agree on the social welfare function ECON 4910, L1 12/ 20Ecient and optimal allocation of goods I An ecient allocation of resources is not unique I Given a social welfare function, nd the optimal allocation I Do we agree on the social welfare function I Note: Welfare maximization implies allocative eciency, but moving towards allocative eciency does not necessarily imply welfare improvement I Compensation tests are void of welfare comparisons ECON 4910, L1 12/ 20Ecient and optimal allocation of goods Given ideal conditions, markets allocate goods eciently. These ideal conditions are: 1. All goods and services are private goods. 2. Markets exist for all goods services produced and consumed 3. All markets are perfectly competitive. 4. All agents are rational maximizers with perfect information. 5. All utility and production functions are 'well behaved'. ECON 4910, L1 13/ 20Public goods and the Freerider problem Figure: Characteristics of private and public goods (Table 4.4 in Perman) ECON 4910, L1 14/ 20Public goods and the Freerider problem If X is a public good, eciency condition corresponding to (1) is: A B MRUS +MRUS =MRT (2) The private provision of a public good will not be ecient. ECON 4910, L1 15/ 20Public goods and the Freerider problem Figure: http://theinfluentials.wordpress.com/2010/03/30/freeriding/ ECON 4910, L1 16/ 20Externalities and the Coase theorem Externality: \An economic sidee ect. Externalities are costs or bene ts arising from an economic activity that a ect somebody other than the people engaged in the economic activity and are not re ected fully in prices." http://www.economist.com/economicsatoz/ Externalities are classi ed as: I Consumption to consumption I Production to consumption I Consumption to production I Production to production ECON 4910, L1 17/ 20Externalities and the Coase Theorem Coase did not write a theorem, but an article. Main point for environmental economics course is that: a.) The ineciency caused by an externality can be corrected by private bargaining if: I property rights are well de ned I there are no transaction costs b.) The initial allocation of property rights does not matter for eciency if there are no income e ects The \Coase theorem" is silent on distributional fairness ECON 4910, L1 18/ 20Key concepts this lecture I Markets allocate goods eciently under ideal conditions but need not be optimal from a social point of view A B I Eciency for private goods: MRUS =MRUS =MRT I Public goods are goods that are both nonexcludable and nonrivalrous A B I Eciency for public goods: MRUS +MRUS =MRT I Public good implies presence of externality I Externality does not imply existence of public good I Uncorrected externalities lead to ineciencies ECON 4910, L1 19/ 20Preview next lecture Emission control: Targets Perman et al (2011) ch 5 1. Bene ts and damages from emissions 2. The ecient level of emissions 3. Di erent types of pollution problems ECON 4910, L1 20/ 20
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