Making public environmental decisions.What is “environmental economics”?Market FailureIntroduction to Project AnalysisWhy are we studying this?Two Basic Kinds of QuestionsEconomic ProblemsIdentify the Tension in These Examples (Some Positive, Some Normative)Examples cont’dProject EvaluationExample: GnatcatcherMethods for Project EvaluationCost effectiveness vs. Cost benefitCost-Effectiveness Usually Sufficient for Environmental ProblemsHow can economics help environmental problem solving?Bren GP’s: 2007Bren GP’s, continuedCost effectiveness not as obvious as you might thinkEvaluate 2 optionsCharacteristics of most social investments“Cookbook” conceptual approach to evaluating public projectsReadings Read for section this weekMaking public environmental decisions.What is “environmental economics”?Environmental Resources:Air, water, marketed species (fisheries, timber), non-marketed species (birds, frogs), natural areas, exhaustible resourcesEconomy and EnvironmentPeople gain well-being from environmentEnvironment absorbs wasteFirms use environment to produce goods & servicesFirms and individuals subject to environmental regsPeople gain well-being from goods & servicesEnvironmental Economics: study of interaction between economy and natural environmentMarket FailureMarkets generally work fine without any interferences – private goodsEnvironmental problems are different – markets tend to fail because:•Externalities: what firms do inadvertently affect others negatively (pollution)•Public Goods: Some goods benefit everyone (species preservation)•Uncertainty/Asymmetric InformationIntervention generally necessary to “fix” market failure – regulation or direct actionIntroduction to Project AnalysisCost-effectivenessCost-BenefitMulti-criteriaSustainabiltyPrecautionary Principle/Safe Minimum StandardWhy are we studying this?All group projects are fundamentally about making decisions about how to best solve an environmental problemOur goal today: look at ways of evaluating different solutions to environmental problems: “project evaluation”Two Basic Kinds of QuestionsPositive: describes what will happen or why something happenedWhy did US drop out of Kyoto?What firms will leave LA if air regs are tightened?Normative: describes what should happenHow much habitat should be set aside for Gnatcatcher?What should be the level of GHG controls in the US?Economists generally conduct positive analysisPolicy making is supported by normative analysisEconomic ProblemsEconomics is the study of what to do/what is done when things are scarce: allocation of scarce resourcesAll economic problems have a “tension”.Recipe1. Identify the tension (what happens if you move too far in one direction or another).2. Develop a formal model describing the tension.3. Use model to balance the tension & make policy recommendation.Identify the Tension in These Examples(Some Positive, Some Normative)Climate change control requires reducing emissions of GHG’s worldwide. Which countries should reduce, and by how much?How much will housing prices rise from Gnatcatcher habitat protection?Recovery of Snake River Chinook salmon required habitat restoration. Which recovery efforts are most efficient? Should the Lower Granite Dam be removed to provide access to historic spawning beds?Examples cont’dSmall furniture strippers in LA emit VOC’s. The SCAQMD imposes tighter regs. Will the strippers move to Arizona/Mexico or stay in LA?The ANWR is a nearly pristine artic preserve, but it also contains large oil reserves. Should we drill for oil in ANWR?A tax on gasoline is one method for reducing domestic oil consumption and reducing pollution. What should the gasoline tax be? One way to reduce local air pollution is to reduce sulfur burning. Should the EPA require sulfur-free diesel fuel in trucks?Project EvaluationHow to make judgments about the advisability of public actionsProposed regulations (e.g., air regulations)Proposed projects (e.g., habitat acquisition)Normative issueExample: GnatcatcherGnatcatcher lives on California CoastTo protect species, must set aside coastal habitat and protect from housing developmentQuestions to ask:How much land to set aside?Who should pay for land set-aside?How to answer questions (i.e., make social decisions)Vote? Who should vote? Majority rules?•Coastal residents, LA residents, State of CA, US? Future generations?Look at overall benefits and costs?Other methods to decide?Methods for Project EvaluationCost-effectiveness – cheapest way to achieve a goalCost-benefit – balance pluses and minuses of projectMulti-criteria – looks at ways of achieving multiple goalsPrecautionary Principle – how to act faced with great uncertainty*Sustainability – only do things that can be continued in perpetuity**Difficult to implement – we will later formalize these conceptsCost effectiveness vs. Cost benefitCost effectiveness analysis: Start with a goal (eg, 5% reduction in GHG emissions)Given this goal, what is the least-cost way of achieving it?Note: Cost effectiveness says nothing about the appropriateness of the goal.Cost benefit analysis: Weighs costs and benefits to determine the optimal (i.e. most efficient) level. (e.g. optimal gas tax)Cost-Effectiveness Usually Sufficient for Environmental ProblemsEasierOnly need look at cost sideIgnore benefits – they are implicitOften more realisticClient tells you his/her environmental goalWants you to figure out the best way of achieving itDon’t use a bigger hammer than you need!How can economics help environmental problem solving?Bren School Group Projects – Recipe for successImportant environmental problemFocus to a specific, researchable question•Interesting: want to know the answer•Don’t know the answer•Can find the answerCan Bren GP’s be improved with economic thinking?What decision(s) must be made?What is the tension?How to model & inform the decision?Bren GP’s: 2007Developing a Market-Based Strategy for Conserving and Managing Open Space in California's Big Sur Region Conservation Planning for Blue Oak Woodlands in the Southern Sierra Foothills Prototyping a Campus Sustainability Management System Changing the Campus Climate: The Continuation Plan for a
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