1 ENVIRONMENTAL ECONOMICS Econ 4545 Edward Morey Fall 2014, August 26, 2014 Course Description Environmental Economics (Econ 4545) considers the efficient and equitable use of society's environmental resources, which like all resources are scarce. Environmental resources include the atmosphere, water, undeveloped land, wilderness, many parks (but not Disneyland), wildlife, genetic diversity, and ecological systems. The environment is where we get the stuff that sustains us and determines, to a large extent, the quality of our lives; the environment is also where we must dump our waste. Environmental economics accepts, without much discussion, efficiency and equity as the goals for environmental policy. Note that many others (some environmentalists, politicians, environmental studies majors, etc.) do not accept efficiency and equity as the appropriate measures of whether an environmental policy is good or bad. Throughout the term, I will mention and discuss some of these other perspectives. Environmental economics is a course in applied welfare economics: how to increase the welfare of society. The primary economic goal is to make society better off; it is not to improve the environment. So, making society better off might mean preserving more of an environmental resource or it might mean preserving less of it—it might mean more pollution rather than less pollution, or more of one kind and less of another kind (there are always tradeoffs). The course will consider market failures (particularly externalities and common-property resources), and the economic valuation of environmental amenities such as clean air, wilderness and ecological systems. Put simply, a market failure is something inherent to the market that keeps the market equilibrium from being efficient. My expertise is in the valuation of environmental resources. I have done much policy and legal work in this area. Use of environmental resources will be considered from four perspectives: the market allocation (how the market would allocate environmental resources if the market were left to its own devices (no government involvement)), efficient allocations, equitable allocations (environmental justice), and government attempts, some successful, some not, to achieve more efficient and more equitable allocations of our scare resources. Courses in environmental economics and courses in natural resource economics both consider natural resources but differ in that natural resource courses have historically dealt with the inter-temporal utilization (how much to use now and how much to save for the future) of conventional renewable and nonrenewable natural resources such as energy, minerals, trees and fish; whereas environmental courses have considered pollution and other environmental issues, historically2 from a static perspective. This historical distinction is blurring. Before we begin, I want to make a few comments about what economics is not. Economics is not about making money or how to run a firm. Economics is the study of the allocation of society's scarce resources. Economics per se is not pro-market or pro-government. The purpose of this course is not to argue that government action to protect the environment is bad or good; sometimes it is bad, sometimes it is good, often it is necessary if one wants environmental resources to be more efficiently allocated. The purpose of this course is not to extol the virtues of the market. Markets have many virtues, but, when it comes to the environment, they also have many faults. In one respect, this course could be described as a course on market failures and government actions to correct those failures. An important component of environmental economics is estimating the costs, in $, of decreasing pollution, cleaning up the environment and protecting scarce ecological systems such as wetlands and wilderness. (Contrary to what Al Gore (former Vice President, arguably elected President) says, there is no free lunch when it comes to cleaning up.) I want to stress that, equally important, environmental economics is motivated to estimate the benefits of decreasing pollution, cleaning up the environment and protecting scarce ecological systems. To increase efficiency, one must estimate both an action’s costs and its benefits. Not surprisingly, polluters tend to play up the costs of cleaning up and downplay the benefits of cleaning up. I do a lot of research, theoretical and applied, on estimating the benefits of environmental improvements. An important issue is the costs and benefits to whom. I have worked on a lot of environmental damage cases (legal cases where the government is suing polluters for the damages caused by their pollution). Note that a lot of non-economist environmentalists reject the idea valuing the environment is $ and even the ideal that the value of the environment can be quantified. Many insist that economists are weird because economists insist that everything can be valued in $. Economists are weird. Environmental economists don’t consider society’s production and distribution of goods and services as separate from the environment; put simply, societies take from the environment to produce goods and services, and, ultimately what they take ends up being emitted back into the environment in terms of emissions, pollution and wastes. Very simply, the total weight of what is taken from the environment to produce goods and services must eventually equal the total weight of what we put back into the environment (“what goes in must come out”). This fact is often referred to as materials balance. The same balance holds for energy—we change energy’s form but do not create or destroy energy. Production and consumption change the form of matter and3 the form of energy but, with the exception of nuclear reactions, no matter or energy is created or destroyed. The word consumption is a misnomer; when you eat a Big Mac, nothing is destroyed. Materials balance is of critical importance but it is not stressed in your other economics courses. Details My hope it that the end of the semester you conclude the course was difficult but worth the effort. Web page: My web site is located at http://www.colorado.edu/Economics/morey/index.html . From it you can link to the web page for Econ 4545, or you can go directly to the web page for the course, http://www.colorado.edu/Economics/morey/4545/4545home.html You can