The Economy in the Environment – basic concepts The Holistic View.
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Transcript of The Economy in the Environment – basic concepts The Holistic View.
The Cowboy Economy
• Circular flow between firms and consumers
• Seemingly perpetual• Success measured by
the amount of stuff moving through
• Reckless, romantic, not realistic
The Spaceship Economy• Expanding system
boundaries• Limited reservoir of
materials on earth• Economy uses inputs
from the environment and emits waste
• Must limit throughput• Limits to growth?
The Big Picture
Input from the environment
• Resources• Life support services• Amenities• Waste-sink
• Last time established the economic importance of environmental input
The Big Picture
• Continually trying:– Not to overwhelm regenerative capacity of the
environment– Not to overwhelm the waste-assimilative
capacity of the environment
First - a few concepts
• Thermodynamics• Matter = energy and materials
• Energy = ability to do work
• Entropy = unavailable bound energy - represents level of chaos or disarray. Can also measure the quality of energy.
First - a few concepts
• Systems: Two or more entities that interact
• Open system: Exchanges energy and materials with its surroundings
• Closed system: Exchanges only energy with its surroundings.
Laws of Thermodynamics
The first law:
• Matter (energy or materials) can neither be created nor destroyed
Implications:
• Whatever comes in will come out (implies waste)
• Economic processes simply rearrange things
Laws of Thermodynamics
Second law:The entropy law• All processes require energy - and as they
do they reduce the quality of the energy used - increasing entropy in the universe
• The arrow of time: over time we always will see an increase in entropy
• Energy cannot be recycled - continually goes from a high quality state to a low quality state
Laws of thermodynamics
• Implications for the earth as a whole– A closed system, and thus
quantity of materials is constant
– Constant flux of energy into the system
– Energy cannot be recycled but materials can
– No process is 100% efficient
– Implications for economic systems?
Natural Capital
• Capital: A stock that yields a flow of goods and services into the future
• Natural capital: Those stocks in nature that provide goods and services into the future
• Example: A fish stock (capital) yields a flow of goods (harvested fish) into the future
Natural Capital
• Two types:– Renewable or active capital
• Providing extractable renewable resources, and provide services without being extracted (ex. Waste assimilation).
– Nonrenewable or passive capital• Inactive (passive). Provide no services until
extracted. Ex. Fossil fuels
– Perpetual resources - only provide flow services and have no stock counterpart
Stock resources
• Non-renewable
• Depletable, scarce (if used)
• Resources vs. reserves– Economic feasibility
• Provide services only if extracted
Non-Renewable Resources
• Rate of regeneration is slower than extraction
• St = St-1 + Gt - Et
Where:
Gt = 0
• Example: Fossil fuels - Others?
Economic theory of nonrenewable resources
• Describes the optimal extraction path for non-renewable resources– Hotelling principle
• By definition scarcity increases as extracted which should increase price– Has it?
Economics of non-renewable resources
• Optimal extraction rule: Extract such that rent rises at the rate of interest
• What happens if interest rates increase? Extract more? Less?
Economic theory of non-renewable resources
– Prices increase over time
– Extracted quantity declines over time
– Total size of the resource declines over time
– All true in reality?
Economic theory of non-renewable resources
• More realistic picture• U-shaped price path
– Technology– Scarcity– Shown by Slade 1982
Economic theory of non-renewable resources
• Is it possible to use non-renewable resources and be sustainable?
• Why/why not?
• If yes, how?
Renewable Resources
• Rate of regeneration faster than rate of extraction• Are all active• Provide services when extracted and also when
left in place• St = St-1 + Gt - Et
Where:
Gt >0
Example: fish stocks
Renewable resources - Population dynamics
• Population: a group of individuals belonging to the same species
• Population dynamics: The dynamics of population growth and how populations interact
• Crucial for the management of renewable resources
Renewable ResourcesPopulation growth
• Focus on G• Exponential growth• Characterizes
anything that can grow without limit
• Pt = Pt-1*(1+r)• Doubling time:
LogN2 =r*DT0.693 = r*DTDT = 70/r
Renewable ResourcesPopulation growth
• Logistic or density dependent growth
• Upper limit to the ultimate size
• Determined by carrying capacity– What defines CC?
• Growth curve u-shaped
Growth determined by:
Pt = Pt-1 + r*(CC - Pt-1)/CC
Renewable resources
Original Equation
• St = St-1 + Gt - Et
• Extraction affects stock size.
• Sustainable yield: extraction equal to growth
• G=E
Renewable resources
• Maximum sustainable yield (MSY)
• Complex dynamics - stock possibly grows drastically with decreased harvest
Renewable Resources
Equilibrium and stability
• Do populations ever reach an equilibrium?
• Are growth curves ever smooth?
• Can populations be stable without an equilibrium?
Renewable Resources
• A) Dampened oscillations - falling amplitude
• B) Constant oscillations - constant amplitude
• C) Exploding oscillations - increasing amplitude - collapse
Renewable resources
Population interactions
• No species lives in isolation
• Predator prey (Lotka Volterra)
• Competition
• Symbiosis
Renewable resources
• Resiliency - ability of a system to bounch back after a disturbance
• What determines resiliency?– Diversity?– Keystone species?
• The rivets analogy
The Big Picture
• Waste: definition
“Unwanted” byproducts of economic activity
• Conservation of matter - always waste into the environment
Waste
• Accumulation of waste
• St = St-1 + W - D– W: inflow– D: assimilation
• Function of S
• D = d*S
• With d from 0-1
• Recycling or reuse possible, intercepts flow
• Industrial symbiosis
Waste
Damage relationships• Biomagnification
– Increasing concentration as going up food-chain
– DDT
• Synergy: Two pollutants interact and create something worse - e.g. smog
Waste
Damage relationships• Dose response
curves– Relationship between
exposure and damage
• Thresholds• Lagged response
Amenity services
• Pleasure of going to a park
• Pleasure to run in a forest
• Simply knowing that nature exists
Amenity services
• Sustainable amenity service
• Relationship between the quality of the service and the number of visitors
Life Support Services
• Services that make human life possible– Purification of air and
water– Stabilization and
moderation of climate– Nutrient cycling– Pollination of plants
Interactions
• Various services interact e.g.– Inflow of fossil fuels
creates an outflow of carbon
– Increasing temperatures, affecting other services
Summary
• Various services received from nature
• Valuable (33 trillion $)
• Very complex dynamics– Non-linear movements– Lags– Thresholds– Interactions
• Creates massive Uncertainty
Threats to Sustainability
• Resource depletion• Waste accumulation• Loss of resiliency
• What to do?• Why those threats?
Markets and efficiency
• Market:
• Is a system in which buyers and sellers of something interact.
• Something is exchanged in return for money
• Illustrates individual preferences
Demand and Supply
Demand function:• Describes the relationship
between the quantity the buyers buy and price of the product
• Inverse relationship• Qd = 30 - 6P • Maximum price – choke
price• Usually not linear
Elasticity
• Elasticity of demand (Ed)• Elasticity of supply• Cross elasticity of demand or supply• Income elasticity (IE)
• Inferior goods (IE negative, Ed negative)• Normal goods (IE positive, Ed negative)• Luxury goods (IE positive, Ed positive)
Supply function
• Describes the relationship between the quantity that sellers are ready to sell and price
• Upward sloping
Market equilibrium
• Bringing together buyers and sellers
• At the market equilibrium D=S, and giving the market price
• Illustrates efficient allocation of resources
Markets and Efficiency
• Economics: Allocation by economic agents of scarce resources among alternative competing ends.
• Three questions:– What ends to economic agents desire
• (what to produce and how much)
– What limited scarce resources do economic agents need to attain those ends
• How to produce this?
– What ends do get priority and how to share this among society
Welfare economics
Answer: Maximize utility
Utility
• What people want, and the benefit from getting it, expressed via preferences
• Increases via ever increasing provision of goods and services
Maximum utility = maximum social welfare
Preferences
• Expressed through the market by what goods and services people are willing to give up (read money) to get sth else
• Willingness to pay
Allocative Efficiency
• Adam Smith – Invisible hand
• First theorem of welfare economics– Pareto efficient allocation (optimality)
• Efficient allocation when noone can be made better of at the cost of others
• Noone can gain at the cost of others+• Only holds under “perfect markets”
Conditions for efficient allocation (“perfect markets”)
• Competitive market– Price takers
• Rational behavior
• Full information
• Full inclusion
• Marginal benefit (MB) = marginal cost (MC)
Market failure
• When allocative efficiency is not achieved• Conditions for a perfect market:
– Full (complete) inclusion of all goods and services (all traded in markets), nothing external
– Full (complete) information– Rational behavior– Competitive markets (price takers)– Property rights allocated – consumer sovereignty
Public goods
• Public vs private goods• Public goods: Used collectively by society• Pure PG are non-rivalrous and non-excludable
(pure vs. impure)– Non-rivalrous: consumption by one does not affect
consumption by another• Crowding
– Non-excludable: agent cannot be prevented from consuming and using it
– Market does not handle allocation of such goods
Management concepts
• Open access
• Private property– Exclusive – Functional ownership
• Common property – “the commons”
Externalities
• Externality– The unintended and uncompensated side-
effects of one agents activities on another– Beneficial, or harmful
• Positive externality (beneficial)– Ex. Orchards and the bee farmer
• Negative externality (harmful)– Ex. Pollution affects a surrounding community
How to intervene to ensure effective allocation?
• Coase theorem– Private property rights– Issues
• High transaction costs• Number of agents
• Intervention– Piguvian taxes (e.g.)– Subsidies
Enter the Environment
• Nature/natural services– Non-market good
• Rarely enter welfare functions, often excluded from economic decision-making
• Services received free of charge
– External to the market• Provide positive externalities• Affected by negative externalities
– Property rights hard to define• Many cases considered public goods
Classical Causes of Environmental Degradation
• Exclusion of the environment indicates market failure– Markets cannot allocate the environment
efficiently– Agents (that operate based on price), do not
have the means to allocate this resource effectively
• Result: We overuse natural capital, extract too much and emit too much waste
Tragedy of the Commons
• A group of herdsmen that all have to use common grazing lands. That is the grazing lands are all used in common and are the resource in question.
• The herdsmen must use the grazing-lands to fatten their cattle - and thus they want to keep as many cattle on the grazing lands as possible.
• Grazing lands are a renewable resource = overuse means degradation.
Tragedy of the Commons
• Assume:– Profit maximization
• Based on weight of each cattle times N
– Rational behavior• Maximize profits, (minimize cost)
Tragedy of the Commons
• Profits = P*Q• Costs = C*Q/N
• Profits private• Costs are shared by all
=> More cattle added until Commons are ruined
Tragedy of the Commons
• Can “Commons” Management ever work?– Strength of norm
• Technology• Prices• Outsiders
What to do?
• Get the market to internalize the environment
• When?– In the presence of market failure
• How?– Property rights– Market intervention
• Policy
Sustainability = efficient markets?
• Correcting market failure does not guarantee sustainability
• Intergenerational equity
• Exclusion of “non-productive” natural capital
• Neoclassical perspective vs. Sustainability perspective
The Economy and the Environment
• Economic Planner – maximize economic utility, economic growth, income
• Environment excluded from framework
• Relationship between the environment and income e.g.the EKC (later)
• But, what is economic growth? (next time)