Environmental Economics

Ambient

Surrounding environment

Ambient Quality

The amount of pollution in the surrounding environment

Residuals

(Product residuals) Material left over after something has been produced

Pollutants

Substance that, when released into the environment, lowers the ambient quality

Types of pollutants:

• Cumulative and non cumulative

• Local and global

• Point source and non point source

Cumulative

Accumulates in the environment (plastic, trash, fertilizer, CO2, DDT)

Non cumulative

Doesn’t accumulate in the environment (biodegrades, noise, light)

Local

Smaller, local towns (water quality (Flint MI), visual, noise pollution)

Global

Worldly (Consumerism, CO2)

Point source

Knows where it comes from (factories)

Non point source

Don’t know where it comes from (Fertilizer runoff)

Emission/Effluent

(Air/water) Portion of residuals released into the environment

Damages

Negative effects of pollution (Destruction of habitat, human health, global warming, extinction of species, and impact on income)

Recycling

Returning some residuals back into the production process

Sustainability

Rates of use chosen to not jeopardize future generations

Common resource

A resource that is open to uncollected access by individuals who wish to use the resource

Problem: Tragedy of the commons

Public good

A good that, if made available to one person, automatically becomes available to others

Problem: free rider problem

Tragedy of the Commons

The overuse of a common resource that arises when it’s users have no incentive to conserve it because they also don’t pay for it

Free Rider Problem

The economy or society will provide an inefficiently small amount of public goods because everyone can enjoy them without paying the cost. People take advantage of the free good.

Private benefits

Benefits experienced by the party making the decision

Social benefits

All benefits of an action, regardless of who experiences them

Social benefits = private benefits + external benefits

Willingness to Pay

(WTP) how much someone is willing to pay for a good

Aggregate Marginal Willingness to Pay

The total amount that a customer is willing to pay

Effects of Demand Curve

1. Increase in consumers

2. Number of consumers

3. Expectations of consumers

4. Price of goods

5. Taste of consumers

Private costs

Costs experienced by the party making the decision

Social costs

All costs of an action, no matter who experiences them Social

Social costs = private costs + external costs

Effects of Supply Curve

1. Technological change (most important in this class)

2. Price of inputs

3. Number of producers

4. Producers expectations

Economic efficiency

When the net benefits (or net value of total surplus) of production is at a maximum

Externality

The impact of an economic agent’s action on a bystander

• spillover effect

• third party effect

External costs

Real costs to some members of society, but firms do not normally take them into account when they make their decisions about how much to produce (pollution)

Dead weight loss

(DWL) Loss in net benefits (total surplus) that results from a market failure

Market failure

When the quantity of a good that the market produces is different than the socially efficient quantity

Benefits of economic activity:

1. Private benefits

2. External benefits

External benefits

Benefits that accrue to somebody outside the decision about consuming or producing a good