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ECONS3013
Environmental Economics
Lecture 1: Social Decision Making
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Overview
Question:
What is the ‘right’ balance between protecting and using
environmental resources?
1. Positive and Normative Economic Analysis
2. Individual Preferences
3. Social Choice from Individual Preferences
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Reading
• Kolstad Chp 2
(Positive and Normative analysis of Climate Change)
• Kolstad Chp 3
(Social Choice Mechanisms)
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Positive and Normative
Economic Analysis
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Positive and Normative
Positive Economic Analysis:
• describe the world as it is
• free of value-judgements
• relies on logic and data
• often an input into normative analysis
Normative Economic Analysis:
• involves value-judgements
• compare the costs and benefits of public policies
• contribute to policy debate
What should be done? When should we do it?
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Positive and Normative
Statement Pos or Norm?
Coral bleaching will reduce tourist numbers Positive
at the great barrier reef
Coal-fired heating reduced life expectancy in China Positive
The Chinese government should continue Normative
providing coal-fired heating to households
Resources are best allocated by allowing the Normative
market to work freely
When less water is available for irrigation, Positive
the price of water is higher
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Individual Preferences
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Individual’s values
A thing has
• instrumental value from its usefulness to humans
EG: fish for food, forest for wood
• intrinsic value just from existing
EG: a blue whale
All individuals value the environment differently, and put different
emphasis on instrumental and intrinsic value.
Next we attempt to define some common philosophies.
See the textbook. Kolstad: Chapter 3, part II
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Biocentrism
• All living things have intrinsic value
• Biologic world (non-human) is very valuable
Examples:
• EG: “No water should be extracted from the Murray Darling
Basin, to protect the species that live there.”
• EG: The animal rights movement: “we should value the existence
of an animals life in the same way that we value a human’s life”
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Anthropocentrism
• The environment is valuable only to the extent that it provides
material gratification to humans.
Examples:
• EG: “The MDB is only valuable because it provides water for
agriculture and households.”
• EG: “A corroboree frog is not useful to humans, so there is no
reason to protect it.”
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Precautionary Principle
• When considering whether to take an action, we should be
cautious about downsides
• If there might be serious or irreversible damages, we should take
action to prevent these damages
Examples:
• EG: “Extracting water from the river today may exacerbate the
environmental damage from a future drought, so we should not
do it.”
• EG: “We don’t know how drilling for gas will damage the water
supply, so we should not do it.”
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Sustainability
No universally-agreed definition, but examples include:
1. The next generation should be as well-off as the current
generation, and this should continue forever.
2. We should use the environment for human needs only to the
extent that the long-term health of the environment is not
jeopardized.
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Sustainability
Corresponding examples:
1. “Using fossil fuels is not sustainable because it causes climate
change and reduces agricultural productivity. But if agricultural
technology improves yields then it can be sustainable.”
2. “Using fossil fuels is not sustainable because climate change will
ruin the Great Barrier Reef and we cannot replace that.”
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Sustainability
Key question that differentiates views:
• Can we substitute natural capital (eg: resources, ocean, species)
for human-made capital (technology)?
So split into two types of sustainability:
1. Weak sustainability
utility levels do not fall from one generation to the next
2. Strong sustainability
utility levels do not fall from one generation to the next, and
natural capital is not replaced by human-made capital.
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Utility
Which individual is the environmentalist?
Anna’s indifference curves Bill’s indifference curves
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Utility
Which individual is the environmentalist?
Anna’s indifference curves
• Give up certain amount of e,
must compensate with a lot
of c
Bill’s indifference curves
• Give up certain amount of e,
can compensate with a little c
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Utility
Draw three indifference curves for a representative agent choosing
between radioactive waste and air pollution.
Explain the reason for the following features of your indifference
curves:
1. slope (increasing or decreasing?)
2. curvature (flat or steep?)
3. utility level
(which curve has the highest and lowest level of utility?)
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Social Choice from Individual
Preferences
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Social Choice
Utility possibilities
frontier
• Society has fixed resources
• Individuals get utility from
consumption goods and
environmental goods
• But there is a trade off between
− consumption by each individual
− consumption and environmental
goods
• Utility possibility frontier (UPF)
shows all combinations of utility that
are feasible with the fixed resources