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Environmental Economics Lecture 1: Social Decision Making 1 / 32 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 2 / 32 Reading • Kolstad Chp 2 (Positive and Normative analysis of Climate Change) • Kolstad Chp 3 (Social Choice Mechanisms) 3 / 32 Positive and Normative Economic Analysis 4 / 32 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? 5 / 32 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 6 / 32 Individual Preferences 7 / 32 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 8 / 32 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” 9 / 32 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.” 10 / 32 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.” 11 / 32 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. 12 / 32 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.” 13 / 32 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. 14 / 32 Utility Which individual is the environmentalist? Anna’s indifference curves Bill’s indifference curves 15 / 32 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 16 / 32 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?) 17 / 32 Social Choice from Individual Preferences 18 / 32 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