Class Notes: Introduction to Environmental Economics
Date: March 6, 2025
Professor: Dr. Smith
Course: ECON 210 - Environmental Economics
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Lecture Overview
- Definition and scope of Environmental Economics
- Market failures and externalities
- Public goods and common resources
- Government intervention and policy tools
- Case study: Carbon taxation
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1. What is Environmental Economics?
- A branch of economics that studies the relationship between the economy and the environment.
- Focuses on how economic activities impact natural resources and ecosystems.
- Aims to develop policies that promote sustainability and efficient resource allocation.
Key Concepts:
- Sustainability: Meeting present needs without compromising future generations.
- Economic Efficiency: Maximizing benefits while minimizing waste.
- Equity: Fair distribution of resources and costs.
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2. Market Failures and Externalities
Market Failure: When the free market fails to allocate resources efficiently.
Externalities: Costs or benefits of a transaction that affect third parties.
- Negative externalities: Pollution, deforestation, carbon emissions.
- Positive externalities: Renewable energy innovation, conservation efforts.
Solutions:
- Government intervention: Taxes, subsidies, regulations.
- Private solutions: Coase theorem, voluntary agreements.
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3. Public Goods and Common Resources
- Public Goods: Non-excludable and non-rival (e.g., clean air, national parks).
- Common Resources: Non-excludable but rival (e.g., fisheries, forests).
- Tragedy of the Commons: Overuse of shared resources due to individual self-interest.
Policies to Address Common Resource Issues:
- Quotas and permits.
- Tradable pollution rights.
- Community management approaches.
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4. Government Intervention and Policy Tools
- Pigouvian Taxes: Taxes imposed on activities that generate negative externalities (e.g., carbon
tax).
- Cap-and-Trade System: A market-based approach to controlling pollution by providing economic
incentives.
- Subsidies: Financial support for sustainable practices (e.g., renewable energy subsidies).
- Regulation & Standards: Laws and policies setting environmental quality standards.
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5. Case Study: Carbon Taxation
Definition: A tax imposed on carbon emissions to encourage reductions.
Example: British Columbia's Carbon Tax
- Implemented in 2008.
- Revenue-neutral policy: Tax revenue used to lower other taxes.
- Resulted in decreased per capita fuel consumption.
Pros & Cons:
[+] Reduces carbon emissions effectively.
[+] Encourages businesses to invest in cleaner technologies.
[-] May disproportionately impact lower-income households.
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Key Takeaways:
- Environmental economics explores the interaction between economic systems and the
environment.
- Market failures, externalities, and common resource mismanagement require policy interventions.
- Governments use various tools such as taxation, subsidies, and regulations to promote
sustainability.
- Carbon taxation is a practical example of economic policy in action.
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Next Lecture:
Topic: Cost-Benefit Analysis in Environmental Decision-Making
Reading: Chapter 4 - Environmental Valuation Methods
