The economy and the

environment
ECON 371, Lecture 1

Instructor: Patrick Baylis

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I have some questions
for you

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Some questions
• Why do many major cities have bad air quality?

• How much is a national park worth?

• Can we have too little pollution?

• Why does fighting wildfires cost more than ever?

• What characteristics of global climate change make fixing it so challenging?

• Why do poor and underprivileged communities often suffer the most from
environmental harms?

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Introductions

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Welcome!
• Who am I?
• Who are you?

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Who am I?
Professional Personal

• Assistant Professor in the Vancouver • From Wisconsin, USA

School of Economics • I bake bread and desserts in my spare time
• I teach and study environmental • I played ultimate frisbee for many years…
economics
• Research focus: how people are impacted
by and respond to environmental hazards,
like climate change and air pollution

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… not always successfully

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OK, back to research
Questions that motivate my research

1. How are people impacted by climate change and natural

disasters?
2. How do they respond? What policies could help them
respond better?

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Temperature and online sentiment

Baylis, Patrick. “Temperature and temperament: Evidence from Twitter.” Journal of Public
Economics 184 (2020): 104161.

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Temperature and online sentiment

Baylis, Patrick. “Temperature and temperament: Evidence from Twitter.” Journal of Public
Economics 184 (2020): 104161.

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Subsidizing fire suppression

Distribution of implicit subsidy by risk and density Spatial distribution of implicit subsidy

Baylis, Patrick, and Judson Boomhower. “The economic incidence of wildfire suppression
in the United States.” American Economic Journal: Applied Economics 15, no. 1 (2023):
442-473. 13
You
• I don’t know much about you (yet)
• First discussion quiz includes questions to help change that
• I know we have a range of academic backgrounds in the
class, with many non-Econ majors
• I strongly encourage participation and value multiple
perspectives
• Don’t be afraid to ask questions or challenge the material

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Our terrific TAs

Xiomara Pulido Medha Sehtia Felipe Sepulveda

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Today’s learning objectives
1. Understand structure of the course so you know where
we’re going (and if you want to take it)
2. Orient you to the field of environmental economics and
define some key terms
3. Introduce types of environmental policies we’ll consider

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Course structure

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Canvas is our central hub
• Lecture slides
• All assessments
• Announcements, changes to class schedule

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Course learning outcomes
1. Work with key economic concepts to describe creation of
environmental goods/bads.
2. Model markets and decision-making and their contribution
to environmental quality.
3. Model and compare various policy solutions to
environmental problems.
4. Describe key intellectual advances in field of environmental
economics.
5. Extend concepts from class to other settings, environmental
or otherwise.
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What are the goals of this course?
1. Provide frameworks and concepts to help you understand how economic behaviours
contribute to environmental problems—and how they can be harnessed to help
mitigate them.

2. Develop mathematical and graphical toolkits to help you apply these concepts to real-
world problems.

3. Prepare you for after UBC:

• Industry jobs (energy, transportation, finance)
• Public sector and NGOs (policy analysis, regulation, advocacy)
• Graduate programs (MAs, PhDs in economics, political science, geography,
sociology, public policy, etc.)

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Textbook
• Keohane and Olmstead, 2e, aka “KO”.
• Digital edition available for free through UBC
Library.
• KO is not a complete reference for the course, but is
an excellent policy-oriented introduction to the
field.
• Lectures will add additional concepts, specific
examples (often 🇨🇦) and mathematical/graphical
models.
• Think of KO and the lecture notes as complements.

Keohane and Olmstead, 2e

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Assessments
1. Participation: Assessed via iClicker participation in lecture,
5% of course grade.
2. Problem sets (3): 15% of course grade, marked on
completion basis (reasonable effort required).
3. Midterms (2): In-person, closed-note, 40% of course grade.
4. Final exam: In-person, closed-note, 40% of course grade.

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More on participation and iClicker
• I use iClicker Cloud to incentivize attendance and engagement in lecture.
▪ Why attendance? In-person learning outperforms online learning (see, e.g., Figlio
et al. 2013, Alpert et al. 2016).
▪ Why engagement? Student feedback from previous years.
• Points are based on participation, not correctness, but I will occasionally check for
random entry (i.e., choose E if you are in class right now).
• Can’t attend class because of, e.g., COVID, visa issues, et cetera?
▪ I drop four iClicker sessions.
▪ Get in touch if you miss more than four sessions and we can discuss.
▪ No need to let me know if missing individual classes.

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Contacting me and/or the TAs
• Please contact us through email: [email protected]
▪ Please direct all course-related questions here (shared by
instructor and TAs)
▪ Include in subj: “ECON 371 Section 001” or “ECON 371
Section 002” as appropriate
• Please do not contact through Canvas or other e-mails
addresses.
• Having a joint e-mail account allows us to better triage and
respond to common issues, and ensures that inquiries are
handled consistently and fairly.
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Class format
• Each lecture will cover theory and policy examples for the relevant topic
• Will also include applications of theory, assessment-style questions to check
understanding (and attention!)
• For more involved mathematical and graphical applications, will reserve last part of
class for workshop style problems
• Class participation is highly encouraged
▪ There are no obvious questions (truly).
▪ Helps me ensure content is understood and pace is appropriate.
▪ Save me from listening to myself for 80 minutes.

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Course topics
• The economy and the environment • Policy under uncertainty
• Benefits, costs, and efficiency • Discounting
• Markets: Externalities, and public goods • Contingent valuation
• Coase Theorem • Travel cost models
• Environmental standards • The environment and real estate markets
• Taxes and subsidies • Offset markets
• Tradable permits • Climate change
• Distortions and second-best policies • Natural disasters

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What is environmental
economics?

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What is environmental economics?
• Environmental economics examines human use of the natural environment and how
that use can impact other people
▪ Starting point: My interaction with the environment can have direct effects on you
• Asks both positive (describing what is) and normative (describing what should be)
questions, such as:
▪ How much would people pay to reduce pollution levels by X? (positive)
▪ What is the socially optimal level of pollution in an area? (normative)
• Key distinction: to answer a normative question, we need to assert a social welfare
function (more later)

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Some examples
• Classic: factory owner sits next to laundromat and generates
air pollution
• Agricultural: Corn fields leach nitrogen fertilizer into
surrounding community
• Air quality: PM2.5 pollution from wildfires in Montana
creates smog in Vancouver
• Climatic: I burn a liter of gasoline to get to work, our
atmosphere gets warmer

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Natural resource economics versus
environmental economics
• An economic system uses natural assets to produce goods that are distributed to
consumers
• Waste products from this system are eventually returned to the natural world in some
way
• Natural resource economics studies the allocation of raw materials as inputs for
production/consumption
• Environmental economics focuses on the flow of waste products and their impacts on
the natural world
• Distinction not always clearly defined (e.g., coal mining)

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Terminology
• Environmental quality: the quantity of pollutants in the
environment
• Pollutants (or “emissions” or “discharges”): residuals that
are placed in the environment
• Pollution: the result of releasing pollutants into the
environment
• Damages: the negative impacts of environmental pollutants
• Source: where emissions occur

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Environmental policies

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What policies can environmental
economics inform?
• Prescriptive (or “command-and-control”) regulations
▪ Technology, technical efficiency, emissions quantity
• Market-based regulations
▪ Emissions taxes
▪ Tradable permit systems
▪ Reduction subsidies
• Behavioural regulations
▪ Establishing social norms
▪ Default-setting or “nudging” for consumers and firms

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What broader economic themes does
environmental economics touch on?
• How do market failures lead to social problems?
• How can those failures be fixed? And by whom?
• How do individuals trade off private goods with
environmental bads?
• How can we value goods which are not sold in a market?

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Models and incentives

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Economic analysis and models
• Economic analysis examines decision-making in the face of scarcity
• To analyze decision-making, we develop and test models that represent reality
• Economic model: attempts to isolate the most important elements of a situation in a
(sometimes very) simplified framework
▪ We will examine a number of models in this course
▪ Remember: “All models are wrong, but some are useful”
▪ Remember also: Models are determined by what they assume
• Key to most economic thinking: considering incentives

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Incentives
• Economists: humans are not inherently bad, but may do bad
things like pollute because they have an incentive to do so
• Contrast with moral approach: pollution is immoral and
only people/firms who evil will do it
• What are incentives?
Incentives
▪ Money, risk, power, norms, morals, reputation, effort, …
• Incentives are central in the models we build in
environmental economics
▪ Help explain patterns of environmental degradation
• Models provide testable hypotheses of how to align private
behavior with socially preferred outcomes
• More subtle: models also provide a shared language: writing
down a model forces us to be clear about our assumptions
and helps us identify where we disagree
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Reducing household waste
• The average Canadian
produces over 700 kg of
waste per year
• Most households pay a flat
fee per month
• Little financial incentive to
reduce waste Landfill in Delta

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Reducing household waste
• Still, most people don’t throw all their waste into garbage. Why?

• Social norms? “Moral suasion”? Other reasons why waste is psychologically costly (for
some)
• Some cities have introduced “pay as you throw” (PAYT) programs
• Households now incentivized to recycle more, compost more, reuse, buy low-
packaging produts
• Other cities allow a certain amount, charge a fee for extra
• Which type of incentive do you think is more effective?

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Corporate pullution
• Corporations would pollute less if they paid for emissions
• Environmental economics suggests possible incentive-based methods
• A emissions tax puts a unit price on emissions
▪ Sweden has the highest tax at $127 USD/ton CO2 emissions
▪ BC’s tax is $45 per ton CO2 emissions
• A permit trading system allows firms to sell “emission allowances” to other firms
▪ Also called “cap-and-trade”: regulator sets overall cap, issues permits
• We will examine these two systems in much more depth later

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Using incentives to design
environmental policy
• Tools from environmental economics can help design efficient and effective policy
• Need to be careful that these policies promote the correct incentives
• Perverse incentives: incorrectly designed policies could can backfire
▪ If forced to pay per bag of garbage, some households might dump their trash
▪ If forced to pay a carbon tax, some firms might move elsewhere
• We’ll discuss this and other considerations for the design of environmental policy

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Summary
• Big objective of course: introduce you to theory and practice of environmental
economics
• Canvas is our central hub
• Environmental economics: how and why people make decisions about environmental
resources
• Economic analysis examines role of incentives in environmental problems and design
of solutions
• Doing so requires consideration and measurement of benefits and costs of policies
• Next time: Benefits, costs, and efficiency
• Read
▪ KO chapters 1, 2 and 4
▪ Don Fullerton and Robert Stavins. “How Economists See the Environment.” (link on
Canvas in Schedule and Readings page)

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