Environmental EconomicsHonors C.A.D.

Objectives

Define and explain the term “environmental economics.”

Explain why natural resources can be examined using the cost/benefit analysis.

Background

We know that economics is about making decisions.

“Allocation” is the buzzword we just learned how this is done with prices.

But for natural resources, can we use the same system?

Factors of Productio

n

Land

LaborCapital

Human Capital

Background

Ownership of land can easily be shown, but what about the intangible stuff, like air, water, soil?

Thus is the paradox of environmental economics.

The problem – the way owners use their land may affect others!

Definition

Environmental economics is “the study of how the natural environment and its resources affect the economy, and vice-versa.”

How does our society affect nature?

How does nature and nature/natural resources shape our society?

These are the two questions environmental economics seeks to answer.

One Side…

One aspect of environmental economics seeks to analyze natural resources: Coal Natural Gas Oil Minerals Plants and animals (fisheries, farms, agriculture, etc.)

How can we sustain these resources, or use them in the best way?

…And The Other

The other aspect of environmental economics deals with pollution.

We understand that some economic activity causes pollution.

The question is: how “clean” is “clean enough” economically?

The Dirty Room Example

Cleaning your room can be done to varying degrees:

You can just pick up a few things off the floor in a few minutes.

You spend a few more minutes (say a half hour) and vacuum and “straighten up” the room.

Our, you can spend a few hours and dust everything, shampoo the carpet, organize all your drawers, etc.

Which works best? Which makes the most sense? You have to analyze cost (time) vs. benefit (cleanliness of room).

Cost/Benefit Analysis

Think back to marginal cost and marginal product. We kept hiring workers until cost and product were equal.

Apply the same principle to the dirty room example.

You want to clean just enough so that the cost of time equals the benefit of a clean room.

The same applies to the environment – we want to clean up only until the cost equals the benefit.

Cost/Benefit Analysis

Environmental Quality

Price

Blue line = marginal cost

Red Line = marginal benefit

Conclusions

What is environmental economics? Resources – sustain them! Pollution – clean it up!

But wait…how clean is “clean enough?”

WHEN MARGINAL COST = MARGINAL BENEFIT!