Economics of Environmental Decisions

Economic principles still apply…even when made outside the market context.

– Prices or other incentives influence the choices made.

– Environmental values are subjective…just as with other goods and services.

– Environmental decisions lack full knowledge of important secondary effects.

Economics of Environmental Decisions

At the heart of the problem you will find…

– poorly defined or enforced property rights, and thus

– a lack of markets and decision-maker accountability.

Economic Growth and the Environment

Environmental quality and economic growth tend to go together.

High income levels generate high demands for environmental improvement through…

– markets (improving environmental quality by private means)

– political action (improving the environment through government regulation)

Exhibit 1Comparison of Air Emissions

Economic Growth and the Environment

Technological change accompanying economic growth tends to improve the environment.

– Advanced technology reduces the amount of resources needed per unit of output.

– Thus, it reduces the amount of waste products generated per unit of output.

– Technology also decreases the cost of pollution control itself.

Metal Required Per 1000 Cans

Exhibit 2Pollution Problems as National

Income Rises

Impact of Property Rights

Without property rights and market exchange, conservation and environmental quality suffer.

– The former Soviet Union and the Eastern European nations illustrate the importance of property rights.

– Environmental disasters occurred in those nations despite the presence of good technical capabilities and above-average per capita incomes.

Impact of Property Rights

Why do property rights promote conservation of the environment?

– They give legal standing to individuals threatened by pollution.

– They promote economic prosperity which tends to mitigate environmental damage.

Property Rights and Water Quality

Private ownership of fishing rights in England illustrates the benefits to water quality.

– In 1948, long before the imposition of water quality regulations, owners of fishing rights organized to get court orders to protect them from polluters.

– They won court cases and established enough precedents that now they seldom go to court.

Property Rights and Water Quality

In the US, state governments own the fishing rights on most streams.

– Bureaucratic decision makers, however, seem less inclined to aggressively protect either the fish or water quality.

– Thus, due to a lack of market information and incentives, progress moves slowly and inefficiently under regulation.

Primary Market Government Sales of Pollution Rights To Car Manufacturers

Initial sales

Price ($)

Quantity

(pollution rights)

S = maximum level of pollution permitted

D

P*

Q*

Initial price of one pollution right

Price ($)

Q2

Quantity(automobile sales)

P1

P2

Q1

Cost of pollution rights per car

S2 = Total cost per car

S1 = Original cost per car

Automobile Market External Costs Are “Internalized” automatically

Pollution rights motivate both producers and consumers to economize.

Exhibit 16-1Economic Growth, Production Possibilities, and Aggregate Supply

Exhibit 16-2Differences in Long-term Growth Rates and

Changes in Per Capita Income

Exhibit 16-3The Growth Of Per-capita GDP for High-Income Industrial

Countries, High-Growth LDCs, and Low-Growth LDCs

Note: LDCs stands for Less Developed Countries.

Investment in physical and human capital

Technological advances

Institutions and policies consistent with efficient economic organization

Sources of Economic Growth

Limited Government (government share of GDP) Secure property rights and political stability Competitive markets Stable money and prices Free trade Open capital markets Low marginal tax rates

Institutions Linked To Prosperity

Exhibit 16-4The Size Of Government—Growth Curve

Exhibit 16-5Government Spending and Economic Growth Among

the OECD Countries

Note: OECD stands for Organization for Economic Cooperation and Development. The organization is comprised of 28 Countries, including most of the major developed countries of the world.

Exhibit 16-8Economic Freedom, Income, and Growth

Interestingly, economic freedom—as a system of institutions—impacts both sides of the equation to improve economic potential. It improves alignment by bringing people of different interests together through exchange (invisible hand). It also improves action by removing arbitrary obstacles from the path of production and by motivating people to produce and innovate.

Basic Elements of Economic Progress

Action

Alignment Potential

Progress

Any person, group, or society improves through the interplay of three basic economic elements. Recall that the main job of government (in the broadest sense) is to improve potential through the alignment of people and their environments. Of course consumers and producers improve potential too, but they do so primarily through their actions.

Goal B

Goa

l A

R2

R1

Contractcurve

• aligns economic interests

• accelerates economic activity

• expands economic potential

The Advancement of Economic Freedom Is What…