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Economics of Environment 1. Efficient Use of Environmental Resources

Source: ocw.mit.edu
Topic: Environmental Economics

Sort Desciption: 2.964: Economics of Marine Transportation Industries. Prof. Hauke Kite-Powell. Lecture Notes: Environmental Economics. Economics of Environment ...

Content Inside: 2.964: Economics of Marine Transportation Industries Prof. Hauke Kite-Powell Lecture Notes: Environmental Economics Economics of Environment Positive Economics What is / was / will be (description) Normative Economics What ought to be (optimization) Environment treated as an asset: - inputs of raw materials & energy - source of benefits & amenities - sink for wastes 1. Efficient Use of Environmental Resources How much of an environmental asset should be used? (normative) Criterion 1: static efficiency: MAX net social benefit from utilization - like efficient production decision . Demand for environmental good (marginal benefit) Cost (supply) of environmental good -> Opportunity cost (max cost) net benefit Q P Net benefit = willingness to pay (utility) social cost Maximum net benefit = Pareto optimal decision Marginal Benefit = Marginal Cost Criterion 2: dynamic efficiency - takes account of changes over time (timing of B + C) present value r = discount rate PV(B n ) = B n (1+r) n Dynamic efficiency: max PV of net benefits over time implies PV(marginal net benefit from last unit in each period) equal Positive discount rate 1 unit of benefit is more valuable today than tomorrow Scarcity Constraints on depletable supply -> present consumption affects future consumpion (not necessarily non-renewable) marginal user cost = PV(forgone opportunities at the margin) Fossil fuel example: market must consider extraction & MU costs Sustainability What level of fossil fuel consumption is sustainable? Sustainability criterion (Rawls): future generations should be left no worse off than present How can this be if dynamic efficiency allocation more consumption now? Need to transfer (save) some present benefit for future. How? Invest. Property Rights For market mech. to achieve efficient outcome (allocation) need property rights structure that conveys: 1. universality (all resources privately owned) 2. exclusivity (all B + C accrue to owner only) 3. tr ...

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