Environmental Science

Environmental
Economics
 Introduction
Environmental economics is the study of the
cost-effective allocation, use, and protection of the
world's natural resources. Economics, broadly
speaking, is the study of how humans produce and
consume goods and services.
 Objectives

1. Define environmental 2. Apply economic 3. Discuss the concepts of 4. Discuss the purpose of
economics. Discuss principles in addressing Garrett Hardin mentioned cost-benefit analyses
how it can be used to environmental problems. in his essay. (CBA)
quantify the damages
done to the
environment.

Ecology Biodiversity Ecosystem Conservation

01
Economic Principles
 ECONOMIC PRINCIPLES
● The article, Tragedy of the Commons will be analyzed to
study the effects of free and open access to natural resources.
Garrett Hardin wrote an influential article in 1968 entitled,
“The Tragedy of the Commons”.
● He talks about the use of a shared limited resource (commons)
that is ultimately destroyed because of the self-interest of
various individuals.
 ECONOMIC PRINCIPLES

● Hardin stresses that

overexploitation of limited resources
ultimately dooms the resource.
● This concept can be applied to
many environmental problems
those mentioned in the previous
lectures, not just on overgrazing.
 ECONOMIC PRINCIPLES
● In the article, he stated a hypothetical example regarding
herders sharing a common parcel of land in which they are
allowed to let their cows graze.
● It is in the interest of the herder to put as many cows as
possible that can eventually damage the commons.
● Hardin stresses that overexploitation of limited resources
ultimately dooms the resource.
 ECONOMIC PRINCIPLES
● Hardin’s concept traces back to
Aristotle who noted that “what
is common to the greatest
number has the least care
bestowed upon it.”
● To stop tragedy from
happening, one can restraint the
use of resource to allow
sustainable renewal and repair.
 GARRETT HARDIN (1968)
● Born on 21st April 1915
● Dellas, Texas
● Died September 14, 2003 (aged 88)
● Santa Barbara, California
● Fields Ecology
● Known for The Tragedy of the Commons
 02
Cases: Tragedy of the
Commons
A social and political problem in which each individual
is incentivized to act in a way that will ultimately be
harmful to all individuals.
TRAGIC CRASH NO.1
The influx of people from the
provinces to Manila create a lot of
problems. With limited space, resources,
diminishing opportunities, and a lot of
people, the effects are: cheaper labor,
high unemployment rate, more crimes,
prostitution, etc. It creates a never ending
loop of crashes enforcing a weak decision
founded on the assumption that life is
better in Manila.
TRAGIC CRASH NO.2
Summer just began and
everyone was searching for a
good grazing area. A herder found
a spot best for feeding his cattle.
Soon after, other herders knew of
the place and decided to let their
“cattle” graze in the same area.
Others brought their goats, sheep,
and other herbivores. Eventually,
there was little or no grass for all
animals.
TRAGIC CRASH NO.3
Procter & Gamble and Wal-Mart
share a similar goal: to improve
profitability and effectiveness of their
respective distribution/production
system. However, P&G’s price
promotions not only incur extra cost to
but also take a toll on Wal-Mart’s item
stocks. Wal-Mart then blames P&G for
low sales. P&G thinks the problem is
Wal-Marts distribution system or
promotion program.
TRAGIC CRASH NO.4
A new road was
constructed to ease congestion
in your area. Upon its opening
to the public, everyone was
eager to use it. A massive
traffic was formed. Considering
the poor condition of the old
roads, motorists insist on using
the new one even if its primary
purpose was to ease
congestion.
UNDERSTANDING PROBLEMS

A problem is an obstacle which

makes it difficult to achieve a desired goal,
objective or purpose. It refers to a situation,
condition, or issue that is yet unresolved. In
a broad sense, a problem exists when an
individual becomes aware of a significant
difference between what actually is and
what is desired.
COMMON PROBLEMS CAN
BE CATEGORIZED IN MANY
DIFFERENT WAYS
● According to level of difficulty or gravity
● By nature
● By impact
● By scope
 EXTERNALITIES
● Externalities occur when producing or consuming a good cause an impact
on third parties not directly related to the transaction.

• Externalities can either be positive

or negative. They can also occur
from production or consumption.

• For example, just driving into a city

center, will cause external costs of
more pollution and congestion to
those living in the city.
EXTERNALITIES
COST-BENEFIT ANALYSIS (CBA)

● Cost and benefits are usually

measured in dollars (or monetary
value). Cost-benefit analyses are
used by environmental
economists to assess the cost of
doing business in environmental
terms. It is used analyze the cost
and benefits of a proposed
environmental policy.
 COST-BENEFIT ANALYSIS (CBA)
● The benefits of having environmental policies can include
improved air and water quality, reduced mortality rate for all
species, species preservation, and better recreational
opportunities.
● Costs can include higher taxes or the creation of new taxes,
internal and external costs, and even externalities. If these
benefits are deemed “priceless” then the purpose of using
costs and benefit analyses to influence decision is forfeited.
However, not assigning monetary value to the environment is
assuming that it is free for all to be used.
 Stages of
Cost-Benefit
Analysis
01 Define project or policy.
The economist must
consider whose welfare
will benefit in the project
or policy and the time
period of the project.
02 Identify physical impacts of
the project or policy. The
implications of the outcomes
must be identified in units.
Examples can be the removal
of 400 billion tons of landfill,
800 labor hours required to
implement the project.
03
Value impacts. The
impact of a specific
action or inaction must
be valued in accordance
to its marginal cost or
benefit.
04 Discount cost and benefit
flows. The sooner the benefit is
received the more valuable it is.
For cost, the further way in time
it is incurred, the less
damaging it is. Thus, to reflect
present net values, both costs
and benefits must be
discounted.
05 Apply the net present value test. To
get the net present value, subtract
the sum of costs in present value to
the sum of the benefits in present
value. Thus, if NPV > 0, the project
must be accepted. If the discounted
benefits exceed the discounted
costs, the project must be
considered.
06 Apply sensitivity analysis. Re-
compute the net present value
if certain parameters are
sensitive to changes. As an
example, 40 thousand liters of
paint are needed to reduce the
damage on building structures
in a city in the US by 30%.
06 If 50 thousand liters of paint can
reduce the damage is done by acid rain
by 60%. The following parameters
must be reviewed conducting
sensitivity analysis:
a) Discount rate
b) Physical quantities and qualities of
inputs and outputs
c) Project lifespan
 ECONOMIC
INCENTIVES
POLICIES
Economic incentives seek to correct the
situation presented by Hardin by setting a
price for the environmental damage or
creating ownership rights to environmental
goods.
1. ENVIRONMENTAL TAXATION

● This incentive tries to

discourage environmentally
degrading behavior. Some
examples of charges include:
emission charges, fuel taxes,
and water pollution charges.
These charges may be used to
finance environmental
renovation and improvement
projects.
2. DEPOSIT-REFUND SCHEME

● Under this scheme, a deposit is

paid by the purchaser on a
certain product or a container of
certain product as soft drink
bottles or cans, waste oil, or
even old automobiles. When the
container is returned to a
designated collection center, the
deposit is instantly refunded.
2. DEPOSIT-REFUND SCHEME

● The scheme provides an

incentive for the consumer to
return the item and it has no
negative budgetary impact since
the incentive is being provided
by the consumer’s money.
 3. LIABILITY LAW

● This law requires the person or the

company who caused immense
damage to the environment such
as an oil spill to pay for the clean-
up and to pay damages to those
who were injured resulting from the
action. This law encourages those
whose activities may pose great
risk to the environment to be
extremely cautions.
4. DISCLOSURE STRATEGIES

● This is to encourage companies

or persons whose activities may
cause great risk to the
environment and danger to the
public to divulge or disclose the
nature of their activities.
 5. CERTIFICATION STRATEGIES

● Third party certifiers monitor the

production processes of various
companies and allow these
companies to label their products
“green” or “environmental friendly”
if the product has passed a series
of tests and standards.
5. CERTIFICATION STRATEGIES

● A survey revealed that most

consumers are willing to pay
higher for products that pose a
lower environmental risk when
being produced or consumed.
“The greatest threat to our
planet is the belief that
someone else will save it.”