Environmental Economics, Part 1
Part 1 of a primer on Environmental Economics
“You know it's said that an economist is a man who, when he finds something that works in practice, wonders if it works in theory.” –Walter Heller
Money constrains design. So when I saw Environmental Economics in the bookstore it was a must-buy. The book is part of Oxford’s Very Short Introduction series of which I'm a fan, most books being too long these days. As it turns out, this small book could have been smaller still. But luckily you don't need to read it because I'm going to summarize it for you, over the course of a few posts.
This first post is an introduction some key economic concepts we’ll build on in future posts.
Economics "is about values, not simply about financial book-keeping." When making calculations, all costs and benefits need to be considered, including health effects and aesthetic values. While economics strives to be comprehensive, "it nevertheless uses money as the measure of value."
The book focuses on market economies (non-capitalist economies are not in scope). Theoretically, markets "provide us with an extraordinarily efficient mechanism for allocating society's limited capacity." Capacity being work, money, technology, and natural resources. One way markets allocate capacity is through pricing.
Prices coordinate economic activity in two ways:
1. Prices communicate the scarcity of a resource
2. Prices incentivize behavior to make productive use of resources
A Market Failure is when markets fail to efficiently or fairly allocate resources. Examples:
A monopoly creates artificial scarcity and raises prices.
Asymmetric Information is when buyers and sellers have different knowledge about an offering.
Public Goods benefit everyone as soon as someone provides them, such as street lighting paid for by locals but used by everyone who passes through.
Externalities are situations where someone's actions have consequences for someone else who has no say in the matter. For example, pollution can be a negative externality when emitted by a factory when it harms the health of people living nearby or farmers growing food nearby.
A Market Success is when markets do something well, such as with positive externalities. For example, when a beekeeper raises bees for honey, and the bees also pollinate a nearby orchard owned by someone else.
Entities such as corporatations generally don't voluntarily reduce pollution on their own: public intervention is necessary to instigate the regulations that lead to "the socially optimal level of pollution control." While this is obvious, the above economic mechanisms such as the market, pricing, and externalities give us a framework to create policies governing exactly how pollution control will happen.
In my next post I'll summarize how economists answer the question, "What level of resources should we devote to the reduction–the abatement–of pollution?"