I. What is Environmental Economics?
Economics is the study of the allocation of scarce resources.
o Note that the theories of economics can be applied to any scarce resource, not just
o Economics is not simply about profits or mo
Federalism and Environmental Protection: Theory
There are three key theoretical questions:
1. Choosing the extent of environmental control
2. Deciding on the methods of pollution control to use
3. Determining and funding the basic research agenda for a
I. What is Voluntary Compliance?
Policy makers and environmentalists have paid increasing attention to voluntary
environmental programs, in which firms improve environmental performance beyond what is
required by regulation.
Key questions include:
The Role of Uncertainty: Theory (continued)
Using the results we covered Monday, we began class deriving rules for the desired
policy based on the slope of the marginal damage function (MDF):
o When MDF is steeper, mistakes with quantity are more costl
I. Sulfur Dioxide (SO2) Permits and the 1990 Clean Air Act
o Acid rain is caused mainly by sulfur dioxide (SO2) and nitrogen oxides (NOx).
o Comes from burning of fossil fuels.
o Impact of acid rain:
Kills aquatic life (e.g. dead lakes and p
. Permits: Implementation Issues
Initial allocation of permits
o To begin a permit trading system, firms need to have permits to trade. The initial
distribution can be done in several ways.
The government can auction permits to highest bidder.
We began class concluding the e-mail discussion on the disadvantages of emission
fees. Issues raised included:
Compared to command and control, emission fees provide more
certainty on costs, but less certainty on the final level of emission
Pigouvian tax A tax levied on each unit of a polluters output in an amount equal to the
marginal damage that it inflicts at the efficient level of production.
o The goal is to set the tax so that the polluter incorporates the social
I. The Coase Theorem (continued)
Our discussion of the policy examples on the reading list suggested several limitations to
the Coase Theorem. These included:
1. Costs of bargaining and transactions costs
o Negotiation won't work when large numbers of pe
For any environmental policy, we also need to consider the costs society pays to enforce
and administer the policy.
o These can be modeled as increasing the marginal abatement cost, which decreases
the desired level of abatement.
We began class by finishing our discussion of the commons. These include the means for
rationing scarce resources, which are on the last lecture notes, and strategies for
successful commons management. These include the following:
o Successful commons usu
I. The Invisible Hand
The goal of today's lecture is to discuss why the free market may fail, and to discuss the
consequences when that happens.
To begin, we must consider how the market should function.
Adam Smith, who coined the phrase "The Invisible