The environment as a resource

If you took FREC 424 Resource Economics last year, many of these themes will be familiar to you because we introduced them in that course.  Environmental economics is an important topic in resource economics.

In some ways the environment is an exhaustible resource.  Degradation of some environmental amenities is irreversible.  Some pollutants simply accumulate in the environment and their toxicities persist for very long periods.  In this context, the environment is a finite waste-assimilation resource, analogous to an exhaustible mineral or energy resource that is depleted over a finite time horizon.

In other respects the environment is a renewable resource.  It has the capacity to assimilate many kinds of pollutants, converting them into benign forms.  In this context, the environment is a resource that is not depleted even over an infinite time horizon.

Why we have pollution problems

Pollution is an inescapable consequence of the presence of humans in the environment. Biologists, engineers, epidemiologists all contribute their expertise in diagnosing the symptoms and physical effects of pollution. The mechanisms by which pollution causes harm can be extremely complex, and are often not well understood.  The simple conceptualization of cause-and-effect can be confounded by many co-factors.  We are exposed to so many pollutants that the job of disentangling the health effects of one pollutant from another can be difficult if not virtually impossible.  Different species, and even different individuals within species, can have differing vulnerabilities to pollution.  There may be threshold effects, where a slight increase in pollution levels can suddenly trigger dramatic effects.  There may be long latency periods before the consequences of pollution exposure appear.  While the basic conceptualization of a pollution damage model is typically deterministic, the empirical diagnostic model is more often probabilistic.

This frustrates many environmentalists.  After all, pollution control costs money, and it is difficult to justify forcing a polluter to clean up his or her act when you can't prove for certain that the clean-up will be beneficial.  Even polluters are innocent until proven guilty.  It is easy to postpone a clean-up by calling for more studies to prove the clean-up is actually warranted.

Command-and-control policies

The history of environmental protection policies in the US illustrates some important paradoxes that arise in the interplay of politics and economics.  The shortest distance between where we are (a polluted environment) and where we want to be (a cleaner environment) is not always a straight line (outlaw pollution).  Politicians may promise to get tough on polluters, but the toughest laws often turn out to be the hardest to enforce.

Many of our current environmental policies reflect a simplistic "straight-line" approach recommended by the diagnostic experts, the biologists and engineers.  I am regularly amazed at how many scientists readily appreciate the complexities of nature while refusing to acknowledge the complexities of political economy.  This narrow-mindedness is dramatic proof of the need for general education requirements in universities.  These experts are well qualified to diagnose environmental problems in the natural realm, but this doesn't mean they are qualified to prescribe policy solutions in the social realm.

Politically naive people typically advocate straight-line command-and-control (CAC) policies.  These may include absurdly ambitious objectives such as no detrimental health effects on anyone (Clean Air Act Amendments) or zero discharges to waterways (Clean Water Act), that are to be achieved via complex regulations that specify technology standards dictating what kind of pollution-control equipment each firm should install, effluent standards that dictate how much each firm should emit, and/or ambient standards that simply specify maximum allowable concentrations of each pollutant in the environment.

US environmental policy is largely command-and-control--politicized, bureaucratized, adversarial, inefficient.  We have made some significant gains in environmental quality, but slowly and at very high cost.  We will analyze the inefficiencies of standards-based policies in some detail.

Looking toward incentive-based policies

Environmental economics addresses the economic incentives that motivate people and firms to misuse the environment.  Once we understand polluters' incentives, we can look for ways to alter the incentive structure so that they reduce emissions to an appropriate level.   In the social realm, the most efficient path from where we are to where we want to be is rarely a straight line.  We need to apply some divergent thinking, try some "thought experiments," and use some common sense in analyzing the results of these experiments.

We start with the economist's usual assumptions that people are rational and mostly pursue their own self-interests.  This includes polluters too.  We have an easier time understanding social problems when we look at the interplay of human behaviors dispassionately.  In the economic view, there are no good guys and bad guys, just markets and institutions in which rational, self-interested people interact.  Analysis of people's economic behavior reveals the economic incentives that motivate it.  If the behavior is problematic, it's often smarter to address the causes rather than the symptoms.

The basic problem in environmental economics is that individuals and firms tend to overuse the environment's pollution assimilation capacities because they don't pay for them.  Nobody owns the environment.  It has obvious value, but no price.  The damage costs of pollution are mostly external to the polluter's own accounting framework.  The social costs of pollution are typically spread across many people who may have difficulty organizing a challenge the polluter; most people prefer to wait for someone else to clean up the environment for them.  Unless the polluting firm can be induced to account for the full social costs of its emissions, it overuses the environment as an unpaid factor of production, and typically underutilizes other inputs--labor, capital, etc.  Economic theory tends to refute the frequent claim that environmental protection costs jobs.  This course will investigate various methods of getting to polluters to internalize the social costs of their pollution emissions.

Economists have developed a formal taxonomy of market failures that explain why the environment gets degraded.  Note that these are well-defined exceptions to the general principle of market efficiency.  They should not be construed as general refutations of market efficiency.

Free markets generally are efficient, and most economists have a natural distaste for market-distorting policies.  Government interventions in markets usually validate the "law of unintended consequences."  For example, a rent control ordinance may be politically popular with today's tenant voters, but in the longer run it may depress property values, degrade neighborhoods  by discouraging landlords from maintaining their properties, cause housing shortages, and generate illegal sublet markets.  We will examine some unintended consequences of various environmental laws later on.