Environmental Economics

When the free market fails to allocate resources efficiently because environmental costs are not included in prices, leading to overproduction of harmful goods.

Negative externalities mean environmental costs are hidden → market overproduces pollution → internalisation puts costs into prices → corrects the failure.

Making the polluter pay the full social cost of their actions, so the market price reflects the true cost to society including environmental damage.

A cost imposed on a third party who did not choose to incur it. Example: factory pollution causing respiratory disease in nearby residents.

Carbon tax: fixed price per tonne, predictable cost, uncertain reduction. Cap-and-trade: fixed total emissions, guaranteed reduction, but volatile price.

Non-excludable (cannot prevent people using it) AND non-rivalrous (one person's use doesn't reduce availability). Examples: clean air, stable climate.

1) Pollution taxes (carbon tax). 2) Subsidies for clean alternatives. 3) Cap-and-trade. 4) Direct regulation. 5) Property rights for commons.

A benefit received by a third party not involved in a transaction. Example: a beekeeper's bees pollinating nearby farms for free.

When individuals or nations benefit from a public good without contributing to its provision. This leads to underfunding of environmental protection.

CO2 emissions have no price. Producers and consumers don't pay the true social cost, so fossil fuels are overproduced and overconsumed.

It adds a fee per tonne of CO2 emitted, making fossil fuels more expensive to reflect their true social cost, incentivising switch to cleaner energy.

Private cost + external cost = the true total cost to society of producing a good, including environmental damage.

Government sets a total limit (cap) on emissions. Companies get/buy permits. Those who reduce below their limit sell surplus permits. Total emissions controlled with flexibility.

1) Air pollution → respiratory disease. 2) Agricultural runoff → eutrophication. 3) Carbon emissions → climate change. 4) Noise pollution → reduced property values.

Non-excludable (hard to prevent fishing) BUT rivalrous (one catch reduces stock). This makes them vulnerable to overexploitation — tragedy of the commons.

1) Clean air. 2) Stable climate. 3) Biodiversity. 4) Ozone layer. 5) Ocean fish stocks (partially rivalrous — common pool resource).

Subsidies reduce clean energy costs, making it competitive with fossil fuels whose prices don't include environmental damage. This corrects the pricing failure.

WHO bears the external cost and HOW they are affected. Show the chain: activity → pollution → third party impact.

Shared resources have no price in the market, so they are overexploited. The market fails because it does not account for the cost of depleting the commons.

Each fleet maximises its own catch (self-interest), but collectively this depletes stocks beyond sustainable levels, harming all fishers and the ecosystem.

Useful but imperfect. It makes costs visible and helps compare options, but struggles with irreversible damage, intergenerational equity, and non-monetary values.

1) Direct use — timber, food, water. 2) Indirect use — pollination, flood protection. 3) Option value — potential future uses. 4) Non-use/existence value — knowing it exists.

1) Makes environmental costs visible to policymakers. 2) Allows comparison of policy options. 3) Can justify conservation spending in economic terms.

A systematic method of comparing total expected costs against total expected benefits of a decision, including environmental and social factors.

1) Reduces nature to monetary terms. 2) Ignores intrinsic value. 3) Cultural/spiritual values can't be monetised. 4) Valuations vary widely by method used.

The rate used to reduce future costs/benefits to present value. High discount rates undervalue future generations' wellbeing, making long-term environmental protection seem less worthwhile.

Timber = market pricing. Flood defence = replacement cost. Visitor spending = travel cost. Whale survey = contingent valuation (willingness to pay).

The stock of natural resources and ecosystems that provide benefits (ecosystem services) to humans. Depleting natural capital reduces the ability to provide these services.

Natural capital is the stock (forests, oceans, soil). Ecosystem services are the flows (timber, clean water, pollination). Depleting capital reduces the flow of services.

Estimating the value of environmental goods by asking people how much they would be willing to pay to protect them (surveys and questionnaires).

1) Market pricing — value of traded goods. 2) Replacement cost — artificial substitute cost. 3) Travel cost — spending to visit natural areas. 4) Willingness to pay — survey-based valuation.

An ecocentric view argues nature has value beyond what economics can capture. Reducing a rainforest to its timber value ignores its intrinsic worth and spiritual significance.

Valuing an ecosystem service by estimating how much it would cost to artificially replace it. E.g., a wetland's flood protection valued by cost of building flood defences.

1) Putting monetary value on species/ecosystems. 2) Discount rates undervalue future generations. 3) Irreversible damage can't be compensated. 4) Cultural/spiritual values can't be quantified.

Mangroves provide coastal protection from storms and flooding — this is indirect use value because people benefit from the service without directly harvesting the mangroves.

The value of keeping an ecosystem intact for potential future uses that may not yet be known — e.g., undiscovered medicines from rainforest plants.

Discuss its usefulness (makes costs visible, aids comparison) AND limitations (can't capture intrinsic value, discount rates undervalue future, valuations vary). Conclude with a balanced judgement.

The value people place on knowing something exists, even if they never use or see it. E.g., many people value knowing blue whales exist even though they will never see one.

High discount rates make future environmental damage seem unimportant in present-value terms. A forest worth billions in 100 years appears almost worthless today — undermining long-term protection.

Different methods give different answers. Market pricing captures only traded goods. Willingness-to-pay depends on income and awareness. Discount rates change present values dramatically.

1) Carbon tax. 2) Cap-and-trade. 3) Subsidies for clean alternatives. 4) Payment for Ecosystem Services (PES).

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs (1987).

A fee imposed on the burning of carbon-based fuels, designed to reduce greenhouse gas emissions by making fossil fuels more expensive.

An economy that reduces environmental risks and ecological scarcities while improving human wellbeing and social equity.

1) Economic growth — improving living standards. 2) Social equity — fair resource distribution. 3) Environmental protection — maintaining ecosystem health.

Schemes where beneficiaries of ecosystem services pay landowners or communities to maintain those services. E.g., a city paying upstream farmers to protect a watershed.

An economic model that eliminates waste by keeping materials in use through reuse, repair, recycling, and remanufacturing — as opposed to the linear "take-make-dispose" model.

1) Gross National Happiness (GNH) — Bhutan. 2) Human Development Index (HDI). 3) Ecological Footprint. Each captures dimensions GDP misses.

1) Design out waste and pollution. 2) Keep products/materials in use. 3) Regenerate natural systems. 4) Shift from ownership to service models. 5) Use renewable energy/materials.

Regulation sets minimum standards (floor). Market instruments incentivise going beyond minimums and find cost-effective solutions. Together they are more effective than either alone.

Carbon tax: simple to implement + predictable price. Cap-and-trade: guarantees emission cap + flexible for companies to find cheapest reductions.

Economic growth often requires resource consumption. Short-term profit conflicts with sustainability. Developed nations consume disproportionately. Measuring progress is contested.

GDP only measures economic output, ignoring environmental degradation, social inequality, health, and wellbeing. A country can have rising GDP while destroying its natural capital.

Balancing economic growth, social equity, and environmental protection simultaneously — especially when these goals conflict in the short term.

Linear: take resources → make products → dispose as waste. Circular: design for longevity → reuse/repair → recycle/remanufacture → no waste.

A financial incentive paid by governments to encourage environmentally beneficial activities, such as installing solar panels or adopting organic farming methods.

Car-sharing services instead of individual car ownership. This reduces total cars manufactured, raw materials used, and waste generated while still meeting transport needs.

1) Carbon price can be volatile, creating business uncertainty. 2) Complex to administer — requires monitoring, verification, and trading infrastructure.

Bhutan measures development through nine domains including wellbeing, ecology, and culture — not just money. It shows an ecocentric alternative to GDP-focused anthropocentric development models.

An alternative development measure used by Bhutan, based on nine domains including psychological wellbeing, health, education, ecological diversity, and governance.