This book explores why economics matters more to environmental and natural resource policy than many people think. To begin with, it is important to say that economics is not just about financial comings and goings within markets: the 'unpriced' or non-market services that the natural environment provides us with are equally its concern. The value of protecting wetlands for their biodiversity, flood defense, and pollution treatment functions is just as much an economic value as this week's production of oil from a Texas oilfield. Next, people can benefit from a better appreciation of how the economy and the environment are interlinked. The economy operates from inside the environmental system, with conditions in the two systems being simultaneously determined in an evolving, dynamic way. By 'the economy', we mean all the firms that make up industry; households (people) in their twin roles as consumers and suppliers of labor; governments; the institutions that govern interactions between these groups, such as markets; the state of technology; and our stocks of produced capital (such as roads and space stations). By 'the environment', we mean all natural resources found in the biosphere, including land, land cover, and ecosystems (flora and fauna); resource deposits under the land surface; the world's oceans and atmosphere; and the natural climate and nutrient cycles. There are many links between these two systems. First, the environment provides the economic system with inputs of raw material and energy resources, including minerals, metals, food, hydrocarbons, and fibres such as wood and cotton. These resources may be either non-renewable-such as coal or iron ore-or renewable, such as fisheries or forests. Inputs are transformed by the economic system into outputs that consumers demandwood into paper and oil into petrol, for example. Second, the economy uses the environment as a waste sink.
Gabriel Gonzalez is an environmental economist. He studies the effect of weather and climate on agricultural production, how climate trends and the US biofuel mandate influences agricultural commodity prices, and how pollution impacts both agricultural yields and human morbidity. He recently examined how financial markets incorporate climate forecasts and the incidence of a carbon tax. He co-directs the Center on Environmental Economics and Policy (CEEP) with Professor Douglas Almond and co-directs the Energy & Environment Concentration at SIPA with David Sandalow. He is a Research Associate at the National Bureau of Economic Research. He currently serves on the Board of Reviewing Editors at Science. Gabriel holds a Master of Science in Economics from the University of Wisconsin - Madison, a Graduate Certificate in Energy and Oil Economics from the Instituto Tecnológico de Buenos Aires, and a Bachelor of Science in Economics from the Universidad Católica Argentina. Before enrolling at Columbia University, Gabriel worked as a research assistant at the Wisconsin Institute for Discovery, specializing in computational economics. Additionally, he has over six years of experience in consultancy, providing economic and financial services to a range of institutions and firms.
Preface 1. HISTORY OF ENVIRONMENTAL ECONOMICS.....................................1 1.1 An Eighteenth Century Forerunner 1.2 The Classical School: From Smith to Mill 1.3 Ricardo: Resource Scarcity and Economic Growth 1.4 Perspectives on the Classical Economists 1.5 Natural Resource Scarcity: Jevons and the Coal Question 1.6 The Marginalist Revolution and the Environment 1.7 Pigou and the Foundations of Environmental Economics 1.8 The Emergence of Natural Resource Economics 2. UNDERSTANDING ENVIRONMENTAL ECONOMICS.......................22 2.1 Economic Analysis 2.2 The Importance of Incentives 2.3 Incentives: A Household Example 2.4 Incentives and Global Warming 2.5 The Design of Environmental Policy 2.6 Macroeconomic Questions: Environment and Growth 2.7 Benefit–Cost Analysis 2.8 International Issues 2.9 Globalization and the Environment 3. IMPLICATIONS OF ECONOMY AND THE ENVIRONMENT..............40 3.1 Natural Resource Economics 3.2 The Fundamental Balance 3.3 The Environment as an Economic and Social Asset 3.4 Basic Terminology 3.5 Emissions, Ambient Quality, and Damages 3.6 Types of Pollutants 4. SUPPLY AND DEMAND, COST AND BENEFIT ANALYSIS.............................................................59 4.1 Willingness to Pay 4.2 Aggregate Demand/Willingness to Pay 4.3 Benefits 4.4 Cost 4.5 Technology 4.6 The Equimarginal Principle 4.7 Marginal Cost and Supply 5. MARKETS, EXTERNALITIES, AND PUBLIC GOODS.........................77 5.1 Economic Efficiency 5.2 Efficiency and Equity 5.3 Markets 5.4 Markets and Social Efficiency 5.5 External Benefits 5.6 Public Goods 6. THE ECONOMICS OF ENVIRONMENTAL QUALITY ........................96 6.1 Pollution Control—A General Model 6.2 Pollution Damages 6.3 Abatement Costs 6.4 Enforcement Costs 6.5 The Equimarginal Principle Applied to Emission Reductions 7. FRAMEWORKS OF ANALYSIS...............................................................120 7.1 Impact Analysis 7.2 Cost-Effectiveness Analysis 7.3 Damage Assessment 7.4 Benefit–Cost Analysis 8. BENEFIT–COST ANALYSIS: BENEFITS...............................................143 8.1 The Damage Function: Physical Aspects 8.2 Measuring Damage Costs Directly 8.3 Willingness to Pay: Estimating Methods 8.4 Willingness to Pay: Revealed Preference Methods 8.5 Willingness to Pay: Stated Preference Methods 8.6 Problems in Benefit Estimation 9. BENEFIT–COST ANALYSIS: COSTS.....................................................166 9.1 The Cost Perspective: General Issues 9.2 The With/Without Principle 9.3 A Word on Social Costs 9.4 The Distribution of Costs 9.5 Concepts of Cost 9.6 Costs of Single Facilities 9.7 Costs of a Local Regulation 9.8 Costs of Regulating an Industry 9.9 Costs at the National Level 9.10 Future Costs and Technological Change 10. CRITERIA FOR EVALUATING ENVIRONMENTAL POLICIES.........185 10.1 Efficiency 10.2 Cost-Effectiveness 10.3 Fairness 10.4 Enforceability 10.5 Flexibility 10.6 Incentives for Technological Innovations 10.7 Materials Balance Issues
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