Chapter 1 Econ 2J03
Environmental economics is the study of environmental issues.
It involves various decision-makers: consumers, firms, non-profit organizations,
It uses analytical ideas of economics, which are mostly microeconomics.
In this subject, we often use the key concepts of scarcity, opportunity costs, trade-offs,
marginal benefits, marginal costs, taxes, efficiency and equity.
Economic efficiency deals with maximization or better-off outcomes.
For example, value of A is $100, B is $50 and C is $10.
The value may be difficult to observe, yet given the stated values, we can say that the
outcome A satisfies efficiency criteria.
Equity deals just and fair outcomes. It is normative.
Horizontal equity: similar treatment of people in similar economic circumstances.
Vertical equity: proportionate treatment of people in various economic circumstances.
For example: fixed income tax-rate.
• Is polluting a rational behavior? Is polluting an immoral act?
• Incentives mechanism
• Externalities and property rights
• Free market system (capitalism), carbon-pricing, intervention
• Present versus future
Externalities and Property rights
Socially efficient level of pollution
Incentives to Households
Incentives to Businesses
Incentives to Pollution-Control Industry See Figure 1-1 (Page 11 Textbook) to see the rising trend of world greenhouse gas
The main greenhouse gases (GHGs), their approximate proportionate contribution to
global warming, and their major sources are shown in Figure 1-2 (Page 12 Textbook)
Main contributor is the use of fossil fuel
Total GHGs = (Population)x(GDP/Population)x(Energy/GDP)x(GHGs/Energy)
% increase in GHGs = Percentage increase in Population + % increase in per capita GDP
+ % increase in energy inefficiency + % increase in GHGs per unit
of energy use
Sustainability of our Environment and Economy
Trade-offs and Sustainability
Draw the following graphs and show optimal combination of goods and environmental
• Production possibility frontier (PPF) with goods on the vertical axis and
environmental quality on the horizontal axis
• Community indifference (CIC) curve with those two variables
• Optimality: tangency of PPF with CIC
Static: at a given time
Assumptions for a given PPF
Increasing opportunity costs
Recession and inefficiency puts the economy inside a given PPF.
Can there be zero opportunity costs?
See the graph below.
Point A shows recession.
Movement from A to B has zero opportunity costs The table shows PPF of Canada and PPC of Bangladesh.
Goods (G) Environmental Quality Goods (G) Environmental Quality
1000 0 140 0
900 10 120 1
700 20 90 2
400 30 50 3
0 40 0 4
Opportunity costs in Canada
A to B: Opportunity cost of one unit of EQ is 10 units of G.
B to C: Opportunity cost of one unit of EQ is 20 units of G.
C to D: Opportunity cost of one unit of EQ is 30 units of G.
D to E: Opportunity cost of one unit of EQ is 40 units of G.
Opportunity costs are increasing as EQ is increased.
Opportunity costs in Bangladesh
A to B: Opportunity cost of one unit of EQ is 20 units of G.
B to C: Opportunity cost of one unit of EQ is 30 units of G.
C to D: Opportunity cost of one unit of EQ is 40 units of G.
D to E: Opportunity cost of one unit of EQ