Environmental Econ Concept Quiz 3
Inclusive wealth as a metric of sustainable development
"Aggregate value of all capital assets, where the value of a unit of capital asset is measured by the contribution it makes to increasing current and future human wellbeing" For short: "non-declining human wellbeing"
Sustainable development
"Development that meets the needs of the present without compromising the ability of future generations to meet their own needs"
The Invisible Hand
"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." "by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention."
CPR Focus: Institutions What is an Institution?
"the regular, patterned behavior of people in a society and the ideas and values associated with these regularities" "Institutions are the rules of the game in a society; they are the humanly-devised constraints that shape human interaction" • Key features: - encompassing behaviors, beliefs, social norms, rules - Includes: family, corporation, unions, financial system, legal system, state, markets • Formal vs. informal institutions - Formal: constitutions, contracts, laws, property rights (binding) - Informal: norms, taboos, customs, traditions, codes of conduct (non binding)
Information Problems
- Given scarce resources, how can we best allocate resources to maximize utility? - How can we know the "right" amount of goods and services?
Incentive Problems
- How do we encourage socially-optimal production of goods and services?
Elinor Ostrom's 8 Principles Managing the Commons
1. Define clear group boundaries. 2. Fair distribution of benefits and costs. 3. Collective decision making. 4. Monitoring. 5. Graduated sanctions. 6. Fast and fair conflict resolution. 7 . Local autonomy. 8. Polycentric governance.
Efficient property rights
1. Individually owned - reduces need for coordination 2. Completely specified - rules for all contingencies 3. Secure and fully enforced - need an enforcement mechanism 4. Transferrable - allows for trade via market Property rights reduce uncertainty and create conditions for more efficient outcomes that help eliminate externalities
Six Distributional Effects of Environmental Policy (Don Fullerton)
1. Will the policy raise prices of goods and services? 2. If so, which goods and services? How do these relate to % income for different groups? 3. Does the policy affect the costs of production? Will the policy lead to changes in materials or technology? 4. How will the policy affect the labor market? Will it increase wages? Require job transitions? 5. How will revenues generated by the policy be distributed? 6. How does the policy affect the prices of capital stocks (land, property, resources)?
A market is efficient if the following conditions are met:
1.The market is competitive, meaning that firms and consumers seek to maximize profits/utility. 2.Firms and consumers both have full and complete information about the quality of the good or service being traded. 3.The market is complete, in the sense that all relevant costs and benefits are borne by the market participants (the firms and consumers involved in transactions).
UN Sustainable Development Goals
17 goals, examples: no poverty, zero hunger, good health and well being, quality education (check ppt)
Criteria air pollutants
6 of them: carbon monoxide, lead, nitrogen dioxide, ozone, particulate matter, and sulfur dioxide.
Efforts to Measure Inclusive Wealth
= Social Value of Manufactured Capital + Social Value of Human Capital + Social Value of Natural Capital Arrow et al. (2012) • Ambitious attempt to measure change in inclusive wealth for five countries (US, China, India, Brazil, Venezuela) from 1995 to 2000 • Exercise is informative • But... - Large data gaps, - Many important elements of capital are not included, & - Requires many assumptions that may not be accurate • Stark contrast between elegance of theory and limited ability to measure capital stocks and shadow values Opportunity in China • China is developing and pilot-testing a new measure of ecological performance: Gross Ecosystem Product (GEP) • The aim of GEP accounting: - Reveal the contribution of ecosystems to the economy and human well-being - Show the ecological connections among regions - Basis for compensation from beneficiaries to suppliers of ecosystem services - Serve as a performance metric for government officials • GEP will be reported alongside GDP
Stocks and flows
A stock variable is measured at one specific time, and represents a quantity existing at that point in time, which may have accumulated in the past. A flow variable is measured over an interval of time. Therefore a flow would be measured per unit of time
Weak vs. strong sustainability
Absurdly Strong Sustainability: Manufactured Capital and Natural Capital completely separate Strong Sustainability: Some overlap Weak Sustainability: Complete overlap see ppt for definitions, consequences, etc.
Pareto efficiency
At least one person is better off, and nobody is worse off.
Consumer versus citizen preferences in contingent valuation: evidence on the role of question framing
Consider the pros and cons of the alternatives solely from the point of view of your own welfare. 'Would you personally be willing to pay $X yearly as an extra tax to safeguard the sustained preservation of conservation areas in Ilomantsi? vs Consider the pros and cons of the alternatives as a citizen from the point of view of your own welfare as well as the whole society. If the sustained preservation of existing conservation areas in Ilomantsi would cause you an extra yearly tax of $X, would you vote for preservation? schemes, too.
Nudging pro-environmental behavior (interventions)
Contextual: -Commitments -Defaults -Messenger -Norms -Priming -Salience Traditional: -Education -Financial see ppt for definitions
If we assume resources are scarce, what criteria should be used to evaluate alternatives?
Efficiency: maximize net benefits Equity: prioritize fairness & distribution -"Through disproportionate emissions of greenhouse gases alone, the rich group may have imposed climate damages on the poor group greater than the latter's current foreign debt." -Where will future damages be greatest? -What happens when we convert these damages to $? Strong preference for polluters to pay -Preference for allocation of costs in proportion to ability to pay -"Public preferences do not support making efficiency the only goal of policy, at the expense of equity"
EU Sustainable Development Indicators
Eurostat, European Commission - 10 major categories - Headline indicators in categories - 100 indicators total check ppt for chart
Semi-structured interviews
Experiences -> Interest -> Capabilities -> Experiences -> etc.
Collective Action Problems and Free-riding
Free-riding Problem: "...some individuals don't contribute at all to a public good, instead relying only on the contributions of others - becomes more acute as the size of the relevant public increases."
Characteristics that promote effective Common Pool Resource (CPR) management
Group Characteristics • Well-defined group boundaries • Shared interests and values • Trust, reciprocity, reputation • Existing mechanisms of communication and shared decision-making • Social norms Situation Characteristics • Single resource with clearly defined boundaries • Understanding of resource dynamics • Low monitoring costs • Existing sanctioning mechanisms
State solutions problems that the market solves
Incentives Information problems
The "Standard Economic Model" assumes....
Individuals are the best judges of what is in their own best interest and that their preferences are valid regardless of how they are viewed by others. Individuals are rational, self-interested and have well-defined and consistent preferences. Individuals seek to maximize their own utility. Goods are commensurable. Economically efficient policies are those that maximize the aggregate net benefits of individuals in society.
Institutional vs. Neoclassical economics
Institutional: • Evolution of institutional structures • Focus on collective • Institutions as relevant and independent actors • Evolutionary • Empirical observation • Role of social, political context Neoclassical: • Allocation of scarce resources • Focus on individual • Methodological individualism • Mechanistic • Reductionist • Role of markets and transactions New Institutional Economics: extend range of neoclassical theory via institutional factors - property rights, transaction costs, contract design
Methodologies of institutional economics:
Interdisciplinary: including economics, law, organization theory, political science, psychology, sociology, and anthropology. • Mathematical and game-theoretic models • Social network analysis • Agent-based modeling • Lab experiments • Randomized experiments • Case studies • Document review • Surveys • Interviews
Inclusive wealth
Key components: • Not just market values: includes a broader set of constituents of human well-being and wealth (must be "inclusive") - Value of anything that contributes to quality of life: natural capital, social capital, manufactured capital, human capital, financial capital • Inclusive wealth builds from aggregate ECONOMIC GROWTH MODELS - relationships between stocks and flows
Economic efficiency
Maximize aggregate net benefits
Why do economists prefer efficiency?
Maximizes net benefits Represents optimal use of scarce resources Objective basis for policy evaluation Can be estimated empirically Prioritizing equity up front leads to inefficiencies - there is less overall wealth Prioritize efficiency first - make the pie big. Then slice it.
moral limits of markets
Michael Sandel where do markets belong and where do they not?
Cost-Benefit Analysis vs. Cost Effectiveness Analysis
Net benefit vs (cost/unit outcome/benefit)
Loss aversion
Part of Kahneman & Tversky's "Prospect Theory" The strong tendency to regard losses as considerably more important than gains of comparable magnitude—and, with this, a tendency to take steps (including risky steps) to avoid possible loss.
Applications of behavioral economics
Policy or program design Valuation
What are the pros and cons of a multiple indicators approach to assessing sustainability?
Pros: - Comprehensive Cons: - Metrics can be arbitrary and subjective - Not future oriented - Can't be aggregated to a single number or easily monetized - Difficult to interpret or critique
Carbon Market pros and cons
Pros: -you know what levels you'll end up with Cons: -creates volatile price market for alternative technologies, discourages adoption (taxes uncertain) -permits are issued for free, don't generate revenue like taxes -CREATES CONCEPT THAT THERE IS A RIGHT TO POLLUTE - MORALLY WRONG
Property Rights
Reduce uncertainty and create conditions for more efficient outcomes that help eliminate externalities Can either be assigned to the polluters or to bystanders Corrective taxes on pollution are based on the assumption that bystanders have the (property) right to clean air and this (property) right is violated by polluters. In order to work, property rights need to be: well-defined, enforceable, and tradeable
Methods for gathering evidence for cultural ecosystem services and the benefits they provide to human well-being:
Semi-structured interviews Participatory mapping Choice experiment Travel cost Contingent Valuation
Sociological-ecological systems approach
Social-ecological systems are based on the concept that humans are a part of — not separate from — nature. This concept, which holds that the delineation between social systems and natural systems is arbitrary and artificial, was first put forth by Berkes and Folke, and its theory was further developed by Berkes et al.
Valuation as a process - w/ behavioral insights relevant at each step
Step 1: Diagnose the decision context (who - identify the relevant population, what - identify values at stake, and why - anticipate how value outputs will be used) Step 2: Select the value-articulating process and methodology Step 3: Interpret and communicate (Keeler 2020 Annual Reviews in Environment and Resource Economics)
Supply & Demand
Supply (cost) curve - as prices rise, more sellers enter market and Q supplied increases Demand (value) curve - as prices fall, more buyers enter market and Q demanded increases
Status quo bias
The tendency to favor the "here and now" and to reject potential change
Semi-structured interview
There is a list of questions that have been worked out in advance but interviewers are also free to ask follow up questions when they feel it is appropriate. or... This kind of interview uses both closed and open-ended questions.
Kaldor-Hicks efficiency
Those made better off could (in theory) compensate those made worse off.
Homo economicus
a term used to describe a person who would make rational decisions in ways predicted by standard economic theories
Behavioral Economics
an approach to the study of consumer behavior that emphasizes psychological limitations and complications that potentially interfere with the assumed rational decision making of SEM
Mental accounting
categorizing spending and saving decisions into "accounts" mentally designated for specific consumption transactions, goals, or situations some dollars are worth more than others in different scenarios
Cap-and-trade
costs less than tax systems (unless tax revenues are recycled back into investments) both tax and cap-and-trade are carbon pricing models still has government information problem
A perfectly competitive market is one in which
economic forces operate unimpeded. - Many players, identical products - Low/no barriers to entry - No advantage for existing firms - Full and complete information. - Firms are profit maximizers.
travel costs
estimate of destination value
common pool resources
goods that are available to everyone, such as open ocean fisheries; it is difficult to exclude anyone from using the common pool, but one user's consumption reduces the amount available for others
Liability assignment
hold polluters accountable for the proper management and disposal of their waste or emissions, but also for cleanup and remediation costs.
choice experiments
present a series of alternative resource or use options, each of which are defined by various attributes including price
Capped Allowance Systems
sets a maximum allowable cap on total emissions. Once allocated, firms must either reduce their emissions directly, or they can purchase allowances from other firms who have reduced below their required level.
Coase theorem
the argument of economist Ronald Coase that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities
participatory mapping
the creation of maps by local communities - often with the involvement of supporting organizations including governments, NGOs or other actors engaged in development or land-related planning
Libertarian paternalism
the idea that it is both possible and legitimate for private and public institutions to affect behavior while also respecting freedom of choice, as well as the implementation of that idea. - Richard Thaler "Don't trust yourself too much. Overconfidence is the enemy of good thinking." - Danny Kahneman
Endowment effect
the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it
Prospect Theory
theory that suggests that a decision, or argument, can be framed in different ways and that the framing affects risk assessments consumers make the theory that people choose to take on risk when evaluating potential losses and avoid risks when evaluating potential gains
contingent valuation
uses surveys to determine how much people are willing to pay to protect or restore a resource estimating the value of an ecosystem service by surveying people's willingness to pay
5 P's of policy solutions
• (P)rescriptive regulation - Command and control • (P)roperty rights - Privatize resources - clear ownership - (P)rescriptive + (P)roperty rights = Tradable permits e.g. Cap and trade • Financial (P)enalties - Taxes • Financial (P)ayments - Subsidies • (P)ersuasion - Information-based approaches
What is a market?
• A DECENTRALIZED collection of buyers and sellers whose interactions determine the allocation of a good or set of goods through a TWO-WAY EXCHANGE. • Markets are institutions • Driven by self-interest and competition • Information in the form of price signals determined by supply and demand • Prices provide signals that incentivize consumers to allocate resources more efficiently
Measuring IW: The ideal world
• Assuming we are in the world of economic textbooks (complete and competitive markets, full information, no externalities...) • Market prices reflect the contribution of capital stocks to present and future wellbeing - Value of a capital asset is the present value of the flow of benefits created by the asset
Hybrid Approaches
• Combine aspects of command-and-control and market-based incentive policies. • Combine the certainty associated with a standard with the flexibility of allowing firms to pursue the least costly abatement method. -Capped Allowance Systems -Liability assignment
Not just Equity vs. Efficiency... Other key considerations for policy evaluation:
• Desirability - do people want it? • Viability - is the case for cause and effect sound? • Achievability- is it feasible? Politically?
Market-Based Instruments
• Either influence PRICES or limit QUANTITIES • PRICES - Pigouvian tax on pollution - Subsidies - paying firms for abatement • QUANTITIES - Allowance trading (cap & trade) - Regulators set cap, markets allocate the allowances Market instruments work by getting prices right, reducing "free riding", establishing clear property rights. Markets "solve" two problems: • Information problems - Individual preferences reveal utility - Doesn't require data collection • Incentive problems - Prices provide a signal that changes behavior
Gathering evidence for cultural ecosystem services and the benefits they provide to human well-being - implications for policy and management
• Elicit diverse perspectives. You don't know what you don't know. • Think broadly about features, values, qualities, attributes of importance. • Consider history and context - social, environmental, infrastructure • Recognize that values are dynamic and co-produced • Seek win-wins where feasible. Build broader constituencies of support.
Voluntary Initiatives
• Encourage polluting entities to go beyond what is mandated by existing regulation. • Or improve environmental quality in areas that policymakers expect may be regulated in the future but are currently not regulated (e.g. non-point source pollution)
Measuring IW requires:
• Estimate utility in present and future time periods - Specify all potential future conditions - Specify probabilities of each potential future - Estimate value under each potential future - Find expected value: sum over all potential future conditions of the value times the probability for each potential future
Desirable properties of a sustainable development metric
• Forward looking: must address FUTURE wellbeing • Coherence and completeness • Operational: Metric must be MEASURABLE with existing or potentially collectable data Two types of Metrics: Sustainability Indicators Inclusive Wealth
Measuring IW: The real world case
• Incomplete markets: do not trade most forms of environmental quality or ecosystem processes - Market prices do not exist for many forms of capital (natural capital, human capital, social capital) • Imperfect competition, imperfect information and externalities (market failure)
The BIG Questions of Sustainable Development & Inclusive Wealth
• Is the global social-ecological system on a trajectory that can maintain or enhance human well-being over the long term? • Will we leave the world a better place for future generations? • Do particular societal decisions increase or decrease the probability of maintaining/enhancing HUMAN WELL-BEING?
Types of capital stocks
• Manufactured capital: durable goods, infrastructure, buildings, machinery • Natural capital: ecosystem states or processes, biological stocks, natural resources • Human capital: knowledge and experience • Social capital: institutions and relationships (formal and informal)
Critiques and challenges (of sustainable development metrics?)
• Measurement • Substitutes (Weak vs. strong sustainability) • Are prices reliable proxies for wellbeing • How to deal with equity? • Uncertainty • Aggregation • Discounting
Measuring IW: Additional real world challenges
• Non-market valuation typically measures values under current conditions • Shadow values should represent the contribution of the stock to present AND FUTURE well-being - Requires understanding of range of potential future conditions (environmental, cultural, technology...) - Requires measuring value under potentially different conditions
Heal: Policy interventions to benefit biodiversity
• Protected areas • Ecotourism • Green certifications • Endangered species act • Payments for ecosystem services
Essential components of economic growth model
• Relationship between capital stocks (K) and flow income (Y) • Income: consumed (C) or saved and invested (S) - Consumption generates well-being - Investment generates capital accumulation that increases future income • Tradeoff: current consumption (well-being) vs. future consumption (well-being) see figures in ppt/google doc (elephant trunk)
Problems with Privatization of CPR
• Requires assignment and enforcement of property rights and monitoring of actions of users. • How does one assign property rights to flowing water, swimming fish, or game in the forest? • Transferring property rights to a single owner introduces the "holdout problem" where the single owner applies monopoly power (can also occur with even a few actors).
Information-based Approaches
• Right to know laws - Toxics release inventory - www.scorecard.org • Eco-labeling and certification programs - Shade grown coffee • Behavioral "nudges"
Command and control regulations (state/regulatory solutions)
• Technology or design standard: mandates specific technologies or production processes that polluters must use to meet a standard • Performance-based standard: requires that polluters meet a standard, but allows the polluters to choose any available method to meet that standard • Ban or phase out: Bans use or production of a particular product or pollutant, eg. chlorofluorocarbons (CFCs)
The selection of the most appropriate approach depends on a wide variety of factors, including:
• The type of market failure being addressed; • The specific nature of the environmental problem; • The degree of uncertainty surrounding costs and benefits; • Concerns regarding market competitiveness; • Monitoring and enforcement issues; • Potential for economy-wide distortions; • Equity considerations; and • The ultimate goals of policy makers.
Problems with Centralized CPR Solutions
• They require a non-corrupt central authority. • Significant monitoring and enforcement costs. • "Pigovian solution" requires central knowledge of resource production and payoff functions, as well as observability of activities of each individual. • Legal limits requires knowledge of production function, observability of activities, and likely even more enforcement with associated costs.
Interdisciplinary tools are necessary Mixed methods from different disciplines for gathering evidence for cultural ecosystem services and the benefits they provide to human well-being:
•Social science: Qualitative (deliberation, participation, narratives, ethnography) and quantitative (measuring, modelling). •Arts & humanities: interpretative, exploratory, performative •Environmental and economic data and modeling