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0.1 Environmental Economics

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von linnea H.

ECONOMIC GROWTH

At the initial period, two countries (Country A & Country B) have identical GDPs of 20.000 EUR and identical natural resource stocks of 10.000 tons. They decide to invest in different technologies:

Country A chooses a technology leading to a yearly GDP growth rate of 2%, and a yearly use of natural resources represented by a negative growth rate of 0.2% p.a. related to the resource stock. Country B decides to extract natural resources instead of investing in a new technology. As a result, GDP of Country B grows initially at 10% per year, and at 0% after 5 years. Country B has a resource use rate that leads to a negative growth rate of 20% per year for the resource stock.


  • After 12 years, which country has the higher GDP?

  • Based on the information provided, do you think the developments of the countries are sustainable? Define the concept of sustainability and defend your argument whether their growth is sustainable using concepts discussed in class.




Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Country A has a more sustainable development than country B. After 12 years, country A still has many resources, while country B has almost used up all resources.

Investing in new technologies helps the country's sustainability. Technology can help to use resources more efficiently and waste less, so that more growth can be generated with less resources.

The GDP of country B does not grow so much, but it is sustainable. The GDP of country B grows very quickly at the beginning and then stops growing, which is not sustainable ⟶ future generations are going to have a problem.


Nachhaltige Entwicklung ist eine Entwicklung, die die Bedürfnisse der Gegenwart befriedigt, ohne die Fähigkeit künftiger Generationen zu gefährden, ihre eigenen Bedürfnisse zu befriedigen.

Land A hat eine nachhaltigere Entwicklung als Land B. Nach 12 Jahren verfügt Land A noch über viele Ressourcen, während Land B fast alle Ressourcen aufgebraucht hat.

Investitionen in neue Technologien tragen zur Nachhaltigkeit des Landes bei. Technologie kann helfen, Ressourcen effizienter zu nutzen und weniger zu verschwenden, so dass mehr Wachstum mit weniger Ressourcen erzeugt werden kann.

Das BIP von Land B wächst nicht so stark, aber es ist nachhaltig. Das BIP von Land B wächst am Anfang sehr schnell und hört dann auf zu wachsen, was nicht nachhaltig ist ⟶ zukünftige Generationen werden ein Problem haben.

ECONOMIC GROWTH

At the initial period, two countries (Country A & Country B) have identical GDPs of 20.000 EUR and identical natural resource stocks of 10.000 tons. They decide to invest in different technologies:

Country A chooses a technology leading to a yearly GDP growth rate of 2%, and a yearly use of natural resources represented by a negative growth rate of 0.2% p.a. related to the resource stock. Country B decides to extract natural resources instead of investing in a new technology. As a result, GDP of Country B grows initially at 10% per year, and at 0% after 5 years. Country B has a resource use rate that leads to a negative growth rate of 20% per year for the resource stock.


  • After 12 years, which country has the highest natural resource stock?

  • Based on the information provided, do you think the developments of the countries are sustainable? Define the concept of sustainability and defend your argument whether their growth is sustainable using concepts discussed in class.



Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Country A has a more sustainable development than country B. After 12 years, country A still has many resources, while country B has almost used up all resources.

Investing in new technologies helps the country's sustainability. Technology can help to use resources more efficiently and waste less, so that more growth can be generated with less resources.

The GDP of country B does not grow so much, but it is sustainable. The GDP of country B grows very quickly at the beginning and then stops growing, which is not sustainable ⟶ future generations are going to have a problem.


Nachhaltige Entwicklung ist eine Entwicklung, die die Bedürfnisse der Gegenwart befriedigt, ohne die Fähigkeit künftiger Generationen zu gefährden, ihre eigenen Bedürfnisse zu befriedigen.

Land A hat eine nachhaltigere Entwicklung als Land B. Nach 12 Jahren verfügt Land A noch über viele Ressourcen, während Land B fast alle Ressourcen aufgebraucht hat.

Investitionen in neue Technologien tragen zur Nachhaltigkeit des Landes bei. Technologie kann helfen, Ressourcen effizienter zu nutzen und weniger zu verschwenden, so dass mehr Wachstum mit weniger Ressourcen erzeugt werden kann.

Das BIP von Land B wächst nicht so stark, aber es ist nachhaltig. Das BIP von Land B wächst am Anfang sehr schnell und hört dann auf zu wachsen, was nicht nachhaltig ist ⟶ zukünftige Generationen werden ein Problem haben.

ECONOMIC GROWTH

The graphs below represent the wealth of two different European countries: Norway and Romania. You can see Net National Income (taken from Eurostat) and Adjusted Net national income (taken from the World Bank) for these countries. Here is an explanation of these indicators:


"Net national income is defined as [total value of all goods and services produced by a country] minus the depreciation of fixed capital assets (e.g. buildings, machinery)" Source: OECD Data


"Adjusted net national income is gross national income minus consumption of fixed capital and natural resources depletion." Natural resources depletion includes net forest depletion, energy depletion, and mineral depletion. Source: World Bank

Elaborate on the wealth of Norway and Romania and how it changed over time. Compare the two countries. In your opinion, discuss how one should measure wealth in a country.


Compared to Romania, Norway has shown higher economic growth in both indicators in recent years.

Norway initially had a net national income that was below the adjusted net national income, which means that the country consumed and extracted less than it produced. This gap widened between 2007 and 2014 in particular. As you want to operate more sustainably and not consume more than you produce, the adjusted NNE falls to the level of the ANE, which means that you consume and extract more.

In Romania, the opposite is the case. Throughout the period, the NNI has been above the ANE, meaning that they are consuming and using more than they are producing, with the gap widening since 2008. Romania is becoming less sustainable.


ANE better indicator than NNE


Measuring prosperity by goods and services produced is good for getting a quick overview of a country's prosperity. It is also an indicator of a country's life expectancy.

However, it does not take into account factors such as inequality, wealth distribution and general welfare of the country, which are also an important part of a country's prosperity and well-being.

To determine prosperity, you need to look at more than one indicator to get an overall picture.


Im Vergleich zu Rumänien wies Norwegen in den letzten Jahren bei beiden Indikatoren ein höheres Wirtschaftswachstum auf.

Norwegen hatte zu Beginn ein Nettonationaleinkommen, das unter dem adjustierten Nettonationaleinkommen lag, was bedeutet, dass das Land weniger verbrauchte und abbaute, als es produzierte. Vor allem zwischen 2007 und 2014 wurde diese Lücke immer größer. Da man nachhaltiger wirtschaften und nicht mehr verbrauchen will, als man produziert, sinkt das bereinigte NNE auf das Niveau des NNE, was bedeutet, dass man mehr verbraucht und abbaut.

In Rumänien ist das Gegenteil der Fall. Während des gesamten Zeitraums lag der NNI über dem bereinigten NNI, was bedeutet, dass sie mehr verbrauchen und verbrauchen als sie produzieren, wobei sich der Abstand seit 2008 vergrößert hat. Rumänien wird immer weniger nachhaltig.

Die Messung des Wohlstands anhand der produzierten Waren und Dienstleistungen ist gut geeignet, um einen schnellen Überblick über den Wohlstand eines Landes zu erhalten. Es ist auch ein Indikator für die Lebenserwartung eines Landes.

Sie berücksichtigt jedoch keine Faktoren wie Ungleichheit, Wohlstandsverteilung und allgemeine Wohlfahrt des Landes, die ebenfalls ein wichtiger Bestandteil des Wohlstands und des Wohlbefindens eines Landes sind.

Um den Wohlstand zu bestimmen, muss man mehr als einen Indikator betrachten, um ein Gesamtbild zu erhalten.

OPTIMAL LEVEL OF FISHING

Let us consider the management options for fisheries in an industrialized country. Assumte than a fishery sector has a demand for fish (benefits) and a cost of fishing (costs). Their costs can be represented by:


And their benefits are represented by:

Where F represents the fish harvested by the fishery sector.


2.1. How much fish will the sector decide to harvest from the ocean?


2.2 Suppose that a neighbouring industry is negatively affected if the fisheries sector decides to harvest fish at the optimal (profit maximizing) level. Their damage function can be described as:

In other words, the costs of fish harvesting do not represent all the costs for society. In this context, fishing represents which market failure?


2.3. Calculate the socially optimal level of fishing.


2.4. After negotiating, an international convention deems that it is the neighbouring industry that has the property rights to a stable fish stock with zero harvest. Therefore, the fishing industry has to compensate the neighbouring industry for their losses if they decide to harvest at the level that maximizes their profit. Determine the minimum compensation demanded by the neighbouring industry.


2.5. What is the maximum compensation the fishing industry would be willing to pay to harvest at the level that maximizes their individual profit as compared to no harvest at all?


2.6. Compare your answers in 2.4 and 2.5. Are the industries going to agree on a level of compensation? If yes, what would you predict this level to be? If no, what could be solutions to this problem?



2.1

2.2

Because fishing has a negative impact on the neighboring industrial sector, it is an external effect that leads to market failure. Social costs are not taken into account in the private optimum.


2.3.



2.4.


2.5.


2.6.

Because the compensation the fishery is willing to pay is higher than the minimum compensation demanded by the neighboring industry, they will come to an agreement

Agreement between 12.100 Euro and 60.500 Euro ⟶ exact level depends on the trade-off



POLICY INSTRUMENTS

Consider the following newspaper excerpt:


"A group of 18 California children - ranging in ages from 8 to 17 - has filed a new constitutional climate case in federal court against the US Environmental Protection Agency, alleging it has harmed children's health and welfare over decades.


"The case, Genesis B. v. United States Environmental Protection Agency, alleges the EPA "intentionally allows" planet warming pollution to come from the sources it regulates, such as vehicles and heavy-duty trucks, power plants, and oil and gas wells. It follows the first constitutional climate case in the US, which youth plaintiffs successfully tried in Montana earlier this year.


"The case further alleges the agency allows this pollution "despite knowing the harm it causes to children's health and welfare." The case was filed Sunday night in US District Court in the Central District of California. (...)


"The foundation of this youth climate case goes far beyond the Biden administration. The plaintiffs allege that since the EPA was created five decades ago, it has let the US become one of the world's biggest emitters of planet-warming pollution, despite knowing this pollution would harm children.


"In statements, youth plaintiffs talked about how climate-fuelled wildfires, extreme heat and floods have directly impacted their lives. (...)"


To which kind of environmental policy instrument does this story connect? Argue why that is the case.

Liability is required! (Children demand liability)

It connects to command and control instruments & incentives. The children argee that the EPA did not have strict enough regulations, such as emission limits or a cop on resource use, that would have slowed down the pollution and not caused the harm to the childrens healtn and welbeing. Also with incentive the EPA could have regulated the pollution by putting taxes on emission or giviry subsidies for abating pollution.

They didn't take enough precautionamy action.

A chemical firm is located next to a river. The profit function of the chemical firm depends on the number of chemicals produced (x):

The production of x causes water pollution, which influences a fishery that is located 5 km downstream. The profit function of the fishery depends on the fish harvest (y) and the number of chemicals (x):


a. What will be the maximum profit for the chemical firm? And, given the pollution produced by the chemical firm, what will be the maximum profit for the fishery?


b. Can the profit-maximizing production of the chemical firm and the fishery be characterized Pareto efficient? Explain


c. What are the implications of the Coase theorem in this case?


d. Suppose that the firms decide to co-operate. This means that they now maximize their joint profits. What will now be the production of the chemical firm?


e. The owner of the fishery offers the chemical firm e100 if the chemical firm would produce the social optimal amount. Is this offer attractive for the chemical firm?


f. What would be the profit of the fishery if the chemical firm

would accept the offer? Would the “deal” thus be beneficial for

both?





b. To determine wether the profit maximizing production levels of the chemical firm and the fishery are Pareto efficient we need to analyze wether there is a way to reallocate production levels such that at least on firm is better off without making the firm worse off.

Because the chemical firm produces x=12 in its private maximization which is higher than the socially optimal level x=4 the outcome is not Pareto efficient.

198 / 5.000

If the chemical company reduces its production, the fishermen's production can increase. The chemical company could be compensated for its loss. This would be a Pareto improvement.

the original profit maximizing production level of x=12,y=50 are not Pareto efficient, because there exists a allocation x=4,y=50 with appropriate transfer where both firms can be made better off.


c. ???





Beauty and destruction: The Amazon rainforest - in pictures

The Amazon rainforest is the world’s largest, but in the last 40 years at least 20 % of it has been destroyed. The Amazon basin covers nine countries in South America, with 60 % of it in Brazil, and for a decade local photographer Rodrigo Baleia has documented the beauty and destruction of the region from above


Assume an industrialized country negotiates with a developing country regarding the protection of rainforest

The utility of the preserved rainforest for the industrialized country is:

*where Q denotes the area of rainforest

The rainforest is an economic resource to the developing country and the preservation is associated with opportunity costs


a. Calculate the marginal utility and marginal costs of rainforest protection

b. Calculate optimal area of rainforest

c. The developing country holds the property rights of the rainforest

  1. What are the opportunity costs for the developing country if both countries agree on the optimal area of rainforest

  2. What is the utility gain for the developed country compared to the situation in which the rainforest is depleted

  3. What is the excess between utility gain of the industrialized country and the opportunity costs of the developing country?

  4. Assume the industrialized country aims for the optimal area and reimburses the developing country for its opportunity costs and pays a transfer of 50% of the net welfare gain ! What is the net welfare of both countries?

d. Assume that more than one industrialized country gains utility from the preservation of rainforest. The property rights are held by the developing country. Discuss the associated problems of the utilization of the Coase-Theorem


d. If more than one industrialized country is involved, the transaction costs increase.

Also, the 'freerider' problem arises

Author

linnea H.

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