Environmental Economics Exam
Question One
The laws of thermodynamics
The increasing need for environmental consideration and conservation has been a subject in debates and has received equally varied interpretations from many an environmentalist. Of particular significance is the importance of the laws of thermodynamics in environmental economics, environmental policy planning, and policy design. In this era of increased environmental degradation characterized by severe human activities and implications to the environment, it becomes crucial to apply the principles of thermodynamics in studying the different interactions between natural systems and the interaction of technology in the environment. The First and Second thermodynamic laws formed the basis for necessitating the need for ‘economics’ in environmental conservation. The First Law posits that no energy is created or destroyed other than the change in form. Second Law stresses the need of studying the amount of energy used in the energy conversation process (Burness, Cummings, Morris, and Paik 1980). The Third Law elaborates on the other two laws while the Zeroth Law is essential in enabling environmentalists and policy makers to ascertain the criteria for achieving equilibrium in the other laws. Simply put, the laws of thermodynamics explain the necessities of heat and work as far as environmental issues are concerned.
Practical examples
The First thermodynamic law refers to the conservation of energy and mass while the Second Law is known as the Entropy Law. According to the First Law, it is possible to transform energy into different forms even though it can neither be created not destroyed. As such, it implies that the energy within the ecosystem might vary but the total amount remains constant. For instance, burning firewood in an insulated room for purposes of providing heat entails a process whereby the chemical energy in the burnt wood is transformed to a higher room temperature representing the same volume of wood that had been burnt up. Equally, the second law describes a process of converting heat into work, and involves the loss of heat. As such, a state of internal equilibrium in an isolated is achieved when it reaches the highest entropy levels. However, the process of transforming heat into work cannot be achieved at a 100% level of accuracy. The types of energy associated with the second law include kinetic energy, physical energy, potential field energy, and chemical energy.
The potential of thermodynamics is an essential measure in measuring the environmental capacity to perform its work. For instance, thermodynamics as a science enables environmentalists to determine the least thermodynamic potential expenditure that is requisite to facilitate the realization of a particular change in heat or energy. This is attributed to the fact that nearly all environmental processes need to utilize some element of thermodynamic potential at some stage in their processes. As such, it becomes easier for environmentalists to obtain a comparison of different environmental processes and identify those that can deliver the highest levels of thermodynamic efficiencies. In the event, the change of thermodynamic potential in each process will assist in the measuring the amounts of energy exchange in the entropy system (Burness, Cummings, R. Morris, G. & Paik, 1980).
Speaking of policy formulation, thermodynamics enables environmentalists to understand that the use of energy resources does not lead to the loss of energy but it rather leads to change in the form of energy. Recycling policies, pollution control mechanisms, and pollution control devices are all built from the thermodynamic standpoint provided they can be able to relate the use of resources and the amount of energy used. Lastly, economic policies regarding resource utilization are also developed from the study of resource inputs to product outputs, recycling, and gross residuals and calculation of the amount of heat or energy used in such processes requires the application of thermodynamic laws.
Transjurisdictionality
The deteriorating levels of environmental conservation and increased cases of pollution within the Australian drainage system can be attributed to less strict administrative capabilities or lack of cooperation among the concerned environmental forces. Of significant importance are reduced efficacies and low efficiencies in transjurisdictional pollution and management forces. Coupled with the increased conflicts between human beings and their environment, economic development has led to damages within the environment. A clear example can be evidenced from the story of the Cubbie Station whereby natural resource management and rogue elements of farming and fishing activities has led to increased resources being damaged in Queensland down to the Murray Darling Basin and some regions of New South Wales (The rise and rise of Cubbie Basin).
Lack of proper interpretation of governmental laws, considerable favors from the government, and willingness among authorities to relax laws has made projects such as the Cubbie Station to frustrate any existing environmental regulation leading to endless court battles that have done nothing other than more harm to the affected communities. Another vital region in terms of environmental and economic importance is the Murray-Darling Basin, which supplies Australia with the largest food volume and water supply. The Murray-Darling Basin spans across different states such as Queensland, New South Wales, South Australia, Australian Capital Territory, and Victoria. Given its significance in the economy and the environment, the Murray-Darling Basin is subject to the management of 5 different state and territory governments as mandated by the constitution (Pigram, 2007).
The increased jurisdictions from different states has led to varied water and resource management authorities, poor water monitoring and grading system, low standards and procedures of water management, and unmonitored discharge of polluting materials into the water system. Increased management and administrative boundaries to water resources has led to majority of hydrological boundaries being ignored at the expense of realizing economic obligations such as the supply of water for commercial or agricultural purposes. In case of the Murray-Darling Basin, the failure of different jurisdictions such as the provisions of the Murray-Darling Basin Agreement and the Murray-Darling Basin Initiative led to the creation of the Murray-Darling Basin Authority to outline the Jurisdictions and Plans that must be adopted to realize a sustainable ecological health of the Basin (Pigram, 2007).
Transjurisdictionality is essential in providing legislations, institutional arrangements, regulations, and operational directives that are necessary for the management of river basins within the Australian drainage systems. It provides a framework with which management or authoritative councils can be developed in collaboration with other environmental bodies. In the event, not only would an efficient water monitoring body would be formed but also a unified approach of addressing drainage issues.
Bounded Rationality
According to the bounded rationality model, the ability of individuals to make the right decisions is only limited to the ability of information contained in their minds and the little span of time with which they can use to make the right decisions (Kahneman, 2003). In environmental economics, the bounded rationality model can be applied in different perspectives provided it supports the idea of optimizing resources. In making decisions related to the environment, environmental economists consider all the relevant or useful information relating to the problem under review. In efforts aimed at coping up with environmental complexities, environmental economists develop criteria, techniques, habits, and standards that will be essential in providing solutions to such problems (Kahneman, 2003). A good example is the allocation of property rights in the management of resources. For instance, economic agents can stipulate certain property rights to provide guidance regarding the utilization of natural resources. Polluters might be allocated property rights to emit pollution to an agreed level from where they will be accountable for extra payment.
Majority of insights to aspects in environmental economics are developed based on the rational behavior model of constrained maximization of profits in economics. Environmental and ecological economists use bounded rationality to analyze different environmental and policy implications to alternative theories within the environment. Bounded rationality can be applied to the environment in a number of ways that include developing and implementing environmental policies based on price-based policies rather than using normal standard policy theories. Second, it enables environmental policies to allocate more priority to policies that lead to the realization of long-term environmental sustainability. It can enable environmentalists to make a tradeoff between essential environmental and economic implications with regard to the process of producing goods. The availability of increased options can enable environmental economists to determine ways of negotiating matters regarding to environmental conservation, making choices on important policy issues within the environment, and measuring the value of the environment in terms of monetary value.
Question Two
Property Rights in Environmental Management
Undeniably, the process of managing environmental resources is quite a complex task. The fact that Australia is blessed with abundant resources has led many individuals and policy makers to perceive that uncontrolled exploitation of environmental resources will lead to scarcity and degraded resources. Equally difficult is the process of determining individuals who are permitted to utilize the environmental resources due to ownership complexities, entitlement, and right issues. On a wider picture, the management of the environment entails the process of striking a balance between environmental imperatives and the demands of hundreds of users, majority of who attach significant social, cultural, or economic importance to these natural resources (Anderson, 2008). The process of using a particular type of resource has been a subject of controversy given that some resources have been privatized including the allocation of pollution or emission units to particular companies, and the process of controlling and using private resources. The prevailing property rights regulations in Australia are aimed at ensuring diverse utilization of resources and as well continued conservation of such resources. This entails the utilization of regulatory and control structures to realize such economic goals.
Coarse Theorem and property rights
The coarse theorem posits that the existence of low transaction costs and well-defined property rights enables individuals and policymakers involved in an externality situation to reach an efficient consensus by bargaining among themselves. As such, it becomes possible to have clearly stipulated and enforceable property rights and a bargaining situation that enables economic agents to achieve an optimal Pareto allocation of resources. For instance, a chemical factory can be allocated property rights to pollute a river. Thus, the amount of pollution will be dependent on the initial level of property rights allocated and the incentives to pollute or not to pollute will depend on the level of incentives.
Graphical Representation
Incentives to pollute
Initial Outcome:
Pollution occurs until MB pollution = 0 to the polluter (Length 0A).
Area 0EA represents Polluter Welfare
Area M0A (negative surplus)
Area 0EC-MCA represents social welfare
Outcome after Negotiation:
(Pollutee pays the polluter $F per unit pollution reduction)
0N represents pollution
Area 0ECN + NCFA represents polluters welfare while Pollutee’s Welfare is represented under -0CN-NCFA
Area 0EC represents the social welfare while MCA represents gain in welfare
The Australian environmental policy has included concepts of environmental management issues in major areas such as irrigation given that Australia has excelled in agricultural innovative activities such as water trading. The aspect of property rights has assisted in the process of clarifying responsibilities for different environmental players as well as defining the processes to be followed in case the need for compensating particular parties arises. Additionally, property rights has played a significant role in facilitating the criteria of rationing resources among different users and settling disputes relating to the share of property rights. The process of understanding property rights requires specific knowledge from other disciplines such as law, economics, sociology, agronomics, engineering, and philosophy. This is essential because boundaries of resource ownerships have to be drawn, responsibilities determined, and effects to third parties identified before property rights can be allocated.
The management and use of environmental assets does not involve interactions between things and people but it rather represents how people relate in situations where property or things are concerned. For this reason, the significance or legal attachment allocated to property does not entail property in its form as something that can be touched but rather it entails the legal rights that people attach to property. The failure to identify or allocate property rights has been the reason for most negative consequences in environmental conservation and management such as increased cases of pollution and political oppositions. For instances, the activities of irrigators in Australia have been subject to government regulations and policy implications without which the irrigation sector would be subject to increased violations. Alternatively, the legal framework and composition of private property interests is a subject that has caught the attention of states within the Australian region due to the creation of different boundaries.
Speaking of specifying specific property rights as the best policies, this assumption can still be subject to particular debates and varied considerations. However, the process of using licenses and statutory property is not the only framework that can be used to achieve control in the management of assets. Nonetheless, specifying specific property rights plays a significant role in defining the criteria of managing the relationships between property use and the perception of people. Property rights offer users different incidents of ownership that includes the right to possess, the right to use, rights to income, the right to capital, transmissibility rights, and the prohibition of harmful use (Anderson, 2004). These provisions show that the specification of particular property rights acts as the best policy in the management of property rights.
Other normative arguments that have been proposed in favor of specifying particular private property interests with regard to environmental resources have been obtained from a range of disciplines. Such proponents of property rights have argued that possessing of property interests acts as one of the most appropriate recognitions of stressing the importance of natural resources in addition to providing solutions that can be used to manage the issue of controlling natural resources. Settlement of natural property issues becomes easier with the specification of property rights. It also enables individuals to attach significant value to their property, provides legal certainties and justifications for the property in situations that might call for the application of legal treatment.
It is also necessary to mention that the specification of property rights include negative externalities such as claims that specification of property rights leads to obscurity of public qualities associated with natural resources, preferring compensation at the expense of creating sustainability of resources, and using legal documents such as licenses to facilitate environmental degradation practices. Other than these prepositions, it is evident that specification of particular property rights in the management of environmental management creates more good than harm as far as sustainability of environmental resources is concerned.
Question three
In the recent past, the utilization of cost-benefit analysis on environmental standards has attracted high profile and large groups in the world of environmental economics and management. Cost-benefit analysis offers a platform to the realization of superior environmental results and it is noteworthy because it tests the viability of economic resources in the environment (Adler, & Posner, 2010). Due to prevailing economic and social structures, the universal standard of measuring the costs and benefits in the environmental issues is money. In the management of natural resources, cost-benefit analysis involves subtraction of the financial cost of development from the general monetary value, of benefits received from the same type of development (Adler, & Posner, 2010). This process is conducted to obtain net monetary cost or benefit for the projected activity. Additionally, cost-benefit analysis is important because it helps in the replacement of lost assets. Many a time, changes in the quality of the environment may cause immense loss of physical assets, such as buildings, cars, machines, and houses. Therefore, cost-benefit analyses helps in investigating the degree of damage, to replace the assets.
Quantity
Environmental economists always advocate for zero pollution in the environment. Therefore, when developing policies, it is important to use cost-benefit analysis. At point x marginal social cost is equal to marginal social benefit; hence, this is the point in which the environmental surplus is at maximum. At point 1, marginal cost exceeds marginal benefit, meaning the economy is inefficient. If the quantity of was to reduce to point -1, then some of the surplus will be lost, indicating a degree of inefficiency. In conclusion, environmental economists use CBA to attain maximum economic efficiency at point x.
Environmental economists advocate for zero pollution. This goal is exceedingly difficult to be conveyed; this is because cost-benefit analysis enables environmentalists to develop policies needed to solve the environmental problems. Through the analysis, environmental economists can recommend policies that appear to be anti-environment. In the environmental sector, there is scarcity of resources. Scarcity is a situation in which resources devoted to one sector is not available to meet another, leading to the opportunity cost in one way or another. In such a way, environmental economists are required to recommend on policies to be implemented to eliminate the scarcity. This is possible using cost-benefit analysis.
Perhaps, it does not make any sense if the government implements a project that affects the environment negatively. If the social cost is more than the social benefit, then it is not worth carrying out the project. For example, if the flood-control project has a high cost than benefit, then the project should not be implemented. Therefore, cost-benefit analysis is like a roadmap in determining the effectiveness of policies. There are no prices for natural resources and a healthy environment, but for the sake of accountability, cost-benefit analysis needs the creation of artificial prices. Environmental economists, use cost-benefit analysis to create artificial prices for environmental and health benefits, this is achieved by carrying out a study on what individual in society would be willing to pay for these natural resources.
Certainly, cost-benefit analysis furthers efficiency in the environment; it ensures that at all cases, regulation is adopted when its benefits exceed costs. Furthermore, the analysis helps the regulatory bodies in directing them towards regulations and policies that will yield maximum net benefits (Byrne, 2004). Cost-benefit analysis economizes the resources, as it is predictive in nature. The analysis considers the cheapest policy to be the most appropriate. For example, in reducing the greenhouse gas emission, the analysis considers the least cost strategy to be most appropriate. Undeniably, valuation of benefits and costs associated with natural resources and environmental assets is crucial, due to its power to provide an organizational framework. The underlying framework is for quantifying, identifying, as well as comparing the benefits and costs of a policy in action. The final decisions on the proposed policy are informed by comparing total benefits and costs.
Despite all the importance related to cost-benefit analysis, numerous issues arise during estimation of values. Many of the extreme environmentalists would not accept any level of human destruction on the environment. They would just demand an end to different environmental issues such as deforestation, without analyzing its benefits or costs. Cost-benefit analysis has drawn a lot of attention to the inconsistent expression of diverse environmental values. Actually, the environment is something whose main values defy all sorts of economic measurement. The issues that arise during the cost-benefit analysis evaluation carry some degree of truth. Estimates of costs and benefits are very incomplete and imprecise to be useful. This implies that the valuation of unknown prices of natural resources does not present the exact real prices. Hence, carrying out cost-benefit analysis never eliminates uncertainties. In addition, monetization of all environmental issues outweighs the qualitative judgment.
In every analysis, equity is one of the factors to be considered. Cost-benefit analysis does not put equity into consideration, ignoring differences across space and time. Furthermore, it illuminates potential tradeoffs and distributional impacts between equity and cost consideration. Currently, issues of environmental sustainability and equity are leading in suggesting adjustments in practice, modifying the cost-benefit analysis to be more precise.
Reference List
Adler, M. D., & Posner, E. A. (Eds) 2010. Cost-benefit analysis. Legal, economic, and
philosophical perspectives. University of Chicago Press, Chicago.
Anderson, T.L. 2008, Political Environmentalism: Going Behind the Green Curtain, Hoover Institution Press, Stanford, CA.
Anderson, L.T. 2004. “Donning Coase-Coloured Glasses: A Property Rights View of Natural
Resource Economics” The Australian Journal of Agricultural and Resource Economics, 48:3, pp. 445–462
Burness, S., Cummings, R. Morris, G. & Paik, I. 1980. “Thermodynamic and Economic
Concepts as related to resource-Use Policies.” Land Economics. 56:1 pp. 1-9
Byrne, J.P., 2004 “Property and the Environment: Thoughts on an Evolving Relationship”
2004 28 Harvard. J. L. & Pub. Pol’y 679
Kahneman, D. 2003. "Maps of bounded rationality: psychology for behavioral economics".
The American Economic Review 93 (5): 1449–75
Pigram, J. J. 2007. Australia's Water Resources: From use to management. Collingwood,
Victoria: CSIRO Publishing. p. 160—162
The rise and rise of Cubbie Basin (u.d) Home Articles
