tema 1. ecological economics 1.economic activity and environment 2.foundations of ecological...

Tema 1. Ecological Economics

1. Economic activity and Environment

2. Foundations of Ecological Economics

1. Economic activity and Environment

1. The concept of Ecological Economics

2. Interdependent systems

3. The economy in the environment

4. Threats to sustainability

o Ecology can be defined as the study of the relations of animals and plants to their organic and inorganic environments and

o Economics as the study of how humans make their living, how they satisfy their needs and desires

o Ecological economics is the study of the relationships between human housekeeping and nature’s housekeeping … or it is about the interactions between economic systems and ecological systems.

1. Economic activity and Environment2. Foundations of Ecological Economics

The concept of Ecological EconomicsInterdependent systemsThe economy in the environmentThreats to sustainability

Interpendent systems

Recent history of the environment in economicso 70’s, renewed interest in neoclassical economics about the

natural environmento Environmental economics: focused on the economy’s

insertions into the environment.o Natural resource economics: focused on the economy’s

extractions from the environment

o Neoclassical (Environmental) economics.- Address the environment from a market-law perspective. Environment is a framework which supply inputs and a place to deposit the waste. It is a matter of valuation.

o Ecological economics.- A close interdependence between “how humans make their living” and its “organic and inorganic environment”. It is a matter of values.





http://2012books.lardbucket.org/books/entrepreneurship-and-sustainability/s07-04-practical-frameworks-and-tools.html

o Neoclassical (Environmental) economics.- o Do not ignore equity, but focus on policies to promote

efficiency (pareto). o Confidence in the ability of markets to drive

technological and behavioural changes that will enable the capacity of the economy--environment system to satisfy humans to go on increasing.

o Ecological economics.- o have less confidence in markets and technology.o that solving the problem of poverty cannot be left to

economic growth



Ecological and neoclassical economics: Whose utility counts?


Deontological

Ethical Approach

Duty


Lithosphere -- the solid outer shell of the earth;Hydrosphere -- the water on or near the surface of the earth;Atmosphere -- the gases surrounding the earth’s surface;Biosphere -- living organisms and their immediate environment. - “Ecosphere”



The Environment


The carbon cycle

o The slow cycle. Geological time. 5-10000 Gt in lithosphere in fossil fuel deposit o The fast cycle.- Figure represents annual exchangeso The anthropogenic cycle.- 40% Increase in ppmv since industrial revolution


natural human



Hunting and gathering

Transition to agriculture(12,000 years)

Transition to industry(200 years)

Humans long-history


Humans & purposes

«…they may appear to some to be the most wretched people on earth, but in reality they are far more happier [sic] than we Europeans. They live in a Tranquillity which is not disturb’d by the Inequality of Condition: The Earth and sea of their own accord furnishes them with all things necessary for life, they covet not Magnificent Houses, Household-stuff &c’, they live in a warm and fine climate and enjoy a very wholesome Air, so that they have very little need of clothing… they think themselves provided with all the necessarys of Life and that they have no superfluities.»

Capitan James Cook on Australian aboriginals




Human economy system is a subsytem of the system which is the environment, which provides:o Resources to Firmso Amenities to Individualso Life support serviceso Waste sink

Basic Economic activitieso Consumption.- The use by human

individuals of goods an services to satisfy some of their needs and wants. Not all consumption is ‘consumptive’

o Production.- Commodities to be consumed by individuals or by firms

o Investment.- …in Capital Stock, which provides capital services

Humans & environment



o Reproducible or human-madeo Durable capital.- Tools, machinery, buildings,

infrastructures..o Human Capital.-Stock of learned skillso Intellectual capital.- Accumulated knowledge and skillso Social capital.- Set of institutions and customs

o Natural capital.- Stocks in the environment that deliver services to the economy.

Capital Stock

o Sustainability.- Maintaining the capacity of the joint economy-environment system to continue to satisfy the needs and desires of humans for a long time into the future

o Major problem.-o the current scale of global economy activity threatens

sustainabilityo It is necessary to increase the scale of economic activity to

alleviate povertyo Sustainable development.- a form of economic growth

that would meet the needs and desires of the present without compromising the economy--environment system’s capacity to meet them in the future.


Sustainability




The environment provides:

1. Resources to Firms2. Amenities to Individuals3. Life support services4. Waste sink



o Desde el punto de vista físico, son factores que, afectando a los procesos de producción y de consumo, tienen su origen en fenómenos o procesos naturales (biológicos, geológicos o químicos) que escapan al control del hombre.

o Desde el punto de vista económico, son factores no antropogénicos que afectan a las actividades productivas.o Recursos biológicos (bosques, fauna, pesquerías).

o Recursos minerales (oro, hierro, suelo).

o Recursos energéticos (petróleo, gas, radiación solar).

o Recursos ambientales. (agua, aire, capa de ozono).

Resources to firms



o Flow resources Neither accumulate nor de-cumulate (solar, wave, wind, hydro power).

o Renewable resources Considering sustainable harvestingo Non-Renewable resources Natural grwoth is zero (fossil

fuels)o Non-Renewable resources , but recyclable (iron, cupper).

Resources to firms



Resources to firms

Problematic

Open access

Discount rate

Fundamental Uncertainty



o Amenity services from the environment can, that is, be consumed direct without being first transformed by productive activity

o It may be, and often is, a non-consumptive process.

o Environmental amenity service-consumption is different from the use of the resource-input and waste-sink services in that it does not necessarily involve any direct physiochemical impact

Amenities to individuals



o the purification of our air and water;o the stabilisation, and moderation, of the climate;o nutrient cycling;o the pollination of plants. o All of the other plants and animals that we use as natural

resources, which participate in waste assimilation, and which contribute to the provision of amenity services, also depend on these life support services.

Life support services



o Pollution.- any chemical or physical change in the environment due to waste emission that is harmful to any living organism; By a waste we mean something that is an unwanted by-product of economic activity. The flow of a waste into the receiving environment will be called emissions, or discharges.

o Not all the waste discharges in the environment gives rise to pollution…

o Biomagnification involves the increasing concentration of toxic materials in animals higher up in a foodweb. Ex: DDT

Waste sink



Involves the diversion of some activity away from production for consumption or investment to the interception of some of the waste stream before it crosses the economy--environment boundary

Recycling



o Depletion of non-renewable resourceso Waste accumulationo Loss of resilienceo Global warming

o Sustainable development is about dealing with poverty without undermining sustainability

o The major threats to sustainability, and hence to sustainable development, are global in nature. The climate in every part of the world, for example, depends on the concentrations of various gases in the global atmosphere.

Threats to sustainability

1. Economic growth and human well-being

2. Limits to markets

3. Governance

2. Foundations of Ecological Economics

Economic growth and human well-beingLimits to marketsGovernance


The rich and the poor

http://hdr.undp.org/en/content/table-1-human-development-index-and-its-components



The rich and the poor

o Many economic historians take the view that until around 1500 the differences were so small that all of the world’s economies should be regarded as having had the same level of per capita income.

o Given the nature of exponential, or compound, growth… growth rates do not need to differ greatly to produce large differences in levels over periods of the order of a century.

·



What drives economic growth

·

𝐾 𝑡=𝐾 𝑡−1+𝐼 𝑡=𝐾 𝑡−1+𝑆𝑡

𝑆=𝑠 ·𝑌

o Consensus on the basic model of economic growth while it is useful in drawing attention to the role of capital accumulation, it is not a satisfactory model of economic growth.o Mainly this is because it generates a declining rate of growth.o Why is the savings rate higher in one economy than another? Given two

economies with the same savings rate, why does one have more technical progress than another, why is it more innovative?...

o People will save and innovate more when the incentives to do so are greater. Again, this answer leads to more questions – what are the incentives to save and innovate, and why do they differ across economies?

Development and under-development





Why “NOT” nations fails

o The Geography hypothesis vs the “Equatorial Paradox”o The Culture hypothesis.-

o “Is the culture hypothesis useful for understanding world inequality? Yes and no. Yes, in the sense that social norms, which are related to culture, matter and can be hard to change, and they also sometimes support institutional differences, this book’s explanation for world inequality. But mostly no, because those aspects of culture often emphasized—religion, national ethics, African or Latin values—are just not important for understanding how we got here and why the inequalities in the world persist. Other aspects, such as the extent to which people trust each other or are able to cooperate, are important but they are mostly an outcome of institutions, not an independent cause.”

o The ignorance hypothesis.-o "The ignorance hypothesis maintains that poor countries are poor because

they have a lot of market failures and because economists and policymakers do not know how to get rid of them and have heeded the wrong advice in the past"

o Economic growth and prosperity are associated with inclusive economic and political institutions while extractive institutions typically lead to stagnation and poverty

o Inclusive economic institutions.- allow and encourage participation in economic activities and that enable individuals to make the choice they wish: Secure private property, unbiased system of law, provision of public services that provides a level playing filed where people can exchange and contract.

o Extractive institutions.- An small group (elite) which fight to keep their privilegis trough restrictive laws and barriers to entry. Extractive institutions cannot generate sustained technological change for two reasons: the lack of economic incentives and resistance by the elites.



Why “DO” nations fails

o Aislamiento de Madrid de los flujos económicos e innovadores (Altiplano, sin río navegable), que llegó a ser Corte, pero nunca Villa

o Única manera de prosperar, era la de “medrar” para conseguir “regalías”

o Buques de la nueva “Armada Española” son hijas del BOE:o Ex-Monopolios (privatizaciones ad hoc)

o Constructoras (contratas obra civil).

En Versión Española… “Capitalismo Castizo”

o Fuertes interrelaciones entre la clase política y la aristocracia empresarial, con trasvase de miembros entre ellas… generadora de instituciones extractivas que tratan de capturar al regulador



o Neoclassical economist only relies in growth (“the rising tide lifts all the boats”) because:



Poverty alleviation: Economic growth vs redistribution

o The better-off tend not to like ito the amount by which the better-off collectively

are better-off than the poor collectively is not sufficiently large for it to be possible to solve the poor’s problems this

o Redistribution could act as a disincentive to behaviour

o Ecological economics, does not share neoclassical enthusiasm for economic growtho the world as a whole, economic growth is not, on account of economy--

environment interdependence, a feasible long-run objective

o Economic growth is only highly desirable in the economies where there are many poor people

o Un cierto grado de desigualdad económica es fundamental para estimular el progreso y el crecimiento (recompensar talento y el esfuerzo de quienes tienen la ambición necesaria para innovar y asumir riesgos empresariales) pero la riqueza extrema (al igual que la pobreza extrema) es una amenaza.

o Los ricos están jugando con fuego en su visión cortoplacista; no se dan cuenta de que su destino está unido al resto de la población. "A través de la historia, esto es algo que el 1 por ciento superior finalmente acaba aprendiendo. Demasiado tarde".

The price of inequality



The Easterlin paradox



the reasonable conclusion is that economic growth is very important for improving human well-being at income levels typical of the developing world today, but not very important in that respect at income levels typical of the developed world today.

What makes people happy?



Why does growth not increase happiness in rich countries?

“The explanation is that an individual’s happiness depends on the match between what he aspires to and what he experiences, and that his aspirations depend on his own experience and what he observes about others’ experience. Aspirations are formed by adaptation, or habituation, and rivalry”. (Common)

"The first problem arises because people overestimate the long-term happiness they will derive from consumption goods and underestimate the satisfactions of leisure, education, friendship and other intangibles. The second problem arises because, even if people are rational in wanting to be top of the pile, the logic of positional competition dictates that not all of them can be“ (Skidelsky)

Market failures: Externalities



o Externalidad*.- Un coste (negativa) o un beneficio (positiva) impuesto sobre alguien por las acciones de otros y sin reflejo en las transacciones del mercado.

o Problema: indefinición de los derechos de propiedad.o Ejemplo: Industria cárnica que al verter residuos, perjudica

piscifactoría aguas abajoo Sol. 1.- Cárnica indemniza piscifactoría por la menor producción.o Sol. 2.- Piscifactoría indemniza cárnica por costes depuración.

o ¿Qué solución parece más justa? ¿Qué solución es eficiente en el sentido de Pareto?

o Externalidades producen Pareto ineficiencia o Demasiados recursos escasos son asignados a una actividad

que produce una externalidad negativa.o Pocos recursos escasos son asignados a una actividad que

produce una externalidad positiva.




Supongamos que las funciones de coste de dos empresas que producen el mismo bien son: 𝑪𝟏 = 𝟎.𝟏𝑿𝟏𝟐 + 𝟓𝑿𝟏 − 𝟎.𝟏𝑿𝟐𝟐 𝒚 𝑪𝟐 = 𝟎.𝟐𝑿𝟐𝟐 + 𝟕𝑿𝟐 + 𝟎.𝟎𝟐𝟓𝑿𝟏𝟐

a) Determinar los niveles de output de las empresas en el supuesto de que cada una de ellas iguala su coste marginal privado a un precio de mercado fijo e igual a 15.

a) Determinar sus niveles de output en el supuesto de que igualan su coste marginal social al precio de mercado anterior.

b) Determinar el sistema de impuestos y subsidios que conduciría a las empresas a unos niveles de output Pareto eficientes.




o Conclusión del ejemploo La empresa 1 controla contaminación pero no tiene incentivos

para reducirla.o La empresa 2 tiene incentivos para reducirla pero no la

controla…o Por tanto, el nivel de contaminación es socialmente excesivo

o Solucióno Si la empresa 1 y la empresa 2 se fusionan, desaparece la

externalidad, pues la empresa resultante no se ve afectada por la producción de otra al maximizar la producción conjunta, se internaliza la externalidad.

o Si el beneficio conjunto en caso de internalización es superior a la suma de los individuales quedaría demostrado el coste de la externalidad.

Solutions to externalities



o Sol 1. Property rights and emissions marketso Companies have a right to pollute which could use or sell. o The market price should equal the cost of reduce the pollution.




o Sol 2. Pigouvian taxo But, which is the optimum level of pollution?

. . .

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Cárnica Max X Z p X C X Z tZ

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o Existencia de unos derechos de propiedad bien definidos, que faciliten la libre negociación sobre los mismos.

o La estructura de mercado de la empresa contaminadora es de competencia perfecta.

o Los costes de transacción derivados de la transacción son bajos o cero.

o Sol 3. Market solution. Internalize via merge or cooperation




. . .

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( , ) ( , ) ( , ) ( , ) 0 * 0

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Max X Y Z p X p Y C X Z C Y Z

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o Empresa contaminante Produce hasta CMg=0 Minimiza costes privados.o Eficiencia Pareto requiere minimizar los costes sociales : CMgx+CMgy=0.

o Contaminación eficiente: empresa X paga por contaminar el coste induce a Y.o Coste social difiere privado Estado

o Problema.- Estado desconoce el coste de las emisiones de las empresas

o Sol 3. Market solution. Internalize via merge or cooperation




o Sol 4. Rules.


The tragedy of commons



o Explotación conjunta de pastos comunales.- Valor de leche producida es f(L) y coste de una vaca es c.

o Campesinos deciden individualmenteo Si PMe [f(L+1)/(L)] es mayor que el coste llevará la vaca,

pero…

o …Incorporar una vaca adicional disminuye la producción media del resto (coste social) sobreexplotación

o El pasto no se explota hasta el nivel de maximizan los beneficios sino hasta el nivel en que Bº=0 sobre explotación

Determining policy objectives



o Two reasons to “not” left to markets alone the sustainable development:o First, market failures of various kinds mean that the actual

market outcomes are not allocatively efficient.o Second, achieving efficiency does not guarantee either inter-

or intragenerational equity, both of which are essential features of sustainable development.

o Hence, aiming for sustainable development requires more than correcting market failure

Major sustainable development events



Year Event Outcomes

1972 The limits to growth: a report for the Club of Rome’s project on the predicament of mankind

concerns about the over-use of natural resources

1983 The ‘Brundtland Report’ – our common future

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

1988 IPCC (Intergovernmental Panel on Climate Change)

IPCC Reports, which supports the United Nations Framework Convention on Climate Change (UNFCCC)

1992 The United Nations Conference on Environment and Development -- Río de Janeiro

Rio Declaration; Agenda 21;Legally binding agreements: Convention on Biological Diversity; UNFCCC; United Nations Convention to Combat Desertification

2002 World Summit on Sustainable Development (Río+10) -- Johannesburg.

The Johannesburg Declaration.- multilateralism as the path forward.

2012 United Nations Conference on Sustainable Development – Río+20 -- Río de Janeiro

“The Future We Want”.- non-binding political commitment to sustainable developmentSustainable Development Goals (SDGs)

The sustainable development principle



o A truly sustainable way of life:o Economic Growth and Equityo Conserving Natural Resources and the Environmento Social Development

o A three interconnected component dimensions of sustainable development vs short-term economic success

o Adapted to specific circumstances: emphasiso in economic growth in poor countrieso In social and environmental objectives in rich world

Decision making under imperfect knowledge



Risk: the different possible outcomes are known exactly and a probability can be assigned to each possibility;

Ambiguity: the probabilities are known but the outcomes to which they attach are not known exactly;

Uncertainty: the different possible outcomes are known but probabilities cannot be assigned to them;

Ignorance: the definition of a complete set of possible outcomes is problematic and probabilities cannot be assigned.

o Common, M. S. and S. Stagl. (2005): Ecological economics : an introduction. Cambridge: Cambridge University Press.o Chapters 1-9

tema 1. ecological economics 1.economic activity and environment 2.foundations of ecological...

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