Environmental and Resource Economics

Bowdoin College
Brunswick, Maine


Instructor: Freeman, A. Myrick III
Subject area: Economics
Department: Economics
Course number: 318
Year taught: 1996
Level: Undergraduate

Please note that the copyright for this syllabus is retained by the instructor.


OVERVIEW: I have organized the course material as follows:

I. Core Concepts: efficiency and optimization; theory of externalities and their control; discounting; welfare measurement and valuation.

II. Topics and Applications in Environmental Economics: valuation methods and studies: contingent valuation; applications of environmental taxes and fees; the "double dividend question; issues with tradable permits; CO2 induced climate change -costs, damages, policies; second best issues.

III. Topics in Resource Economics: optimal forestry management; fisheries management; nonrenewable resources and optimal depletion.

After we cover the core concepts (probably 3-4 weeks), we will have a good deal of flexibility in selecting topics from categories II and III. There is far more material listed in categories II and III than we can reasonably cover in the remainder of the semester. I intend to poll the students at that time to determine which topics you are most interested in.

Optional readings go into some of the topics in more detail.

Single copies of all items are on reserve at the Library. Original sources are also given for journal articles so that you can go directly to the stacks to see a copy. Finally, some of the articles are also reproduced in collections of readings that are on reserve. These collections and the abbreviations used below are:

DD = Robert Dorfman and Nancy Dorfman, Economics of the Environment, 3rd ed.

AM = Anil Markandya, Environmental Economics.

Wo = Wallace sates, The Economics of the Environment.

These collections also contain many other important articles in this field. They would be an excellent starting place for research on the term paper.

CORE CONCEPTS
TOPIC 1: A REVIEW OF OPTIMIZATION AND MATHEMATICAL TECHNIQUES

Readings:
"Mathematics for Microeconomics" Handout.


Optional Readings:
Henderson and Quandt, Microeconomic Theory, 3rd ed., Chs. 1, pp. 5-24, 32-34, Ch. 4, pp. 64-80, 98-101, (A more rigorous treatment of the application of calculus to economic analysis.)

Key Points: - The first and second order conditions for a maximum and their economic interpretation.
- Constrained optimization and the Lagrangian multiplier.

TOPIC 2: PARETO OPTIMALITY, ECONOMIC EFFICIENCY, COMPETITIVE MARKETS, AND BENEFIT-CO8T ANALYSIS

Readings:
Review the relevant sections of your intermediate microeconomics text.

Freeman, "The Methodology of Benefit-Cost Analysis," skipping pp. 30-32.

RTI Benefit-Cost Assessment Handbook, Chap. 1, Chap. 2 to p, 2-9.

EPA, "Benefit-Cost Analysis of Removing Lead from Gasoline."

Key Points: - Pareto optimality.
- The conditions for an efficient allocation.
- The Pareto improvement criterion (Hicks and Kaldor).
- The definitions of benefits and cost.
- With vs without scenarios.
- When indirect effects should be counted as benefits and costs.
- How to deal with what you don't know for sure.

TOPIC 3: THE THEORY OF EXTERNALITIES AND ENVIRONMENTAL POLICY

Readings:
.
Pearce and Turner, Economics of Natural Resources and the Environment, Chaps. 4 - 8.

Varian, "Production Externalities, pp. 551-559. To be handed out.

Turvey, "On Divergences Between Social Cost and Private Cost," Economica, 1963, pp. 309-313; also in DD and AM.

Freeman, "Externalities, Prices and Taxes: Second Best Issues in Transportation," pp. 1-10.

Baumol and Oates, The Use of Standards and Prices for Protection of the Environment, Swedish Journal of Economics, 1971, pp. 42-54; also in WO and AM.

Bohm and Russell, Ch. 10 of Kneese and Sweeney, Handbook of Natural Resource and Energy Economics, vol. 1, to p. 415.

Addtional Readings:
Freeman, The Measurement of Environmental and Resource Values, pp. 19-23.

William Baumol and Wallace Oates, The Theory of Environmental Policy, 2nd ed., Chap. 3 to p. 25 and Chap. 4 to p. 47.

Key Points: - What is an externality.
- What is the economic consequence of a negative externality for Pareto optimality?
- How do taxes and marketable permits work to correct externality type market failures.
- Can direct regulation of the externality alone achieve an efficient allocation of resources?

TOPIC 4: THE THEORY OF WELFARE MEASUREMENT

Readings:
Freeman, "Nonmarket Valuation by Revealed Preferences," pp. 1-17.

Freeman, The Measurement of Environmental and Resource Values, Chap 2, pp. 23-333; Chap. 3, pp. 39-56, 61-66; and Chap. 4, pp. 93-103, 104-108, 115-118, 124-131.

Freeman, "Nonmarket Valuation by Revealed Preferences," pp. 17 to the end.

Markandya, "The Value of the Environment: A State of the Art Survey," in AM.

Key Points: - How to derive the indirect utility function and expenditure function Lund using them to defining welfare measures.
- How models of individual choice and behavior can be used to draw inferences about the values of things not purchased in markets.
- Contingent valuation.

TOPIC 5: TIME, DISCOUNTING, AND THE INTEREST RATE

Readings:
Review section on discounting, time preference, and present value in your intermediate microtheory text.

Freeman, The Measurement of Environmental and Resource Values. pp. 199-213.

RTI Benefit-Cost Assessment Handbook, pp. 2-9 to 2-20.

Henderson and Quandt, Microeconomic Theory, 3rd ed., Ch. 12, pp. 322-326, pp. 341-342.

Lind, "The Conceptual Basis for Discounting," pp. 1-19.

Key Points: - Discounted present value in both the discrete time and continuous time cases.
- Using present values for investment and project evaluation decisions.
- The choice of discount rate.
- The shadow price of capital.

TOPICS IN ENVIRONMENTAL ECONOMICS
TOPIC 6: ON THE DESIGN OF CORRECTIVE TAX AND PRICE POLICIES
Readings
Buchanan, "External Diseconomies, Corrective Taxes, and Market Structure, American Economic Review, 1969, pp. 174-177.

Palmer and Walls, 'Materials Use and Solid Waste Disposal: An Evaluation of Policies," RFF Discussion Paper, 95-02, 1994 (Appendix A and B optional).

Fullerton and Wu, "Policies for Green Design," 1995.

Freeman, "Externalities, Prices and Taxes: Second Best Issues in Transportation," pp. 10 to end.

Freeman, "The Environmental Costs of Electricity," and Harrison and Nichols, "Environmental Adders in the Real World," 1995.

TOPIC 7: APPLICATIONS OF THE THEORY: COST EFFECTIVENESS

Readinqs:
Herzog, "Economic Efficiency and Equity in Water Pollution Control," Journal of Environmental Economics and Manaqement, 1976, pp. 170-174.

O'Neil,et. al., "Transferable Discharge Permits and Economic Efficiency," Journal of Environmental Economics and Management, December 1983, also available in WO.

Seskin, Anderson, and Reid, "An Empirical Analysis of Economic Strategies for Controlling Air Pollution," Journal of Environmental Economics and Manaqement, 1983, pp. 112_124, also available in WO.

Key Points: - Concept of cost effectiveness.
- How the environment is modelled (Q as a function of emissions).

- Economic implications of alternative policies.
- Why are some policies less costly then others?

TOPIC 8: EMISSIONS TRADING

Readinqs:
Tietenberg, "Transferable Discharge Permits and the Control of Stationary Source Air pollution," Land Economics, 1980, pp. 391-416, also available in Wo and DD.

Bohm and Russell, Ch. 10 of Kneese and Sweeney, Handbook of Natural Resource and Energy Economics, vol. 1, pp. 419-428.

Stavins, "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, September 1995.

Winebrake, Farrell, and Bernstein, "The Clean Air Act's Sulfur Dioxide Emissions Market: Estimating the Costs of Regulatory and Legislative Intervention," Resource and Energy Economics, 1995.

Netusil and Braden, "Efficiency Gains in Transferable Permit Markets: Evidence on Discrete Bilateral, Sequential Trades of Sediment Allowances," 1995.

Key Points: - Difference between trading emissions and trading ambient permits.
- Problems of market power.

TOPIC 9: WELFARE MEASUREMENT BY REVEALED PREFERENCE

Readings:
Ridker and Henning, "The Determinants of Residential Property Values with Special Reference to Air Pollution," Review of Economics and Statistics, 1967, pp. 246-257, also available in Oates. See if you can spot the error that they make in interpreting their empirical results.

Harrington, Krupnick, and Spofford, "The Economic Losses of a Waterborne Disease Outbreak," Journal of Urban Economics, 1989, pp. 116-137, also available in Oates.

TOPIC 10: WELFARE MEASUREMENT IN A MARKET SETTING

Readinqs:
ES&T, Outlook: "Crop Losses from Air Pollutants."

Kopp, et al., "Implications of Environmental Policy for U.S. Agriculture: The Case of Ambient Ozone Standards," Journal of Environmental Management, 1985, pp. 321-331.


McGartland, "The Implications of Ambient Ozone Standards for U.S. Agriculture: A Comment and Some Further Evidence," Journal of Environmental Management, 1987, pp. 139-146.

Bruce Madariaga, "Ambient Air Quality Standards for U.S. Agriculture: The Correct Welfare Measure Revisited," Journal of Environmental Management, 1988.

Kopp and Krupnick, "Agricultural Policy and the Benefits of Ozone Control," American Journal of Agricultural Economics, December 1987, pp. 956-962.

TOPIC 11: WELFARE MEASUREMENT BY CONTINGENT VALUATION

Readings:
Freeman, The Measurement of Environmental and Resource Values pp. 165-198.

Bishop and Heberlein, "Measuring the Values of Extramarket Goods: Are Indirect Measures Biased? American Journal of Agricultural Economics, 1979, pp. 926-930, also available in Markandya.

Gerking, De Haan, and Schulze, "The Marginal Value of Job Safety: A Contingent Valuation Study," Journal of Risk and Uncertainty, 1988, pp. 185-200.

Boyle, Desvousges, Johnson, Dunford, and Hudson, "An Investigation of Part-Whole Biases in Contingent-Valuation Studies," Journal of Environmental Economics and Management, July 1994.

Carson, et al., "Temporal Reliability of Estimates from Contingent Valuation," RFF Discussion Paper 95-37, 1995.

TOPIC 12: SOME ECONOMICS OF GLOBAL CLIMATE CHANGE

Readings:
Elkins, "Rethinking the Costs Related to Global Warming: A Survey of the Issues," Environmental and Resource Economics, 1995.

Mendelsohn, Nordhaus, and Shaw, "The Impact of Global Warming on Agriculture: A Ricardian Analysis," American Economic Review, September 1994.

TOPIC 13: GREEN TAXES AND THE DOUBLE DIVIDEND

Readings:
Terkla, "The Efficiency Value of Effluent Tax Revenues, Journal of Environmental Economics and Management, June 1984.

Lee and Misiolek, "Substituting Pollution Taxation for General Taxation: Some Implications for Efficiency in Pollution Taxation," Journal of Environmental Economics and Management, December 1986.

Oates, "Green Taxes: Can We Protect the Environment and Improve the Tax System at the Same Time?" Southern Economic Journal, April 1995.

Morgenstern, "Environmental Taxes: Dead or Alive?" RFF Discussion Paper 96-03, 1995.

Parry, "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, November 1995, Part 2.

NATURAL RESOURCE ECONOMICS
TOPIC 14: OPTIMAL FORESTRY

Readings:
Howe, "The Economics of Forest Management," pp. 221-231; HANDOUT.

Hartman, "The Harvesting Decision When a Standing Forest Has Value," Economic Inquiry, March 1976.

Bowes and Krutilla, Multiple-Use Management: The Economics of Public Forestlands, Chs. 1-3 to p. 88.

Optional Readings:

Bowes and Krutilla, Ch. 12 in Kneese and Sweeney, Handbook of Natural Resource and Energy Economics, Vol. 2 (A more rigorous treatment of the multiple use problem.)

TOPIC 15: THE MANAGEMENT OF COMMON PROPERTY RESOURCES: THE FISHERIES


Readings:
Fisher, Resource and Environmental Economics, Ch. 3.

Shone, "The Blue Whale."

Anderson, "Privatizing Open Access Fisheries: Individual Transferable Quotas," in Daniel Bromley, ed. The Handbook of Environmental Economics.

Ellis and Fisher, "Valuing the Environment as an Input." Journal of Environmental Management, 1987.

Freeman, "Valuing Environmental Resources under Alternative Management Regimes," Ecological Economics, 1991, pp. 247-256.

TOPIC 16: THE ECONOMIC VALUE OF WETLANDS

Readings:
Gosselink, Odom, and Pope, "The Value of the Tidal Marsh."

Shabman and Batie, "Economic Value of Natural Coastal Wetlands, a Critique.

TOPIC 17: NONRENEWABLE RESOURCES

Readings:
Henderson and Quandt, Microeconomic Theory, 3rd ed., pp. 349-350.

Fisher, Resource and Environmental Economics, Ch. 2, p. 10-44.

Herfindahl and Kneese, Economic Theory of Natural Resources, Ch. 4, pp. 114-125.

Mishan, Introduction to Normative Economics, Ch. 61-66, pp. 477-497.

Freeman, "Severance Taxes and Depletable Resources," Handout.

Topic 18: Sustainability

Readings:
Michael Toman, John Pezzey, and Jeffrey Krautkraemer, "Neoclassical Economic Growth Theory and 'Sustainability,"' and David Pearce and Giles Atkinsen, "Measuring Sustainable Development," in Daniel Bromley, ed. The Handbook of Environmental Economics.

Stiglitz, "A Neoclassical Analysis of the Economics of Natural Resources," in V. K. Smith, ed., Scarcity and Growth Reconsidered.