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Environmental
Economics
Sedef Akgüngör
Lecture 3
Sustainability
Stock pollutants
 Flow pollutants
Sustainability: Providing our
descedents with a standard of living,
material and environmental welfare
that is at least high as that which we
enjoy today.
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Net National Welfare
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Total output
• Less
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Depreciation
• Less
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Externality cost
Net National Welfare will increase as
long as output grows faster han
depreciation and externality costs.
Dynamic efficiency.
Discounting
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Would you prefer to have $100 in
real purchasing power this year or
next year or are you indifferent?
From an individual’s point of view,
$100 today is worth more than $100
next year.
How does this relate to the
environment?
Example: CO2 Emissions?
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For $15 billion spent today, we could
reduce our emissions or do nothing.
Should we spend $15 billion this year to
prevent $15 billion of damage to our
descendents?
In economic terms, the answer is no.
We could compensate future generations
for the damage we are doing to them by
setting aside money that would be
available for dam construction.
Environmental bond.
Discount Rate
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The higher the discount rate:
• The less important are benefits earned
down the road.
• The more important are the initial
benefits.
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Government policy makers would
choose a discount rate for analyzing
decisions about ow much stock
pollutants to allow.
Choosing the Right Discount Rate
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Dynamic efficiency requires that future benefits
be discounted at a rate close to that of the
growth of NNW.
Estimating NNW: Measure of sustainable
economic development
Begin with GNP
The first step is to augment GNP with nonmarket
consumption (value of leisure time, nonmarket
work,owner occupied housing)
From this, subtract a depriciation fund. i.e. The
amount of money necessary to replace the capital
used up in the creation of GNP and to provide for
a growing population.
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Adjusted net saving – a proxy for
sustainability
Adjusted net saving, (also known
as genuine saving), is a sustainability
indicator building on the concepts of green
national accounts. Adjusted net savings
measure the true rate of savings in an
economy after taking into account
investments in human capital, depletion of
natural resources and damage caused by
pollution.
A Two Period Model
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The objective is to balance the present
and future uses of the resource by
maximizing the present value of the net
benefits derived from the use of
resources.
Allocation of resources.
Assume that we have a fixed supply of
depletable resource.
Demand is constant
• P=8-0.4 q
• MC = $2/unit
Intertemporal efficiency
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(from your notes and reading
package)….