INTERMEDIATE

ENVIRONMENTAL
ECONOMICS
International Second Edition

CHARLES D. KOLSTAD

New York.Oxford
OXFORD UNIVERSITY PRESS
 1
ECONOMICS AND THE ENVIRONMENT

TELL SOMEONE YOU STUDY ENVIRONMENTAL ECONOMIcs AND THE USUAL RESPONSE ISs
a look of puzzlement and the query "Just what is that?" A natural reaction, particularly
considering the common belief in some circles that economics is the root of the "environ-
mental problem."
Environmental economics is concerned with the impact of the economy on the
environment, the significance of the environment to the economy, and the
zppropriate
war of regulating economic activity so that balance is achieved among environmental,
economic, and other social goals. What distinguishes a morally neutral chemical such as
sulfur dioxide from the pollutant suifur dioxide is the
economy. The polluters who emit
sulfur dioxide do so because it is a
consumers want the
by-product of producing some good the public wants
good associated with sulfur dioxide but at the same time obtain
disutility (damage) from the sulfur dioxide pollution. The essence of the environmental
problem is the economy-producer behavior and consumer desires. Without the
econ-
omy, most environmental issues are
simply research questions of concern to chemists or
biologists with no policy significance.
There is no
question that today environmental protection is
and governments around the world, in both developed and recognized by societies
a
top public policy and quality-of-life issue. developing nations, as being
environmental quality for decades, or even Although people have been concerned about
of the centuries, the widespread societal
importance of environmental protection is
relatively recent phenomenon.
a recognition
In this
chapter we first consider
field of economics. We then
the
discipline of environmental economics,a sub-
turn to a broad
policy approaches that have been taken to treatment of environmental problems and
mental quality. provide society with higher levels of environ-

I.ENVIRONMENTAL ECONOMICS AS A
DISCIPLINE
For most
goods and services in a'modern
ducer costs with
consumer demands to economy, we
rely on markets to match pro-
yield the "right" amount of
production (and
bTERI ECONOIAICS AND THE ENVIRO:!MENT

thus consumption). The problem with pollution is that markets do not work to yield the
socially desirable amount of pollution.This illustrates the breadth of problems that need
answers: What are the incentives for the generation of pollution? What are the costs o
is the
deaning up pollution? What are the societal gains from polhstion control? What
right balance between costs of control and gains from control? What regulatory mecha
Sometimes
nisms can
designed to ensure the right balance bet ween costs and gains?
be
these issues are straightforward, othertimes they are exceedingly complex.
late 1950s
Although the field of environmental econonmics probably dates to the
and early 1960s with the important contributions emerging from the "think tank
has been booming
Resources for the Future,' the ficld
ever since. In the 1990s the
really took off in the 1970s and
payoff began to be seen in terms of influence on environ
embraced,
mental Marketable permits for pollution control are now widely
policy. environmental
valuation methods are a n integral part of environmental prevention,
with
valuation is being used to make decisions concerning major public projects
role in the
environmental economics is playing major
a
environmental impacts, and
means
as the world works to develop regulatory
current climate change debate.Now,
approaches
to control climate change.
a very
large proportion of proposed regulatory
involve markets for emission rights.
several of these dimensions
In the sections that follow we will more fully develop
environmental economics relates
environmental economics. We first consider how
of with
Next, we examine how
environmental economics meshes
to environmental policy.
then discuss two related terms that hae emerged
the larger discipline of economics. We
economics and environmental economics.
in the academic and policy world-ecological to resource eco-
differ? Environmental economics is also closely related
How do they
and what are the distinctions
between them? Finally we
nomics. What is the connection
debate, that
issues, currently the subject of much research and
consider several important
economics.
confront the field of environmental

Environmental Policy
A. Environmental Economics and
the environment is not a passing faddeep-seated c o n c e n , brought
but a
Concern with density. If
coincidence of high incomes and high population
on inlarge part by the would be very fogiving and
the world, the earth's environment
there were few people in itself automatically.
most of what humans throw at it, cleansing
capable of absorbing on the earth have passed;
the total number of people on the
The days of low population the size
the density of people in s o m e partis of the planet magnify
planet and particularly the capacity of the earth for self-cleansing.
Income
insults, overloading
of environmental tend to c o n s u m e more and thus gener-
not only because rich people
is also important,
because the environment is
often viewed as a luxury good.
also
ate m o r e pollution, but environmental issues often take a

For the poor who struggle

keep food o n the table,
to
become wealthier,
needs related to survival. As people
backseat to other more pressing environment, which
of their
to the quality living
their attention increasingly of
they turn
recent trends
toward increasing wealth for the people
Thus if
ultimately is the planet. c o n c e r n for the
environment to increase
over time.
we can expect to envi-
the world continue, countries of the world with regard
What are the 4ypical issues
facing most the preservation of natural
envi-
In developed countries
pollution and
ronmental policy? problems usually involve
areas) are major concerns.Pollution
wilderness
ronments (e.g.,
 Environmental Economics as a Discipline 3

two major issueswhat is the right amount of pollution and how can we get poBluters to
control their emissions?
Determining the right amount of pollution is not easy, Pollution is generated as a
by-product of producing goods. To determine the costs of pollution control it is necessary
to understand the structure of goods production and how costs will differ for different
levels of pollution. Contrary to what most people might think, this is not an engineerings
question. Although it is easy to find out how much it would cost for a piece of cquipment
that is placed on a smokestack to reduce pollutants in the smoke (a "scrubber"). to an
economist that is only the tip of the cost iceberg. Faced with the prospect of having to
reduce pollution levels, the firm has many options. These include end-of-pipe treatment,
moditying the production process, modifying the characteristics of the product, relocat-
ing the productive activity to reduce damage, and investing in research and development
to find new ways of cont rolling pollution. If a pollution permit market exists, the
has the additional choice of buying permits to emit, rather than reducing emissions.
fiem
Consumers can also reduce consumption of the polluting good. Thus characterizing costs
at a conceptual level, as well as measuring these costs empirically, is a complex question
without easy answers. It is also the domain of environmental economics.
Determining the right amount of pollution also involves determining damages
from pollut ion. The words "damages from pollution" deceptively suggest that this is a
natural science question, such as counting the dead fish on a polluted lake or determin-
ing the level of pollution at which people begin to get sick.)This is an oversimplification
of the multitude of ways pollution allects people and the relative seriousness of these
eflects to people. Air pollution in an urban area can cause physical irritation (itchy
eyes, running nose), reduced visibility, degraded visibility (a brown pale), soiled clothes,
decreased lung capacity, worry about adverse effects, increased susceptibility to illness,
and ofcourse illness itself. Some of these effects are tangible, ot hers are very intangible.
Economics is accustomed to condensing this variety of effects into a single measure
the willingness to pay to reduce pollution. If pollution is bad. people are willing to
devote some of their resources to eliminating the pollution. Leaving aside the fact that
most people think the polluter should pay, one way of measuring the overall magnitude
or importance of pollution reduction to a person is through his or her willingness to
give up something valuable in exchange for improved personal environmental quality.
Measuring this willingness to pay is not easy and is the subject of mucth rescarcih i.
environmental economics.
Having characterized the importance of pollution reduction to individuals (their
willingness to pay), it is possible to sum up individual preferences to obtain a societal
willingness to pay to reduce pollution. It is then easy to combine this with the cost of
pollution control to determine the socially optimal amount of pollution reduction. But
how to obtain this? The government could tell each polluter how much to emit, but this
wuld be analogous to central planning in the old Soviet Union-we know it works up
to a point but has severe problems. particularly when there are many firms and polluters
invotied It is difficult to determine the best way for the government to intervene in the
economy (regulate") to yield the right amount of pollution coatrol without excessive
administrative costs or control costs while at the same time providing the right incentives
to undertake research to reduce costs for the future.
So the "simple" job of fixing.the problem of pollution is
not so easy at the policy
level and can involve hard-to-solve problems, many in the domain of environmental
 ENVIRONMENT
CHAPTER 1 ECONOMICS AND THE

have used from developed economies but a very similar

economics. The examples we are
cities
analysis could apply to a developing country.
Air pollution big problem many
is a in
is probably the most severe environmental prob-
ofthe developing world. Water pollution contaminated by human waste kills millions of
lem in iany developing ceuntries: water
denmand for clean-up, and how to regulate apply
people annually. The same issues of costs,
equally to this question.
Another important type of policy question is the preservation of natural environ
ments, broadly defined. This could involve preserving wild andscenic areas from deve.
opment or protecting animal and plant species from extinction. Here the priniary issue is
providing balance between the forces of development that threaten these environmental
resources and the social value of preservation. How can both sides of this equation be .

quantified to help policymakers when they are confronted with very specific decisions
(such as whether to alow logging in a virgin forest)?
These examples could go on and on. The point is that environmental protection usu-
aly involves the intervention of governments in the economy and it is often difficult to
decide on the proper extent and nature of that intervention. Environmental economics
as it is applied to real environmental problems can be invaluable in helping make those
important decisions,

B. Positive versus Normative

Perspectives
There are two fundamental of economics. One is to try to
uses
the economy around us. Another is to
explain what we see in
to allocate and distribute
try to explain how we would wish the
economy
goods
and services. The terms positive and normative are
used to distinguish these two
perspectives. Positive economics is more value
aiming to explain economic behavior: why markets and institutions have evolvedfree.as
they have and how they work. Examples are
increases when OPEC meets to restrict understanding why the price of gasolire
lution emissions output and how the spatial distribution of pol-
changes when a marketable permit system is established
sulfur emissions. to
regulate
Normative economics, on the other
hand, attempts to use economic tools to
government policies to intervene in the design
the "best" way of marketplace. Inevitably the question arises as to
what is best-a much
intervening
in the
marketplace. Clearly, this requires a way of defining
more value-laden
works as it does. Normative and process than merely explaining why the economy
some detail in Chapter positive examples from cdimate change
2. are
explored in
Unfortunately, when working with
environmental problems it is not
restrict attention
is the notion of
solely to
positive economics. Fundamental to environmental
possible to
market failure. Repairing that market economics
ment intervention. What
kind of failure typically requires govern-
And that is often the government intervention? That is a normative
In question that
developing the normative theory environmental economists are asked to helpquestion.
answer.
of
provision of nonmarket goods, we will regulation to correct market
failure or the public
process of policy formulation. The try to make clear when value
be aware of the practicing environmental judgments enter the
economist
one reason we
problems of venturing into the should always
turn in
Chapter to the
3 territory of normative
analysis. This is
societal decisions. question of social choice-the process of
making
 Discipline S
Environmental Economics as a

C. Environmental Economics and Economics

Economics is a well-developed discipline with an extensive body of theory. a paradigm
with how the economic world works, strong empirical tools, and number of
associated
branches, or fields of study, associated with pieces of the economy.
a

The fundamental building blocks of economics are contained in microeconomics-

the theory of the consumer, the theory of the firm, and the theory of market interaction.

This forms the basis fornearlyall of economics. Related to microeconomics the branch
is
of statistics applied to economic phenomena-econometrics. Microeconomics permeates
all of economics and econometrics permeates all of applied economics.
Branching out from basic microeconomic theory are the several fundamental fields
of economics. These would include macroeconomics (the study of aggregate as opposed
to individual phenomena), public finance (the study of goods not provided
by the market
and the study of taxation), industrial organization (the in-depth study of how firms
interact with each other and with consumers and organize themselves into industries),
and international trade (concerned with how distinct and independent economies inter-
act). Each of these major fields is concerned with major portions of economic activity and
each has unique contributions to make to the overall study of economics.
There are a number of applied fields of economics that draw on all of the basic fields
as well as microeconomics. These would include labor economics, health economics,
monetary economics, experimental economics, development economics, international
finance, law and economics, and environmental economics. Each of these applied fields
draws heavily on mícroeconomics and the basic fields of economics. For the most part,
each of these fields has contributed in some way to understanding economics outside of
its own narrow set of interests. For instance, labor economics has been the source for
many innovatjons in econometrics that have found application across economics. The
primary contribution of environmental economics has been in the area of nonmarket
valuation, i.e, methods for measuring demand cures for goods when there is no market
(or, equivalently, measuring the willingness to pay or willingness to accept compensation
for nonmarginal changes in environmental quality). Other important components of
environmental economics involve adapting tools developed in other parts of economics
to questions regarding the environment.
The categorization above is by no means unequivocal. I would expect many econo
mists in one or another of the fields mentioned above to dispute how their field has been
categorized and placed in relation to other fields. To an extent they would be right: there
are many different ways of summarizing the different fields of economics. The point that
is being made is that environmentaleconomics is an applied field, like many other applied
fields in economics. Much of environmental economics invoBves adapting concepts devel
oped in other branches of economics (particularly public finance and industrial organi-
zation) and applying them to environmental problems. Some aspects of environmental
economics are unique to the field (such as valuation, mentioned above) and have potential
use in economics outside of the environmental economics fiekd

D. Environmental Economics and Ecological Economics

This book is concerned with environmental economics. There is another fiekd of study
that largely has grown out of systems ecology called "ecological economics." These two
 Environmental Economics as a Discipline 7

However. the greatest distinction between the fields emerges when considering envi-
ronmental problems with verylong time horizons, such as global warming or disposal
of nuclear wastes. As some environmental economists will readily admit, economics has
a difticull time analyzing problems in which costs and benefits span long time horizons.
For nstce, storing nuclear wastes can involve potential risks that extend for a quarter
of a million years. The benefits of the storage are reaped by the present consumers of
nuclear power; the costs, if any. are borne by future generations that must live with the
nuclear repositories. The conventional economic approach to this is to add up all of the
costs and benefits, whenever they may occur, but to apply a discount factor to reduce the
importance of future costs in the sum. Inevitably, this means that what happens a century
from now has very little effect on the decisions that are made today. To many people, this
is disquieting. Ecological economists have proposed other ways of dealing with the inter-
temporal decision problem. particularly the notion of sustainability. They argue that we
should never undertake any action that is not sustainable in the long run. In the nuclear
waste example, they would ask: Can we continue to bury waste forever and ever and be
satistied with the world that results? If the answer is no, then the action is not sustainable.
It is not a matter of balancing costs and benefits. There is some intuitive appeal to such
a philosophy.
Over the past decade, the lines between environmental economics and ecologi-
cal economics have become more blurred, at least based on the content of the journal
Ecological Economics, where environmental economists (as well as ecological economists)
regularly publish. As a case in point, the first edition of this textbook cited no articles
from the journal, whereas the current edition of this textbook cites several. Thedistinc
tions áre clearly evolving

E. Environmental Economics and Resource Economics

Nearly all textbooks combine the treatment of environmental and resource economics.
In
fact. most graduate programs that have a specialization in the area combine environ
mental and resource economics into one fied. Undoubedly this is because both concern
the natural world. Environmental economics involves
questions of excessive production
ofpollation by the market or insufficientprotection of the natural world, due to market
failure. Resource economics, on the other hand, is concerned with the production and use
of natural resources, both renewable and exhaustible. Renewable resources would include
fisheries and forests. Nonrenewables would include minerals and energy as well as natural
assetsSosuch as of plants and animals.
the Alps and species
we see
the distinction
between the two areas but we also see the
overlap. Typically.
environmental economics is concerned with issues of market failure regarding the
natural world-for a variety of reasons, markets do not function
correctly, and as a con-
sequence there is too much of some things (such as pollution) or too little of other things
(such as wild and scenic areas). These problems may be essentially static, where time is not
particularly important; in other cases, long time horizons are the essence of the problem.
For instance, time is not really an issue in
in an urban area such as London.
deciding on the right amount of air pollution
Much of resource economics on the other hand is
concerned with dynamics. Time is
what makes renewable and exhaustible resource
slowly enough, the forest can regenerate itself andquestions interesting. If we log a forest
we can continue
logging indefinitely.
 ENVIRONMENT
CHAPTER1 ECONOMICS AND THE

will determine its scarcity in the future, and

exhaustible resource
How fast we extract an
than the failure of markets to operate prop-
thus its in the future. It is time, rather
price
this logging example.
erly. that is the e s s e n c e of environmental and resource economics.
The manage-
There are overlaps between
is a good example in which the failure of
mar-

ment
of afishery to deal with overfishing
fishers may freely enter the market) as well as dynamics
kets is important (the fact that
is makes it a renewable resource). Global
(growth and regeneration of the fishery what with a frame. There are
of a pollution problem very long time
warming is an example
the
preservation of natural environments. These issues
other overlaps. primarily in
economics. On the other hand, dam-
involve time so they could be relegated to resource
environments is often the incidental result of economic activity
with a
age to natural
conversion of habitat to
different primary purpose. Species loss is usually the result of
human use.
So we see that many environmental economics problems (but not all) are static,
whereas many resource economics problems are dynamic.' Most environmental econom-
ics problems involve market failure, whereas many resource economics problems (but not
all) do not. In other words, there is overlap between the fields. For the most part, in this
book we are concerned with environmental problems involving market failure. As such,
we cover pollution problems but also discuss the management offisheries.

I. THE QUALITY OF THE ENVIRONMENT

There are many comprehensive assessments of the state of the world's environment. It
is unnecessary to offer another review here. What we would like to do is provide some
indication ofthe breadth of problems that are deemed environmental and to gain an
appreciation for what problems are being solved and what problems remain dificult to
solve and are likely to be a focus of attention in the
coming decades.
Pollution problems are not new to mankind. There are records of the Romans com-
plaining about the "stink of smokey chimneys."" Pollution control laws in other parts
of Europe date from the Middle
Ages. It has always been the c e that urban areas have
bad pollution problems, primarily because of the
are associated with emissions as well as
large concentrations of people. People
being
outside of cities, historically the earth's size has
the reason pollution is
damaging. But
been vast enough to dissipate even the
most serious environmental threat.
What is new is the magnitude of the
the fact that the world is no problem and
it. In the 1960s and 1970s
longer infinite compared to the
ability of people to pollute
many people around the world were galvanized into
something to curb
environmental degradation. In most countries, doing
ments to protect the environment date from this significant move
enormous size of our current world's period." To a very large extent, the
population and the
population are responsible for the pressures high
tions of the standard of living of por
on the environment. A
economy generates more pollution, all other larger
demand higher levels of environmental things being equal; richer citizens usually
quality. And as long as the world becomes more
populated and wealthier, the pressures will only increase. This is not to
mental problems cannot be solved, environ-
protect the earth's environment. only that it will become increasinglysaydifficult to
 Environmont 9
the
The Quality of

environmental problems:
air pollution, waler
We focus on four main categories
of
that this is a com
toxic emissions, and ecosystem health. This is not to suggest
pollution, of the major
prehensive list,
just that these are four major calegories that encompass many
environmental problems faced by man today.

A. Air Pollution
in fuels lead
Air pollution is primarily a by-product of energy consumption. Impurities
basic fact of chemistry that
toemissions of sulfur dioxide and particulate matter. ltus a
oxidized carbon-carbon dioxide,
burning carbon-based fuels leads to emissions of
contains significant amounts of
a
major greenhouse gas. Because o u r atmosphere
emissions of nitrogen
nitrogen in addition to oxygen, burning fuels inevitably leads to
oxides. Tropo-spheric ozone is not directly emitted from fuel combustion
but results

chemically from concentrations of

high oxides (from fuel combustion) and
nitrogen
organic vapors (from paint drying and among other things), in
gasoline evaporating.
the presence of sunshine. t has proved to be very difficult to control ozone in many
urban areas of the world.
To a large extent, air pollutants are at their worst in urban areas, due to concentra-
tions of people, both as sources of the pollution (directly or indirectly) and as victims
of the pollution. Air pollution can lead to health problems, including sickness as well as
physical irritation and reduced human performance. The young and those weakened by
other illnesses may be particulariy susceptible to the effects of urban air pollutants. Urban
air pollution also damages materials (such as buildings), increases the cost of mainte
nance(such as increased cleaning requirements), and degrades aestbetics (no one likes to
live in a brown haze).
At a regional level, air pollutants may damage crops (though some sulfur and car-
bon pollution can help crops). Acid deposition is a regional problem in many parts of
the world. Deposition of sulfur and nitrogen-based acids can harm forest and aquatic
ecosystems. Regional haze from nitrogen and sulfur pollutants is also a problem in areas
with less rainfall. Carbon dioxide is a global pollutant in that overall levels in the earth's
atmosphere lead to increases in the heat-trapping capaciry of the atmosphere, which leads
to global warming. Controlling the precursors of climate change is the subject of intense
current international debate.
Someurban air pollutants have been curbed with some succes, though not without
cost and not in all parts of the world. Sulfur dioxide emissions in Western Europe, North
America, and the rest of the developed world have been the subject of significant con-
trol over the past-two decades. Aggregate emissions appear to have peaked and are now
declining. Table 1.1 shows a twenty-five-year time series for three pollutants for three
countries, one in transition from poor to middle-income (China), one rich (Japan), and
one in between (Iran). Note the dissimilarity
among the three pollutants represented.
Carbon dioxide emissions, which lead to global warming. have been increasing over the
period and are higher in wealthier countries. Sulfur dioxide is almost, the opposite. In
fact, sulfur dioxide seems to be particularly troubling for the midde-income country,
Iran. With money (income), the problem can be solved, as the apan data demonstrate.
Suspended particulates (soot) are worse in lower income countries and tend to be less ofa
problem as income levels rise. The story Table 1.1 tells is that not all air polutants are the
same; nor are the same pollutants always the most problematic across countries.
HAPTE 1 ECONOMICS AND THE ENVIRONMENT

TABLE 1.1 Air Pollution Indicators for Selected Cities and Years

1980 1990 2000 2005

China
GDP per capita (2005 U.S.S 523 1,099 2.664 4,076
sO, concentration (Beijing) 56 107 71 50
Particulate concentration (Beijing* 475 413 106 89
Per capita C0, emissions (tonnes)
Iran
GDP per capita (2005 U.S.s 7,087 6.254 7.667 9,314
SO, concentration (Tehran" 130 165 209 NA
Particulate concentration (Tehran 226 261 58

Per capita C0, emisions (tonnes) 7

Japan
GDP per capita (2005 U.S.s 18,652 25,953 28,613 30.310
so, concentration (Tokyo 2 24 19 NA
Particulate concentration (Tokyo* 61 NA 43 40
Per capita co, emissios (tonnes) 8 9 10

GDP per capitafrom World Bank, computed using prehasing power parities, in constant
2005 International doller
Meam anmual concentretios in city center (yg/'m'y. For reference, the U.S. primary ambient
standards are 80 pgim' for S0, and 50 pg/m' for partiulates (PM,J. though in 1997 these were
revised to distinguish betweenfine and coarser particalates.
Source: Word Bank, Word Devlopment Report (various issues: Word Bank (1992 World
Bank World Development Indicators oaline database (World Bank, 2009): United Nations
Environment Program (2008; OECD (2006). In some cases, data unavailable for specific year;
adjacent year used.

One of the major nonfuel air pollutants is chlorofluorocarbons (CFCs), substances

that lead to depletion of the stratospheric ozone layer. These substances are now primarily
used as refrigerants. CFCs have beencontrolled (in theory)by the 1987 Montreal Protoco
which has had some success. Worldwide production of these chemicals in 1995 was 20%
of the level in 1986. Worldwide production of these chemicals peaked in 1988, dropped to
20% of that level by 1995, and had dropped to 3% of peak levels by 2005.' One problem is
a growing black market in illicitly produced CFCs as well as rapid increases in CFC use
and production in the developing word. Under the Protocol, the developing world faces
significantly looser restrictions than the developed world, at least for the time being.

B. Water Pollution
Water pollution has traditionaly been the result of organic material deposited in water
ways or lakes. Organicwaste is problematic since it needs oxygen to decompose. Thus one
of the measures of the quantity of pollution is biologic oxygen demand (BOD). Oxygen is
of course needed for fish to survive. So if pollution has such a high BOD that the water
body becomes depleted of axygen, the water body can no longer support much in the way
of life. In addition, with oxygen depleted, decomposition is now from anaeröbic bacteria,
which do not require orygen. Such decomposition tends to be very odiferous. A major
type of organic waste is of course human waste, which usually also involves significant
human pathogens.
 The Quality of the Environment 11

TABLE 1.2 GDP per Capita, Mortality, and Access to Clean Water and
Sanitation for Selected Countries, 2000

Percentage of Percentage of
GDP per population with population with Child mortality
Country capita safe water" sanitatioon rate

3urkino Faso 896 56 190

Ghana 1,015 12

!:dia 1,718 82 3

China 2.664 80 59
Brazil 7921 89
Costa Rica 8,117 97 96 4

Merico 12,071 93 76
Gree 20,574 99 98
L'nited Kingdom 29,172 100 100

Denmark 31,721 100 100

005 U.S.S per capits, using purchasing power parities.

Percentage of population with access to safe drinking water.
Perentage of population with access to sanitation services.
'Amnual mortality per l,000 live births of children under age five.
Sure World Bank Development Indicators Database (World Bank, 2009).

How serious is water pollution? The World Bank indicates that in 2005, 18% of the
world's population did not have access to improved drinking water supplies. The Workd
Bank also points out that life expectancy in cities in France went from about 35 years in
1830 to 45 years in 1900, with the timing ofchange closely corresponding to the introduc-
tion of modern water supply and waste water disposal. The importance of water supply
and waste disposal is illustrated in Table 1.2. Note that for the ten countries shown, the
child mortality rate is less correlated with income (GDP per capita) than with the popula-
tion's access to safe drinking water and to proper sanitation services. Water contaminated
by pathogens is probably the primary environmental threat in much of the world.
One particularly difficult water pollution problem is pollution of groundwater.
Groundwater, water in underground aquifers, is the source of drinking water for many
people. Because of the cleansing ability of the earth above the aquifer, groundwater has
traditionally been relatively contaminant free. However. groundwater contamination does
occur. primarily from leaking storage facilities on the surface, either waste storage or stor-
age of bulk liquids such as gasoline. In the past, chemical wastes have been dumped oa
the surface, finding their way into the groundwater many years later. Another source of
groundwater pollution is the leaching of pesticides and fertilizers into the groundwater.
As
point sources (pollution sources with clear, identifiable, and practically
measurable discharge pipes or smokestacks) of water pollution are brought under con-
trol (something that is occurring in much of the developed world), the remaining water
pollution problems are tougher to solve. Remaining pollution problems are in large part
from non-point sources of pollution (also called area sources)-urban runoff, agricul-
tural runoff, as well as accidental
spills.
Surface waters, such as lakes and rivers, are the ultimate
is deposited on the land. And even the repositories of much that
sulfur and nitrogen oxides that are emitted as air
12 CHAPTER1 ECONOMICS AND THE ENVIRONMENT

pollution are ultimately deposited on the land, either in dry form or as acidic precipita
tion. Lakes and rivers throughout the developed world suffer to varying degrees fro
excessive levels of and acidification. Nutrients
nutrients (from agricultural runoff)
promote the growth of algae and phytoplankton. which increase the turbidity of the
ca
waters. Acidification has the potential of making lakes uninhabitable for most fish. Even
theworld's oceans are beginning to experience serious pollution. particularly smaller seas
such as the Baltic and the Mediterranean.

C. Toxic Chemicals
Toxic chemicals in the environment have been a problem for decades. In fact, one of the
books most important in coalescing the modern environmental movement was Rachel
Carson's Silent Spring. a book about pesticides finding their way into the food chain and
causing havoc with wild birds (among other species). The good news is that the most
persistent pesticides (such as DDT) have been banned for decades in much of the world
and that many threatened species are making a comeback. The bad news is that there are
still significant discharges of heavy metals and other toxics into the aquatic environment,
even in developed countries.
Another serious toxic problem from the perspective of human health is lead. During
this century,the most significant source of lead poisoning has been through air pollu
tion, due to lead in motor fuels. Lead has been blamed for very serious health effects
(such as mental retardation). particularly in poor urban children. Lead has been a major
air pollutant because of its use as a performance enhancer in automobile fuels. Most of
the developed world now significantly restricts or bans the use of lead in automobile fuel.
The result of such a ban can be dramatic. According to the U.S. EPA, the average annual
lead concentration in a number of U.S. cities in the late 1970s was over 1 g/m'. In 1990,
the concentration had dropped to 0.07 g/m', and the ban on lead in gasoline had still
not become complete.
Aside from intentional discharges of toxics into the environment, there are two other
major sources of toxics-old toxic waste sites and accidental discharges. Toxic wastes
do not rapidly decay and become harmless. Some abandoned
industrial sites from the
nineteenth century are still considered chemically hazardous. There are many sites of
nuclear, mining, and chemical wastes from the post-World War II but
These can be very pre-1970s period.
expensive to dean up. Accidental spills, inctuding oil spills, and chem-
ical spills, will always be with us. And these can be
very serious sources of environmental
damage.

D. Ecosystems and Natural Environments

Most of the foregoing environmental problems (air, water, toxics) are sometimes referred
to as "brown issues-associated with
pollution, often from industrial sources. Some
environmental issues do not directy involve
pollution in the conventional sense. These
green issues concern the natural environment we all live in, depend on, and benefit
from. As some brown issues are
brought under control (though vexing brown issues
remain), and population pressures continue to expand,
its attention to green issues. increasingly the world is turning

*****
 Environmental Regulation 13

in
TABLE 1.3. Forested Land Area,
Millions of Square Kilometers

1990 2000 2005

Africa 6.99 6.55 6.3

7.44 7.34
Asia
9.89 9.98 10.01
Europe
Latin America 9.24 8.82 8.60
Near East 1.28 1.23 1.20
North America 6.78 6.78 6.77
wORLD 40.77 39.88 39.52

Source FAO (2009).

Many green issues have to do with the health of specific species of animals or plants,
or ecosystems, consisting of interconnected species of animals and plants. The rapid rise

in the earth's population has inevitably placed great strain on wild ecosystems around
the planet. Concern for the health of these ecosysterms motivated the massive global
Aillennium Ecosystem Assessment, a United Nations project begun in 2000 to assess the
consequences of ecosystem change around the world, and completed in 2005.
It is dificult to quantify the severity of green issues with a few summary statistics.
For one thing, many relevant data series do not go back very far in tinie. For instance,
Table 1.3 shows the extent of forests in terms of millions of square kiiometers around the
world, from 1990 to 2005. What stands out is that with the exception of Latin America,
the size of forested lands remains fairly stable. What is not shown is the extent of old-
growth forests nor the massive deforestation that occurred many years ago in North
America and Europe. Furthermore, forest extent is only one of the many dimensions of
ecosystem health.

II. ENVIRONMENTAL REGULATION

Tbere is a surprising amount of similarity in how countries around the world have
** responded to enyironmental problems. It is beyond the scope of this book to provide a
comprehensivdreview of international environmental regulationy We will content our-
selves witha very superficial examination of environmental protection regulation in the
European Union, Russia, and the United States.
These reviews will focus on two issues. First, we bope to coaveya sense ofhow envi-
roomerital protection is pursued in each of these countries. Secood, we will try to indicate
the extent to which economic incentives have been used in these countries,
particularly
emission charges, in which polluters pay a fee per unit of emissions,
marketable per-
or
m systems in which polluters may buy and sell the right to pollute a given amount, thus
imputing a value to reducing pollution.
HAPTER 1 ECONOMICS AND THE
ENVIRONMENT
ficds take quite different
perspectives, but are
ultimately concerned with helping make
social decisions about environmental
problems. Unfortunately. in many non-English
speaking countries the distinction between the two fields is lost in the translation because
of the similarities between the words
"environmental" and "ecological."
A simple distinction between the two fields arises from the
fact that environmental
economics tends to involve economists who have extended their
toconsider the environment, whereas
discipline
and paradigm
who have extended their
ecological economics tends to involve ecologists
discipline and paradigm to consider humans and the economy.
Another distinction between the fields is that
ecological economics is very multidisciplin-
ary. In contrast to environmental economics, which is a branch of economics, ecological
economics welcomes and embraces practitioners from a wide variety of fields who wish to
study the environment-society interface. But this is history; the appropriate question to
ask is how do the two fieds approach environmental problems and how do they differ?
Ecological economics (as well as conventional economics) is difficult to succinctly
define. One of the leading ecological economists defines the subject as a "field of study
that addresses the relationships between ecosystems and economic systems in the broad.
est
sense.The emphasis is on the very long-term health of the
ecosystem, broadly
defined (ie., with humans as part of it). In a 2007 invited lecture to the
European Society
of Ecological Economics, Malte Faber argues that an interest in "nature, justice and
time constitutes the defining characteristic of ecological economist" He argues that the
economy must be considered a part of nature, that doing what is just must be a central
tenet of the field, and that the issue of time is oversimplified in coaventional economics.
It follows that ecological economics tends to be normative, indicating what soci-
ety should do, rather than positive, describing what society actually does (as discussed
earlier). And one major distinction between the two fields is associated e and
thus the way in which social decisions are made that depend on measures of value of the
environment. Conventional economists believe that value to society derives from the
individual values held by human members of society. Ecological economists take a more
biophysical view of value. For instance, some ecological economists measure value in
terms of embodied
energy content. Thus in comparing a typewriter
to a the
computer,
appropriate question is which took more energy to create? Less energy is better. This is a
direct extension of ecological theories that ecosystems operate to minimize 1
through-
put of energy. To these researchers, minimizing the energY content of delivered goods and
services should drive public policy. The
criticism leveled at this "energy theory of value
by environmental economists is that there are many resources in short
land and skilled people. supply, including
Reducing the value of a good to the embodied content of fac- any
tor is an
oversimplification. Environmental economists believe the value ofa good stems
from its embodied content of multiple scarce factors
much value individual people (incduding energy) as well as how
place on the final good. In other words, value cannot be
reduced to a simple physical metric.
A recurring theme among some
ecological economists (but not all) is the notion that
economic growth is undesirable. Further, these
economics is that growth is desirable. To a practitioners argue that a central tenet of
large extent, stems froma misunderstand-
this
ing of growth. Technological progress and education, as well as
in fact led to economic population grówth, bave
growth. But it is not inevitable that this growth be at the expense of
the eavironment.
Consumptiof can be of material goods (such as steel or motor vehices)
or it can be of aesthetic
goods (such as art or literature).