UNIVERSITY COLLEGE LONDON MASTER OF SCIENCE IN ENVIRONMENTAL AND RESOURCE ECONOMICS

UNIVERSITY COLLEGE LONDON MASTER OF SCIENCE IN ENVIRONMENTAL AND RESOURCE ECONOMICS Economic Principles and the Environment Professor Stephen Smith Course outline and reading list, 2007/2008 Course lecturer Stephen Smith. Office hour: Mondays, 3.30 - 4.30 pm. Room 3.27 Drayton House. email: stephen.smith@ucl.ac.uk Lecture and tutorial class times 9 two-hour weekly lectures, on Mondays, 10-12, starting 8 October. 4 tutorial classes to discuss problems and written work, 4pm, Mondays 6/11, 13/11, 27/11, 11/12 Aims To provide students with a thorough understanding of core economic theory concerning environmental problems and policies, as a foundation for subsequent study of environmental problems and policies within the degree programme, and as one of the key elements in the professional training of an environmental economist. Objectives At the end of the course, students should: • have a good appreciation of the economic theory of externalities in the form of pollution and environmental hazards, the market failures that can arise from externalities in an unregulated market economy, and the scope and limits of individual "Coasean" bargaining to resolve externalities without regulatory intervention; • have a good understanding of the economic theory relating to the choice of instruments for pollution control, including the relative merits of policies based on "command-and-control" and "market mechanisms"; • have the ability to read and interpret economic models of externalities and environmental regulation expressed in standard mathematical notation, and have had some experience of reading and interpreting original journal articles on this subject. Syllabus This course sets out the economic theory relating to pollution and other externalities. It covers: • the definition of externalities, economic welfare in the presence of externalities, the Coase theorem, public goods, problems of preference revelation; • the choice of instruments for environmental protection, including the relative merits of regulatory standards and "market mechanisms" such as Pigouvian taxes and tradeable permits; • economic analysis of the enforcement of environmental regulations; • problems in the efficient regulation of environmental hazards • the theory of environmental policy in a multi-jurisdictional world. Required coursework • A class presentation (jointly with another student), based on readings to be assigned • Preparation of answers to a set of short-answer questions, to be submitted by the lecture in week 8. Question set to be distributed later. • An essay (maximum 1500 words) to be submitted by the end of term. Titles to be distributed later. • Note that although the coursework grades do not count in the final assessment, the coursework is compulsory. Examination format The course will be examined by a two-hour written examination. This will consist of two parts, each accounting for half the total marks available for the examination. Part A consists of questions requiring short, specific answers. Part B comprises more complex questions, requiring a longer and more structured answer. Candidates should answer four of the five questions in Part A, and one of the four questions in Part B. Further information on the examination, and a sample examination paper, can be found later in this document. 1 Introduction This course outline tries to give a brief flavour of the material which will be covered in the course, highlighting the debates and issues which the course addresses. Although the course is a theory course, the selection of the material to be covered aims, as far as possible, to concentrate on theory which will be useful in understanding policy debates. Many of the issues studied in this course will reappear in other parts of the degree programme (for example in the policy courses on "European Environmental Policy", "Global Environmental Problems" and "Environment and Development" in the second term). The function of this course is to equip you with an understanding of the theory which underpins these policy issues, and with the ability to read and interpret theoretical papers in this field. The course therefore makes considerable use of formal theory and notation. Although it is most important that you should understand the intuition behind the theoretical models (the "essence" of the argument), it is also important that you should feel comfortable with the way in which theoretical models are expressed. Reading Much of the reading list consists of journal articles, making key advances in the theoretical literature. You should try to read these carefully, at least one or two a week, in parallel with the course. You may not find this easy. Some of them, for example, make references to other papers which you will not have read, or presume familiarity with a debate which was current at the time when they were written. However, you will find some of the other readings helpful in providing explanations or alternative formulations of the arguments. You should not expect to understand everything at first reading, and you will probably find that if you re-read the first papers after you have finished the course as a whole that you understand much more than you did the first time. Also, if you have not read original economic theory papers before (or indeed, if you have not done much economics before), you may find these papers quite a shock. Don`t be unduly alarmed, and don`t let yourself get stuck for too long with a paper that you can`t understand. Move on to something else, and come back to it after a few weeks; you`ll often find that what you have learned in the meantime has helped to make sense of the paper. Textbooks The textbook for this course is: Charles D Kolstad, Environmental Economics, Oxford University Press, 2000. Chapters 1 to 12 of this book provide a good introduction to the topics covered in this lecture course. The book is not highly-mathematical, although mathematical notation is used where it helps to make things clearer. I like the book, and have chosen to adopt it as a textbook because it provides clear explanations of the intuition behind the theoretical models discussed. It is rigorous and precise in its analysis, without overcomplicating things that can be explained straightforwardly and simply. It also covers important issues, such as audit, enforcement, and the regulation of hazards, which are neglected in most other environmental economics textbooks. In earlier years when I have taught this course the textbook used was: W J Baumol and W E Oates, The Theory of Environmental Policy, Second Edition, Cambridge University Press, Cambridge 1988. This is more formal and mathematical than Kolstad, and more limited in scope (it has nothing on hazards or enforcement, for example). In many places, it isn`t so much a textbook as a compilation of the authors` own papers, and it feels, to my mind, rather unbalanced in the coverage it gives to different topics. However, it has been written by two of the great scholars in this field, and you may find it useful as a supplement for Kolstad on certain topics (and, in some cases, as a bridge between the relatively accessible analysis in Kolstad and the more technical presentation of academic journal articles). If you find Kolstad, Baumol and Oates and the recommended journal papers too heavy going, there are a number of other rather less technically-demanding textbooks which you may find useful, especially at the start of the course. You 2 might, for example, try: Perman, R., Y. Ma, J. McGilvray and M Common (2003), Natural Resource and Environmental Economics, Harlow: Longman. (Chapters 5-8 are the most relevant for this course) Hanley, N, JF Shogren, and B White, (1997), Environmental Economics in Theory and Practice, London: Macmillan. (Chapters 2 - 6 are the most relevant to this course) However, don`t be tempted to rely on these less-technical books and nothing else. You do need to be able to master the material in Kolstad by the end of the course, and you do need to be reasonably familiar with the notation and methods which the theoretical papers use. To begin with... An overview of many of the issues covered in this course (and also of some issues addressed in next term`s course on Techniques of Environmental Valuation) is given in: Cropper, M. L. and W. E. Oates (1992), "Environmental Economics: A Survey", Journal of Economic Literature, Vol XXX, pp 675-740. Lecture schedule Week 3 Introduction: market failure and externalities 4. Optimal pollution abatement and the Coase Theorem 5. Public goods: Information and preference revelation 6. Market mechanisms versus Command and Control [Reading week - week 7] 8. Uncertainty and Instrument Choice 9. The Pigovian Tax: Further topics 10. Regulatory compliance and enforcement 11. Hazards 12. Inter-jurisdictional issues Tutorial class schedule Week 5 23 October 8 13 November 10 27 November 12 11 December The Coase Theorem Efficiency: Market mechanisms versus Command-and-Control Emissions trading Regulation of environmental hazards Coursework and tutorial class instructions to follow 3 Topic 1. Externalities and Public Goods In economic analysis of environmental policy, a central role is played by the concept of an externality. A large number of environmental problems involve externalities - including the human health effects from lead emissions by motor vehicles, the nuisance caused to local residents by aircraft noise at airports, the various social and economic consequences of climate change due to "greenhouse gas" emissions, etc. We will start by defining the concept of an externality. If there are no externalities present, and given certain other conditions, an unregulated, perfectly-competitive market economy may achieve the socially-optimal ("efficient") outcome. If externalities are present, however, the outcome from an unregulated market economy may fall short of the social optimum. We will consider the meaning of these claims, and set out a formal model in which an externality leads to an inefficient, sub-optimal, outcome. We will then go on to consider some cases where an efficient solution might be possible even where externalities are present. The problems arising from externalities are closely linked to the definition of "property rights". A key paper by Coase (1960) argues that bargaining between individuals will achieve efficient solutions to externality-type problems, if property rights are clearly defined. We will consider the circumstances in which the "Coase theorem" holds, and will introduce some of the problems which arise with bargaining solutions when many individuals are involved. A key idea here is the idea of the "prisoner`s dilemma" - even though it may be in everyone`s interest that cooperation should take place (for example to get together to bribe a local polluter to stop polluting), it may be in no-one`s individual interest to cooperate (everyone may do better by trying to "free ride" on the collective actions of others, without contributing anything themselves). This leads us to think more generally about the problems of information which arise when externalities are present. If individuals try to "free ride", how do we know how much environmental protection they want? We discuss some of the "preference revelation" mechanisms (including the Clarke/Groves/Ledyard mechanisms and Lindahl prices) which have been suggested as ways to obtain accurate information about individual preferences, uncontaminated by incentives for various types of "strategic" response. Readings: You might find it useful to start by reading a standard textbook treatment of externalities, such as: Varian, HR (1987) Intermediate Microeconomics. A Modern Approach, New York and London: Norton, Chapter 31 "Externalities". Joseph E Stiglitz (2000) Economics of the Public Sector, Norton. Chapter 9 Externalities and the Environment (a) Definition of externalities W J Baumol and W E Oates, The Theory of Environmental Policy, Second Edition, Cambridge University Press, Cambridge 1988. Chapters 2 and 3. Newbery, DMG (1980) "Externalities: the Theory of Environmental Policy", Chapter 4 (pp 106-149) in GA Hughes and GM Heal (eds) Public Policy and the Tax System, London: Allen and Unwin. Cornes R and Sandler T, (1996) The Theory of Externalities, Public Goods and Club Goods, Second Edition, Cambridge University Press. Chapter 3, "Theory of Externalities". 4 (b) Public goods Varian, HR (1987) Intermediate Microeconomics. A Modern Approach, New York and London: Norton, Chapter 32 "Public goods". Joseph E Stiglitz (2000) Economics of the Public Sector, Norton. Chapter 6. Public Goods and Publicly-Provided Private Goods (c) Formal model with inefficiency Newbery, DMG (1980) "Externalities: the Theory of Environmental Policy", Chapter 4 (pp 106-149) in GA Hughes and GM Heal (eds) Public Policy and the Tax System, London: Allen and Unwin. Cornes R and Sandler T, (1996) The Theory of Externalities, Public Goods and Club Goods, Second Edition, Cambridge University Press. Chapter 4, "Externalities, Equilibrium and Optimality" Baumol, WJ and Oates, WE, (1988), The Theory of Environmental Policy, Second Edition, Cambridge University Press. Chapter 4 (d) Property rights and the Coase theorem Coase, R. (1960), "The problem of social cost" Journal of Law and Economics Turvey, R. (1963) "On divergences between social cost and private cost", Economica Regan DH (1972) "The problem of social cost revisited", Journal of Law and Economics, 15, 427-37. Cooter RD and Ulen (1996) Law and Economics, second edition Cooter, RD (1989) "The Coase Theorem", in J. Eatwell, M. Milgate and P. Newman (eds) The New Palgrave. Allocation, Information and Markets. Macmillan. Stephen, FH (1988), The Economics of the Law, Brighton, Wheatsheaf Books. Chapter 3, "The Coase Theorem". Cornes R and Sandler T, (1996) The Theory of Externalities, Public Goods and Club Goods, Second Edition, Cambridge University Press. Chapter 5, "Externalities and private information" A Allan Schmid, (1995) "The environment and property rights issues" in Daniel W Bromley (ed) The Handbook of Environmental Economics, Blackwell Publishers. Joseph Farrell (1987) "Information and the Coase Theorem" Journal of Economic Perspectives, Vol 1, No 2, pp 113-129 Paul Milgrom and John Roberts (1992) Economics, Organization and Management, Prentice Hall. Chapter 9 "Ownership and property rights". (e) Problems of preference revelation Mueller, DC (1979) Public choice, Cambridge University Press. Chapter 4, "Some new processes for revealing preferences on public goods". Cornes R and Sandler T, (1996) The Theory of Externalities, Public Goods and Club Goods, Second Edition, Cambridge University Press. Chapter 7, "Alternative mechanisms for the provision of public goods" 5 ... - tailieumienphi.vn