HL.b Environmental and ecological economics flashcards

Topic 10: HL.b Environmental and ecological economics

What is an externality?

A cost or benefit to people outside a transaction. When prices leave out environmental costs, the result is market failure; internalising makes the polluter pay the external cost. (HL only)

Environmental economics versus ecological economics

Environmental economics: the environment sits inside the economy; fix market failure by pricing harm; uses cost-benefit analysis; weak sustainability. Ecological economics: the economy sits inside the biosphere; limit material throughput first; strong sustainability. (HL only)

Weak versus strong sustainability

Weak: human-made capital can replace natural capital. Strong: critical natural capital cannot be replaced. (HL only)

What are the components of total economic value (TEV)?

Use values: direct use (fish, recreation), indirect use (flood control, pollination, water purification), option (possible future medicines). Non-use values: existence (knowing a species survives), bequest (leaving it to future generations). (HL only)

Pollution tax versus cap-and-trade

A pollution tax fixes the price per unit and lets the quantity emitted vary. Cap-and-trade fixes the total quantity and lets the permit price vary; cheaper abaters do more of the cutting. (HL only)

Will a firm cut emissions under a tax?

It cuts every tonne that is cheaper to abate than to tax and pays tax on the rest. Example: tax USD 40 per tonne; the first 5,000 t cost USD 25 to cut, further cuts USD 60 → cut 5,000 t and stop. (HL only)

How does the discount rate affect environmental decisions?

Present value = future value ÷ (1 + r)ᵗ. USD 1,000,000 of damage in 50 years is worth about USD 608,000 now at 1% but about USD 87,000 at 5%, so high rates favour short-term gains. The rate is a value judgement. (HL only)

Name four methods of valuing nature

Market prices; contingent valuation (stated willingness to pay in a survey); travel cost; hedonic pricing. (HL only)