This is the second course in a two-course sequence that is designed to introduce advanced undergraduates and masters-level students in applied economics to the analytical techniques commonly used in the study of resource-use and pollution problems. While the first course concentrates on resource-use, scarcity, and conservation issues, this second course focuses on three broad topics of environmental economics. First, we take an in-depth look at the various types of environmental (or “market failure”, or, “externality”) problems that confound humanity. After exploring the basic externality problem (and what the simple allocation of property rights teaches us about a basic solution to the problem), we explore the specific problems of common-property resources, public goods, and asymmetric information (in particular, what’s known as moral hazard).
Next, we investigate the standard, real-world, market mechanisms (or, “incentive designs”) that economists have proposed to ameliorate these environmental problems, such as taxes and subsidies, liability rules, bonds, deposit-refunds, and tradable permits. We also examine the issue of incentive-compatible contracts for the particular problem of asymmetric information. Finally, we conclude the course by studying the theory and various empirical methods that guide economic valuation of the benefits derived from preservation of the environment (or, if you like, the benefits derived from avoiding the various environmental problems currently confronting us).
Before concentrating on these three foci, we will get our proverbial feet wet by learning how environmental economists broadly classify different types of pollution. We will also explore the various definitions and rules that guide the economists’ thinking about sustainable development, as well as the different indicators that economists have devised to assess humanity’s progress sustainability-wise.