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1、Chapter 2 Valuing the Environment:Concepts Chapter 2 provides an overview of basic microeconomics as it applies to natural resource and environmental economics.The chapter includes much of the basic economics terminology and describes the framework from within which the various topics in the text wi
2、ll be presented.As such,the chapter covers a lot of material.Students without much background in economics may find this material abstract and difficult.You may find it beneficial to spend extra time on this chapter,especially when teaching the non-major.Ensuring that your students have a good grasp
3、 of the concepts and tools early in the semester will make teaching the other chapters easier and will facilitate the learning process.1.Define the economic approach and distinguish between positive and normative economics.2.Derive and define a demand curve,and distinguish between individual and mar
4、ket demand,total and marginal benefits,and total willingness to pay and marginal willingness to pay.3.Define opportunity cost.Distinguish between a contemporaneous opportunity cost and an intertemporal opportunity cost.4.Derive and define the marginal cost curve.Distinguish between marginal and tota
5、l cost.5.Define present value and the discount rate.Illustrate the basic discounting equations.6.Calculate the present value of net benefits and show how benefit-cost analysis can be used to evaluate specific options.7.Derive net benefits graphically.Define optimality and economic efficiency.8.Disti
6、nguish between static efficiency and dynamic efficiency.Use the Equimarginal principle to illustrate both efficiency and inefficiency.9.Define the concept of Pareto optimality.10.Apply these concepts to real world examples.2 Tietenberg/Lewis Environmental and Natural Resource Economics,Eighth Editio
7、n 1.Derive net benefits both graphically and mathematically.2.Derive the optimal allocation graphically and mathematically 3.Distinguish between discrete and continuous discounting formulas.I.The Human Environment Relationship A.The Environment as an Asset The concept of the environment as an asset
8、will likely be a new one to most students.This subsection provides examples of some of the goods and services the environment provides and discusses the treatment of the environment as a closed system,using the first and second laws of thermodynamics.Reminding students that assets have value that ca
9、n be carried into the future will serve as a preview for the discounting topics that come up later in the chapter.As a preview to upcoming chapters you may also choose to discuss examples of natural resource assets.It is easy to illustrate that privately owned tree lots have both an asset value(whil
10、e growing)and a use value(when cut).Open access fisheries,however,lose the asset value as there is no way to save fish for the future if you cannot prevent someone else from catching them.This will serve as an introduction and hint of future topics.B.The Economic Approach Normative and positive econ
11、omics are both defined here.Given the controversies that tend to surround environmental issues and debates,examples from current events should be easy to find.Some timely examples of where normative decision-making will be prevalent include dam removal and policies to prevent or mitigate climate cha
12、nge.II.Normative Criteria for Decision-Making This section is the meat of the chapter and presents the basics of benefit-cost analysis.Beginning with the definition of a demand curve,students should learn the concepts of total and marginal benefits,total and marginal willingness to pay,total and mar
13、ginal costs and present value.I have found it useful when teaching the non-major to derive an individual demand curve for a market good first.Students will grasp the concepts of willingness to pay,for example,for the first cup of coffee in the morning and the idea of diminishing returns from drinkin
14、g additional cups relatively quickly.When they have mastered the basic concepts and vocabulary for a common market good,it will then be easy to illustrate the same for an environmental good that sometimes does not have a market price.Willingness to pay for preservation,for example,is much more abstr
15、act and difficult if the students are not familiar with microeconomic principles and concepts.The concept of things having value because humans value them may also be controversial.A.Benefit-cost analysis provides a method for determining whether or not an action should be supported.Most simply,if t
16、he benefits exceed the costs,then the action should be supported.B.Benefits can be derived from the demand curve for the good or service.C.Total willingness to pay or total benefits is the area under the demand curve from the origin to the allocation of interest.D.Costs are measured by the marginal
17、cost curve.Chapter 2 Valuing the Environment:Concepts 3 E.All costs should be measured as opportunity costs.Opportunity cost is the net benefit foregone when an environmental service is lost to a different use.F.Marginal opportunity cost is the cost of producing the last unit.G.Total cost is the sum
18、 of the marginal costs or the area under the marginal opportunity cost curve up to the allocation.This will also be the area under the supply curve in purely competitive markets.H.Net benefit is the excess of benefits over costs or the area under the demand curve that lies above the supply curve.Thi
19、s is also consumer plus producer surplus.I.Benefit-cost analysis requires comparing benefits and costs that usually occur at different points in time.The concept of present value allows us to incorporate the time value of money and to compare dollars today to dollars in some future period by transla
20、ting everything back to its current worth.J.The present value of benefits,$B,received n years from now is$Bn/(1 r)n,where r is the discount rate.K.The present value of a stream of benefits B0,Bn received over a period of n years is the sum from time I 0 until year n of$Bi/(1 r)i.L.Discounting is the
21、 process of calculating present value.III.Finding the Optimal Outcome A.An allocation is efficient or has achieved static efficiency if the net benefit from the use of those resources is maximized by that allocation.If at an allocation marginal cost is greater than marginal benefit,then net benefits
22、 are less than the maximum possible,and the allocation is inefficient(too much has been produced).Likewise,if marginal benefit is greater than marginal cost,net benefits can be increased by increasing the allocation.Thus,an efficient allocation will be achieved when marginal benefit and marginal cos
23、t are equal.Inefficient allocations do not maximize net benefit.B.The first Equimarginal principle says that net benefits are maximized when the marginal benefits from the allocation equal the marginal costs.C.An allocation is Pareto optimal if no other feasible allocation could benefit some people
24、without any negative effects on at least one other person.D.Allocations that do not satisfy C are suboptimal.E.An allocation has achieved dynamic efficiency if it maximizes the present value of net benefits.IV.Applying the Concepts This section presents some examples of actual studies in which benef
25、it-cost analysis has been used.The benefits and costs of U.S.air pollution control policy are discussed as are preservation versus development conflicts.The Box Examples 2.3 and 2.4 in this chapter are useful case studies to discuss in class.4 Tietenberg/Lewis Environmental and Natural Resource Econ
26、omics,Eighth Edition Students will likely jump ahead and want to know the how to:how to calculate or measure benefits,etc.This subject is covered in depth in Chapter 3.It is important at this point that your students understand the principles,graphs,and jargon.This chapter contains a lot of potentia
27、lly brand new material.While examples are always helpful,getting through the underlying theory and making sure it is understood will make the rest of the course easier for you and for your students!Students with limited backgrounds in economics will also have trouble with the Equimarginal principal
28、and will frequently confuse total and marginal.Simple numerical examples that illustrate the maximization of net benefits means equalizing marginal cost and marginal benefit should help.They may also have difficulty with the concept of optimization and Pareto optimal allocations.This might be a good
29、 place to also start talking about the role of government intervention.The concept of discounting might also be problematic for some students.Examples they can relate to (all students will likely have a high rate of time preference for money)will illustrate present value and the role of the discount
30、 rate.Asking them if they would like$100 today or$100 on the day they graduate should nicely illustrate the time value of money.If they are skeptical,this type of question should help prove to them that most people have positive rates of time preference(prefer benefits sooner and costs later).An in-
31、class example or problem set related to discounting will not only let the students learn with a hands-on example,but will likely ease their minds about the difficulty of the concept and of the course.I have also found that many students will not have used or seen spreadsheets before.Having the stude
32、nts learn how to use a program such as Excel now will facilitate the teaching(and their homework time)in later chapters.If you have a teaching assistant,have him or her hold a review session in the computer lab on how to use a spreadsheet.If your classroom is a lab,you could use a little bit of clas
33、s time for this purpose if time permits.The spreadsheet problem set below is a hypothetical example of two proposed uses for a coastal area.Obviously,you can think of many different scenarios and sets of numbers.You can tell the students,for example,that a coral reef area will either be protected or
34、 mined.A set of costs and benefits is given for a 10-year period.As you can see in the answers,I have set this problem up so that the net present value changes from positive to negative with a change in the discount rate.This is a nice illustration of the effect of the discount rate.The example is a
35、lso set up so that a different project would be pursued at a different rate.Additionally,the answers can be calculated using a continuous discount rate if you are teaching your students both discrete and continuous discounting.A discussion on the choice of the discount rate could be started here or
36、saved for a later chapter.Chapter 2 Valuing the Environment:Concepts 5 There are many different ways to illustrate these concepts.This is just one example.Problem Set 1.Discount rates Project 1.Gringoland Marine Park Years 0 1 2 3 4 5 6 7 8 9 10 Costs(thousands of$)Construction 1250 Recurring costs
37、130 130 130 130 130 130 130 130 130 130 Foregone recreation 20 20 20 20 20 20 20 20 20 20 20 Benefits Increased tourist revenue 300 300 300 300 300 300 300 300 300 300 300 Net NPV 5%NPV 10%Project 2.Gringoland Coral Mining Costs(thousands of$)Extraction costs 3000 Costs of coastal erosion 200 200 20
38、0 200 200 200 200 200 200 200 200 Benefits Revenues from limestone 4500 Net NPV 5%NPV 10%Answers:Project 1.Gringoland Marine Park Years 0 1 2 3 4 5 6 7 8 9 10 Costs(thousands of$)Construction 1250 Recurring costs 130 130 130 130 130 130 130 130 130 130 Foregone recreation 20 20 20 20 20 20 20 20 20
39、20 20 Benefits Increased tourist revenue 300 300 300 300 300 300 300 300 300 300 300 Net 970 150 150 150 150 150 150 150 150 150 150 NPV 5 188.26 NPV 10 48.31 970 142.86 136.05 129.58 123.41 117.53 111.93 106.6 101.53 96.691 92.087 970 136.36 123.97 112.7 102.45 93.138 84.671 76.974 69.976 63.615 57
40、.831 Continuous r NPV 5 181.14 NPV 10 68.44 970 142.68 135.73 129.11 122.81 116.82 111.12 105.7 100.55 95.644 90.98 970 135.73 122.81 111.12 100.55 90.98 82.322 74.488 67.399 60.985 55.182 Continued 6 Tietenberg/Lewis Environmental and Natural Resource Economics,Eighth Edition Project 2.Gringoland C
41、oral Mining Years 0 1 2 3 4 5 6 7 8 9 10 Costs(thousands of$)Extraction costs 3000 Costs of coastal erosion 200 200 200 200 200 200 200 200 200 200 200 Benefits Revenues from limestone 4500 Net 1300 200 200 200 200 200 200 200 200 200 200 NPV 5 244.35 NPV 10 71.09 1300 190.5 181.4 172.8 164.5 156.7
42、149.2 142.1 135.4 128.9 122.8 1300 181.8 165.3 150.3 136.6 124.2 112.9 102.6 93.3 84.82 77.11 Continuous r NPV 5 234.86 NPV 10 97.92 1300 190.2 181 172.1 163.7 155.8 148.2 140.9 134.1 127.5 121.3 1300 181 163.7 148.2 134.1 121.3 109.8 99.32 89.87 81.31 73.58 Should humans place an economic value on the environment?Using debate Box 2.1,discuss the issues related to the monetization of nonmarket values.Can you think of a local example where this is relevant?Is this example controversial?