Lecture 01

.title[
# Lecture 01
]
.subtitle[
## Introduction to Environmental Economics
]
.author[
### Dana Andersen
]
.date[
### ECON 467
]

---

``` r
if (!require("pacman")) install.packages("pacman")
```

```
## Loading required package: pacman
```

``` r
pacman::p_load(
  tidyverse, xaringanExtra, rlang, patchwork, vembedr)
# source("R/video_helpers.R")
options(htmltools.dir.version = FALSE)
knitr::opts_hooks$set(fig.callout = function(options) {
  if (options$fig.callout) {
    options$echo <- FALSE
  }
knitr::opts_chunk$set(echo = TRUE, fig.align = "center", dpi = 500, fig.width = 7)
  options
})
```

```
## Warning in xaringanExtra::style_panelset(panel_tab_color_active = "red"): 'xaringanExtra::style_panelset' is deprecated.
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## Warning in style_panelset_tabs(...): The argument names of `style_panelset()`
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---

# Roadmap

- What is environmental economics?
- What are the goals for this class?
- Microeconomics recap

---

# What is environmental economics?

---

# What's enviro econ?

First, what is economics?

.hi[Economics:] the study of how agents (people, firms, etc) make choices with scarce resources and the social results of these choices

Everything is scarce compared to wants and needs

We need to choose among alternatives and make trade offs

These ideas can be applied to the environment

---

# What is enviro econ?

.hi[Environmental Economics:] the application of economics to the study of the environment as a resource or good

Environmental economics helps us understand things like:

The value of mitigating pollution

How agents will response to climate change policies

Whether investment tax credits for wind power are cost-effective

---

# Air pollution is bad

---

# How do people respond to info?

Places provide info to help people avoid air pollution
  
  Does it work?
  
  How well?

]

---

# Climate change

---

# Climate change

<center><a href="https://youtu.be/c8vLVrxWIpg" target="_blank"><img src="https://img.youtube.com/vi/c8vLVrxWIpg/hqdefault.jpg" style="width:70%;cursor:pointer;" alt="Climate change intro"><br><small>▶ Click to open video</small></a></center>

---

# Climate change

Why do economists care about climate change?

It affects the economy and how we have to allocate resources! How?

- Production
--

- Learning
--

- Leisure
--

- Fishing
--

- etc, etc

---

# Climate change: heat hurts learning

Park et al. (2020)

---

# Climate change: heat hurts the economy

Rudik et al. (2021)

---

# Climate change: extreme heat/cold increases mortality

Carleton et al. (2020)

---

# What is enviro econ?

Spurred by .hi[John Krutilla] in the 1950s

His paper .green[Conservation Reconsidered] is the landmark paper in the field (sort of like Wealth of Nations and economics as a whole)

]

]

---

# What are the goals of this class?

---

# What are the goals of this class?

Enhance your understanding of	how economists think about solving real environmental problems

Prepare you for after college:
  - Industry jobs (energy, transportation, finance)
  - Public sector and NGOs (EPA, DOE, RFF, Brookings, Federal Reserve)
  - Graduate programs
  
--

Learn both the theory and .hi[applications] of environmental economics

---

# Microeconomics recap

---

# Micro recap

Is Intro to Micro applicable everywhere?

<center><a href="https://youtu.be/9qjvwQrZmpk" target="_blank"><img src="https://img.youtube.com/vi/9qjvwQrZmpk/hqdefault.jpg" style="width:70%;cursor:pointer;" alt="Is Intro to Micro applicable everywhere?"><br><small>▶ Click to open video</small></a></center>

---

# Creating markets to solve problems

How do we solve some problems in practice?

<center><a href="https://youtu.be/QwgximJ9vPk" target="_blank"><img src="https://img.youtube.com/vi/QwgximJ9vPk/hqdefault.jpg" style="width:70%;cursor:pointer;" alt="Creating markets to solve problems"><br><small>▶ Click to open video</small></a></center>

---

# Micro recap: terminology

.hi[Market:] 
--
a decentralized collection of all actual and potential buyers and sellers whose interactions determine the allocation and price of a good or service through exchange

.hi[Demand curve:] 
--
A schedule or graph showing the quantity of a good that buyers wish to buy at each price; it gives us the marginal willingness to pay or the marginal benefit

.hi[Supply curve:] 
--
A schedule or graph showing the quantity of a good that sellers wish to sell at each price; it gives us the marginal willingness to accept or the marginal cost

---

# Market demand

![Demand curve](01-slides-intro_files/figure-html/demand-1.png)
]

Market demand is aggregated from all individual demand curves

]

---

# Market demand

Market demand is aggregated from all individual demand curves

.hi-blue[Horizontal interpretation:] if buyers face a price of $10/lobster they will want to purchase 20 million

]

---

# Market demand

Market demand is aggregated from all individual demand curves

.hi-blue[Horizontal interpretation:] if buyers face a price of $10/lobster they will want to purchase 20 million

.hi-blue[Vertical interpretation:] if buyers are buying 20 million lobsters, the marginal buyer is willing to pay at most $10

]

---

# Market demand slopes down

Why do demand curves slope down?

As the price of a good increases, people switch to other, similar goods

This is the .hi-red[substitution effect]: if the price of Coke goes up, people buy more Pepsi
  
--

As the price of a good increases, they can't afford as much of it: purchasing power goes down

This is the .hi-blue[income effect]: if the price of pizza goes up, we have a lower real budget

---

# Market supply

![Supply curve](01-slides-intro_files/figure-html/supply-1.png)
]

Market supply is aggregated from all individual supply/MC curves

]

---

# Market supply

Market supply is aggregated from all individual supply/MC curves

.hi-blue[Horizontal interpretation:] if sellers face a price of $15/lobster they will want to sell 20 million

]

---

# Market supply

Market supply is aggregated from all individual supply/MC curves

.hi-blue[Horizontal interpretation:] if sellers face a price of $15/lobster they will want to sell 20 million

.hi-blue[Vertical interpretation:] if sellers are selling 20 million lobsters, the marginal cost of the last lobster is $15

]

---

# Market supply slopes up

Why do supply curves slope up?

If we produce more of a good, we choose the lowest (opportunity) cost production processes first, higher cost production processes later

Marginal costs go up as production goes up `$\rightarrow$` producers need higher prices in order to produce more goods

---

# Market equilibrium

![Market equilibrium is where D=S](01-slides-intro_files/figure-html/equilibrium-1.png)
]

A market equilibrium is a price/quantity pair where the demand curve crosses the supply curve

]

---

# Market equilibrium

.pull-left[
![Market equilibrium is where D=S](01-slides-intro_files/figure-html/equilibrium-1.png)
]

A market equilibrium is a price/quantity pair where the demand curve crosses the supply curve

This gives us the price where the quantity demanded exactly equals the quantity supplied: no shortages, no surpluses

]

---

# Market equilibrium

![CS is area below demand, above price](01-slides-intro_files/figure-html/cs-1.png)
]

]

---

# Efficiency

We have two notions of efficiency:

1. A .hi[socially optimal quantity] is the quantity of the good the maximizes total surplus
--

2. An allocation is .hi[Pareto efficient] if there's no way to change things to make at least one person strictly better off, without making at least one person strictly worse off

If you can make one person better off without making anyone else worse off its called a .hi-blue[Pareto improvement]

---

# Are markets efficient?

Are (competitive) markets efficient?

Under some assumptions, yes, the .hi[First Welfare Theorem] tells us that any competitive equilibrium is .hi[Pareto] efficient

Under these assumptions competitive markets also maximize social welfare

---

# Under what assumptions are markets efficient?

What are the underlying assumptions for market efficiency?

1. Perfect competition
2. Perfect information
3. Complete markets (minimal transactions costs)
4. .hi-red[No externalities]

They drive a wedge between private and social marginal cost, or private and social marginal benefit

---

# The key departures in environmental economics

In enviro econ, the key departures from the standard perfect market are 
--
externalities and non-rival and non-excludable goods:

.hi-red[Non-rival]: additional people can get the benefits of consuming the same unit of the good at no extra cost to others

---

# Imperfect information

We will also discuss .hi[imperfect information]: 
--
when economic actors are uncertainty about the prices or quality of a good

If there's imperfect information then efficiency may not be achieved

Why?

Without the adequate information, buyers or sellers cannot make the choices in their best interest

---

# Efficiency and equity

The First Welfare Theorem guarantees competitive markets give (Pareto) efficient allocations

It does not guarantee that these allocations are desirable, any examples?

E.g.

- If Elon Musk held **all** the wealth in the world, that would be a Pareto efficient outcome even though it goes against basically all people's notions of equity

- Perfect price discrimination is also Pareto efficient: producers capture all the surplus but it is maximized

---

# Ecological wealth

<center><a href="https://youtu.be/1yzmOrcLIPo" target="_blank"><img src="https://img.youtube.com/vi/1yzmOrcLIPo/hqdefault.jpg" style="width:70%;cursor:pointer;" alt="Ecological wealth"><br><small>▶ Click to open video</small></a></center>