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In this video Paul Andersen explains how economic models, like supply and demand, can be applied to environmental systems. The market forces will not protect environmental services until proper valuation and externalities are established. The wealth of a nation can be more accurately measured through the sustainability of the economic model.
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Transcript Provided by YouTube:
00:03
Hi. It’s Mr. Andersen and this environmental science video 21. It is on environmental economics.
00:09
Before we talk about that let’s make sure you have a basic understanding of economics
00:13
and there is no better place to start than with the law of supply and demand. Imagine
00:17
I want to sell these bobble head dolls but I do not know if there is much of a demand
00:20
out there. And so if we make a graph where we have the price on the y and the quantity
00:25
on the x we can look at what I am doing, we call that the producer or the supply curve.
00:31
And then we can look at the consumer or the demand curve. And so it is the first time
00:34
I am selling these. I do not know if people are going to want it. And so let’s say,
00:38
looking at the supply curve that I charge four dollars for them. I do not make a bunch
00:42
of them. And so that is going to be right here on the supply curve. I do not want to
00:46
invest a lot of money, I am not going to make a lot of profit. I do not make many. Now there
00:50
is also going to be a demand curve. This is how much they want it. And so if it is really
00:55
cheap they want a lot of them. If it is really expensive they do not want very many. And
00:59
so if we play this across at four dollars we find that their demand, they demand 40
01:05
of them. I have only made 20 of them. And so what do we get? We get a shortage. I did
01:09
not make enough of them. And now I know a little bit more. So people want them. There
01:14
is demand it looks like. So I am going to go all in. I am going to spend a bunch of
01:18
money. I am going to make a lot of them and I am going to charge a lot of money hoping
01:21
to get a lot of profit. And so if I charge eight dollars, watch what happens to the demand.
01:27
Now the demand is 20, but I have made 40, and so what do I have that this point? We
01:32
have a surplus. We have too many of them. And so you can figure out where I am headed
01:36
here. What I want to do is I want to make sure that I hit right where those lines cross.
01:40
Again there is no graph like this. This is just trial and error, but you want to hit
01:44
what is called equilibrium where the price hits the demand. That is economics. Now what
01:49
is environmental economics though? It says law of supply and demand is right but what
01:54
you are not including are the externalities. In other words to make a bobble head it is
02:00
way too cheap. It is cheap because you are using maybe cheap labor. You are making it
02:05
in a developing country. Maybe you are polluting the atmosphere. So really your price curve,
02:10
or your supply curve should be pushed in that direction. So if we push it in that direction,
02:15
what does that mean? We are going to have a new equilibrium at this point. In other
02:19
words things are going to cost more if we pay for externalities and people are going
02:23
to have less stuff. And so the economy is really the wealth of a country. And a good
02:27
way to measure that is through the GDP or the gross domestic product. Now the decisions
02:32
that we make are governed by economics. What we are really trying to do is allocate scarce
02:37
resources. And we are using those resources through production, making things, consuming
02:41
them and then moving them around. So that law of supply and demand applies at this point.
02:47
Now the problem is that GDP and supply and demand both do not take into consideration
02:52
these externalities. Those are the costs to the environment and ecosystem services. And
02:57
a lot of the time what we end up with, for example if we are looking at the atmosphere,
03:00
is pollution. We are increasing carbon dioxide levels. It is leading to global warming. And
03:05
so a lot of people are putting forth this idea of economics is at the center, that is
03:10
going to have our solution. So let’s move towards environmental economics. If you just
03:14
let the market go it is not going to solve this problem. We need a sustainable system.
03:19
First thing we have to do is replace the GDP. A good alternative would be the GPI or the
03:25
genuine progress index that includes these externalities into the wealth of a nation.
03:31
We could also add valuation, so give value to these ecosystem services. And then we may
03:37
have to do some regulation to decrease the amount of pollution. An example put forward
03:41
is this idea of caps. So we are capping the amount of pollution that you have. And then
03:45
allowing some of those caps to be traded. There is some controversy there. But the key
03:49
point is to understand that we are a highly developed nation. And that other countries
03:53
are developing. And there is something called the Kuznet’s Curve and it is this idea that
03:58
until your country is wealthy enough to think about the environment and environmental economics
04:03
you simply will not. And so if we think of the economy like this, its production and
04:08
consumption. So we are taking in energy, using ecosystem services and using resources. And
04:13
so this we can think of as a slow economy. It is not consuming much. This would be an
04:19
economy that is consuming more energy. More resources. And so a good measure of that is
04:25
going to be the gross domestic product. How many things are you producing and therefore
04:29
consuming. And so if we look at it in the US the GDP is over 50000 dollars per person.
04:35
But there are going to be certain areas where that number is going to be less than 2000.
04:39
So we see that same thing of developing versus developed nations. If we look at however the
04:45
world over time, from 1950 to 2000, you can see that the GDP keeps going up. And so you
04:51
might think, this is great. So countries are getting wealthier. We do not have anything
04:55
to worry about. But my model was inefficient. So what I had included was the inputs but
05:00
not the outputs. And so what we are really not dealing with is waste. So as the economy
05:06
turns, watch what happens to the waste. We deplete the inputs and we increase the outputs.
05:13
There is pollution, health concerns. As the economy goes faster waste becomes a bigger
05:18
deal. And so some people are putting forth this idea of replacing the gross domestic
05:23
product with the GPI or the genuine progress indicator. And what that includes is not just
05:30
how much money you are making, but pollution, resource depletion, the health of the people,
05:35
education of the people. And if we look at that, that across the world, according to
05:40
this progress model, has been flatlined for the last forty years. That means that we are
05:45
not advancing. So the market has only brought us so far. And so environmental economics
05:50
is how can we use the power of economics to solve this problem. The first one is the idea
05:55
of valuation. And so if we look at the economy on our planet, it is 75 trillion dollars.
06:00
But remember outside of that we have ecosystem services. Those are things the planet is doing
06:05
for free. So for example they are filtering our water, they are taking in carbon dioxide,
06:09
they are providing energy. And so we do not pay anything for that. So we should add value
06:15
to that. If there is no monetary value to that, people are not going to see value in
06:20
it. We also have to discuss the idea of externalities. This pollution coming out of this truck, the
06:26
people in the truck are not paying for it. The people who are moving the material are
06:29
not paying for it, that increased carbon dioxide and what that is doing to the planet. And
06:34
so we have to start discussing those externalities. And it made lead to certain regulations. So
06:39
if we are looking at two factories, factory A and B, and they both are polluting. So if
06:43
we are saying they are polluting like that. We have to value that pollution. How much
06:47
does it cost? What externalities do we have from that? And then we have to regulate it.
06:52
So we could set a cap. This is the amount that you can pollute. We call that a cap.
06:58
And some people are putting forth this idea of cap and trade. What does that mean? Well
07:02
factory A is well within the cap. And you can see that factory B is way outside the
07:08
cap. It is polluting too much. And so the idea is that you could trade some of those
07:12
credits from factory A to factory B. So you could keep polluting, because it is essentially
07:18
within this cap. And in return your going to pay money. Now this weird. We are creating
07:23
these economics of pollution, but it has been pretty successful. If we look back at the
07:28
acid rain program where we were doing cap and trade with the amount of sulfur dioxide,
07:33
it showed some increases. And so a better way to look at sustainable economics is a
07:38
model like this. So what we want to do is take the power of that economy and return
07:44
those ecosystem services and recycle that waste. Because if we can have a sustainable
07:49
system like this we can decrease the amount of waste. And this is something that allows
07:53
us to have increase in not only the GDP but the GPI as well. Now what is the problem?
07:59
It is that countries are all along the spectrum of development. And there is the Kuznet’s
08:03
Curve. And it kind of goes like this. It is this idea that as your economy is increasing,
08:10
income is going up, you will actually worsen the environment until you hit a point where
08:15
you can start to improve the environment. In other words as a country in growing, they
08:19
cannot spend the money on these ecosystem services and they will not. And we also have
08:24
problems with globalization now. So once we have a developed country, with really strict
08:28
regulations we can move some of those factories to an area where they do not have such strict
08:33
regulations as well. And so did you learn the following. Could you pause the video at
08:37
this point and fill in the blanks? So the economy remember measures the wealth of a
08:42
country. We can use the GDP to measure that. But a better way to do it would be to use
08:47
the GPI. We are allocating resources, production, consumption in distribution. Environmental
08:54
economics, the key point, through valuation and regulation is that we have a sustainable
08:59
system where the economy drives increases in ecosystem services. So that is environmental
09:12
economics. And I hope that was helpful.
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This post was previously published on YouTube.
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The post Environmental Economics #21 appeared first on The Good Men Project.