Lecture 01

.title[
# Lecture 01
]
.subtitle[
## Introduction to Environmental Economics
]
.author[
### Ivan Rudik
]
.date[
### AEM 4510
]

---

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

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

```r
pacman::p_load(
  tidyverse, xaringanExtra, rlang, patchwork, nycflights13, tweetrmd, vembedr
)
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: 'xaringanExtra::style_panelset' is deprecated.
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## Warning in style_panelset_tabs(...): The arguments to `syle_panelset()` changed in xaringanExtra 0.1.0. Please
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---

# Roadmap

- Course set up and SDS testing program
- What is environmental economics?
- What are the goals for this class?
- Microeconomics recap

---

# Course set up and SDS testing program

---

# AEM 4510 / AEM 5510 / ECON 3865: Basics

.hi[Readings:] Markets and the Environment by Keohane and Olmstead, papers available through the course website or library

---

# AEM 4510 / AEM 5510 / ECON 3865: Grading

.hi[10 Online Quizzes (2%):] canvas-based, simple questions (solo)
  - Lowest two scores are replaced with the highest two scores (effectively two free drops)
  - On Thursdays where there is no prelim that week, you have all day to start/finish

.hi[3 Problem Sets (15%, 10%, 5%):] mix of quantitative and conceptual problems to give you practice in learning key concepts (teams of 3)
  - 1 before each prelim: Feb 6, Mar 13, Apr 17

---

# AEM 4510 / AEM 5510 / ECON 3865: Grading

.hi[3 Prelims (15%, 15%, 10%):] test your understanding of key concepts (solo)
  - Feb 15, Mar 22, Apr 26
  - .hi[SDS:] This class is in the Alternative Test Program, if approved for exam accommodations, you must request your exam accommodation(s) for this course and fill out an exam request form for each exam in this course via the SDS student portal by February 8th

.hi[1 Final Project (5% paper, 2% presentation, 3% team eval):] put your understanding of key concepts to work on real world issues (teams of 3)
  - Presentations last 3ish days of class, paper due May 16 during finals week
  
  
---

# AEM 4510 / AEM 5510 / ECON 3865: Content

.hi[Weeks 1-6ish:] the economics of environmental regulation
  - More theoretical, graphical
  - Taxes, cap and trade, regulating monopolies, etc
  
.hi[Weeks 6-13ish:] using markets (real and financial) to tell us about the environment
  - Some theory, also real world analyses and data
  - valuing recreation, housing markets, bond markets, green instruments
  
  
---

# AEM 4510 / AEM 5510 / ECON 3865: Last words

This was just an overview, syllabus on canvas and course website has a lot more details about specific requirements

Any questions about the course?

---

# 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

---

# 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?

---

# Creating markets to solve problems

How do we solve some problems in practice?

---

# 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