Course:ECON371/UBCO2024WT1/Reflections/JeddSlakmon

Reflection #1

Reflection on Incomplete Economic Framing in Environmental Economics

Environmental economics offers a quantitative perspective on environmental issues and how economics can be used to create solutions for these problems. The tools provided throughout the course allows for us to calculate optimized routes to follow to minimize negative externalities, assess cost-benefit ratio for decision making, and create solutions to maximize benefit. While these tools have their respective areas of applicability there are critical aspects of environmental and economic health overlooked due to being too complex for a framework. This reflection will explore the shortcomings of economic frameworks.

An externality is the cost or benefit of an economic activity that affects a third party who isn’t directly involved. For example, pollution: factories emit pollutants that would harm the environment or individuals' health, however, the costs are not reflected in the factory's costs. This leads to market failure from true costs not being accounted for. The solution for negative externalities is internalizing these costs by incorporating taxes or regulations to emitters or stimulus for afflicted parties. When something is polluted it can cause long-term or even irreversible environmental damage or health issues. The long-lasting effects of pollution are not overwritten by a tax, a species going extinct due to an externality cannot be undone when regulations are finally put in place. Long-term consequences cannot be quantified with a policy or a tax, and the bearers of the cost are not adequately considered.

Another core concept is coming up with an efficient solution to pollution levels, maximizing the benefits from the pollution while attempting to keep the costs to a minimum. While this is technically a viable solution, it ignores equity issues and how the environmental harm is not equally distributed across communities. Marginalized communities take the brunt of the environmental harm more than wealthier communities who have more opportunity to relocate or initially choose an environmentally stable home. This creates the main issue with efficient pollution output solutions, the model views every affected community as equal but in reality, the cost borne by those who cannot afford it is much higher than those who can.

Valuing environmental goods and the species within an ecosystem is a trying task. Contingent valuation and hedonic pricing attempt to put a monetary value to things like clean air, or a population of caribou. Economists use these tools by asking individuals how much they would be willing to pay for them. This works on a shallow level but assigning a cost per life or a price for clean air is extremely limiting. For example, putting a price on a herd of caribou is usually based on aspects like the cost of meat, or WTP to see the caribou but it doesn’t account for biodiversity or how important they are to their ecosystem. It’s not just about the utility of nature, putting a price tag on visiting a park takes away the intrinsic value of nature and doesn’t factor in the future generations coming from the animal or plant.

Cost-benefit analysis is a critical tool to weigh the costs of damage against the benefits of economic activities, in this case, those activities affect the environment. The analysis focuses mostly on immediate costs whilst discounting long-term risks like climate change. This creates a situation where the true future cost of climate change or mass deforestation of the rainforest could be underestimated and the real costs are irreversible. Cost-benefit has its utility in select situations, but it works more as a hypothetical rather than a true practice. The sheer amount of variables that would need to be accounted for is too much to calculate accurately. Humans have the tendency to believe things will work themselves out but cannot see future outcomes that only arise once the decision has been made. The main issues here tie into the previous topics where calculating the costs of pollution cannot factor in intangible aspects of nature.

A key issue lies in sustainability and its tradeoff for both economic and societal growth. Traditional thinking assumes that growth is inherently good, however, growth often comes at the cost of environmental sustainability. Looking back at the Industrial Revolution, we as a species saw unparalleled growth and we abused that to get as far ahead as possible as fast as we could. We ignored the future generations’ right to resources and lifestyle. The copious amount of fossil fuels and ozone depletion due to the actions of past generations shows that sustainability should be a larger factor in growth. We started the marathon with a sprint that will leave us and future generations panting for the rest of the race. Forever chemicals and permanent environmental damage aren’t things that should ever occur just because some corporation could make some money. The focus on maximizing present utility and discounting future cost fails to incorporate future well-being.

Willingness to pay (WTP)  is often used in cost-benefit analysis to determine the price people would pay to preserve the environment. The bias towards wealthy individuals is an issue with this practice. Someone in a higher income situation could pay to experience Earth's beauty whereas someone in a lower income situation who yearns to experience the same thing is shunned due to the fact they have little disposable income. For example, a wealthy community would be willing to pay more for a nicer park and the model would favor that investment more so than the same number of people benefiting from a nice park but in a marginalized community. Maximizing WTP creates inequality in society and needs to factor more to account for this. Investments into well-being shouldn’t focus on maximizing a return but instead staying true to the cause and maximizing social well-being.

In conclusion, part of the main focus of environmental economics is quantifying the environment and this provides valuable insights but the practice of putting a dollar figure on everything creates shortcomings. We cannot account for the complexity of environmental problems and should expand the frameworks to create a more fair approach to decision-making.

Prof: I hope that some of these comments were inspired by our class. Certainly we discussed the fact that WTP is determined by ability to pay, and thus those with lower income have less representation when well being is measured as total WTP. I do hope that you also see some utility in the tools economists use, while retaining the view that it provides one perspective among many.