Economic Theory for Environmentalists

191 Pages·1995·3.493 MB·\191

by  John Gowdy (Author)

E
CONOMIC THEORY
FOR
NVIRONMENTALISTS
By
John Gowdy
Department of Economics
Rensselaer Polytechnic Institute
Troy, New York
and
Sabine O’Hara
Department of Economics
Rensselaer Polytechnic Institute
Troy, New York
t
S
L
St. Lucie Press
Delray Beach, Florida
Copyright © 1995 St. Lucie Press
Copyright © 1995 by St. Lucie Press
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Library of Congress Cataloging-in-Publication Data
Gowdy, John
Economic theory for environmentalists / by John Gowdy and Sabine O’Hara
p. cm. — (Total quality series)
Includes bibliographical references and index.
ISBN 1-884015-00-X (alk. paper)
1. Industrial procurement—Management. 2. Total quality
management. I. Title. II. Series.
HD39.5.F46 1995
658.7′2—dc20 94-9069
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Copyright © 1995 St. Lucie Press
CONTENTS
Foreword
Acknowledgments
1 Introduction
Markets and Models: The Circular Flow of Economic Activity
Economic Efficiency and Pareto Optimality
The Context of Market Exchange
Economics and the Biophysical World
What This Book Does and Does Not Do
Suggestions for Further Reading
2 The Theory of the Consumer
Introduction
The Indifference Curve
The Edgeworth Box Diagram
Pareto Optimality in Exchange
Consumer Theory and the Biophysical World
The Lack of Information about the Natural World
The Assumption of Substitutability
Irreversibility, Threshold Effects, and Interconnectedness
Discounting
Models and Reality
Summary
Suggestions for Further Reading
3 The Theory of the Firm
Introduction
The Isoquant
Copyright © 1995 St. Lucie Press
viii • Contents
The Edgeworth Box Diagram for Production
The Production Possibilities Frontier
Production Theory and the Biophysical World
Resource Scarcity
The Assimilative Capacity of the Ambient Environment
Discounting Once Again
Summary
Appendix—A Digression on Functional Form
Suggestions for Further Reading
4 General Equilibrium and Welfare Economics
Introduction
General Equilibrium in Exchange
The Social Welfare Function
General Equilibrium Theory and the Biophysical World
Social Welfare and Ethics
Beyond Human Welfare
Summary
Suggestions for Further Reading
5 Introducing Prices: Pareto Optimality & Perfect Competition
Introduction
Prices in Consumption: The Budget Constraint
The Demand Curve
Prices in Production: The Cost Constraint
The Supply Curve
The Model of Perfect Competition
Efficiency in Resource Use: Long-Run Competitive
Equilibrium
Perfect Competition and Pareto Optimality
Prices and the Biophysical World
Summary
Suggestions for Further Reading
6 Market Failure: When Prices Are Wrong
Introduction
Imperfect Market Structures
Public Goods
Externalities
Solutions to the Externality Problem—Coase Versus Pigou
Elasticities—Measuring Policy Effectiveness
Copyright © 1995 St. Lucie Press
Contents • ix
Consumer Surplus—Who Pays for Intervention?
Intervention Failure
Existence Failure
Summary
Suggestions for Further Reading
7 From Supply and Demand to Social and
Ecological Context
Introduction
Before the Classical Economists
The Classical Economists
The Marginalist Revolution and the Mathematical
Foundations of Neoclassical Economics
The Battle Lines Are Drawn: John Maynard Keynes and the
General Theory
The Neoclassical Synthesis
Revolution and Counterrevolution: The End of Consensus
New Directions in Economic Theory and Policy:
Ecological Economics
Summary
Notes
Suggestions for Further Reading
8 The Challenge of Pollution Control: Groundwater Pollution
Introduction
Determining the Source of Pollution
The Efficiency Standard
Market Prices Versus Shadow Prices
Determining the Pollution Optimum
The “Second Best” Approach
The Policy Question—How Do We Enforce Pollution
Standards?
Safe Minimum Standard Options
Summary
Suggested Readings
9 New Directions for Economics, the Economy,
and the Environment
Taking Stock of Where We Are
Economic Decision-Making and the Biophysical World
Economic Decision-Making and Human Culture
Copyright © 1995 St. Lucie Press
x • Contents
Decision Under Uncertainty
Where Do We Go From Here?
De-Mystifying Economics and Seeking Interdisciplinary
Cooperation
Strategies and Structures instead of Optima and
Marginality
From Homogeneity to Diversity
Toward New Economic Models
Suggested Reading
Glossary
Copyright © 1995 St. Lucie Press
FOREWORD
I write these words as an environmentalist, likely addressing
others of the same stripe. To us, I think, economists sometimes
seem like deaf people in a burning cinema, still watching the pretty
pictures as the smoke alarm sends everyone else stampeding. This,
therefore, is a powerful book, one that should have been written
long ago, for it makes clear to the rest of us just why those pretty
pictures are so arresting. It is the neat logic, the sheer elegance, of
neoclassical theory that makes it so appealing—and in some ways
so dangerous, at least in a world that seems to be reaching certain
physical limits.
Some may find it frustrating to have to learn at least a little bit
of the language and logic of the economist. But for better and for
worse, it is the lingua franca of this age, the tongue most widely
spoken, the religion most devoutly worshipped. To be a part of the
debate, you need to understand the assumptions of neoclassical
economics, in the same way that all philosophers of medieval
Europe were Christian philosophers, or that every thought in cer-
tain barrooms is expressed in terms of the Knicks. To understand
efficiency and optimality as economists understand them is to
understand much about how our world works, a useful thing not
only for environmentalists but for anyone concerned with or curi-
ous about the impact humans have on the world around us. This
is not to say, necessarily, that you must accept each brick in the
neoclassical edifice. As the authors make marvelously clear, some
of those assumptions are shakier than they used to be. The scarcity,
for instance, of extra atmospheres into which to pour the exhala-
Copyright © 1995 St. Lucie Press
xii • Foreword
tions of our economy will challenge economists in profound ways
in the years to come. In fact, the next great human debate may be
between those who still desire an ever-expanding economy and
those who are coming to fear its effects.
But to engage in that controversy, or more likely to shape the
smaller twists and turns in public policy on issues from groundwa-
ter pollution to agricultural subsidy, you need a working knowl-
edge of economic assumption and belief. The authors have pro-
vided that blueprint, and they have helpfully labeled some of the
defects in the design. Their straightforward and unhysterical pre-
sentation is precisely what we need most. And if from time to time
you are dismayed by the graphs and charts, comfort yourself with
the thought of all the economists who will soon be forced to under-
stand chemistry, physics, and biology.
Bill McKibben
Bill McKibben is an environmental writer who has published and
lectured widely. His best selling books are The End of Nature and The
Age of Missing Information.
Copyright © 1995 St. Lucie Press
ACKNOWLEDGMENTS
A book is a collaborative project, and this one is no exception.
Far beyond our own collaboration as authors, there are many
whose contributions have helped shape this book. First and fore-
most, these contributions have come from our students, whose
comments, probing questions and sometimes sheer amazement at
the worldview of mainline economists planted the seed for this
project. Since many of our students are majoring in disciplines
other than economics, their comments have broadened our own
disciplinary perspective and challenged us to clarify familiar con-
cepts. Peg, Chuck, and Valerie in particular have given us many
helpful comments.
Second, thanks are due to our colleagues whose writings and
personal conversations have influenced our thinking. More specifi-
cally, Douglas Booth, Steve Breyman, Terry Curran, Carl McDaniel,
Dick Shirey, and Jean Stern have provided many helpful comments
on earlier drafts of this book.
A third group to whom thanks are due are the many committed
people we have met over the years whose work in environmental
organizations, community groups, the private sector, and govern-
ment agencies has advanced the idea of an economics text that
would contribute to the broader dialogue necessary to understand
the complex world in which we live.
Our editor, Sandra Koskoff, deserves our thanks for her tire-
less efforts in moving us along and keeping up her spirits in the
process.
Copyright © 1995 St. Lucie Press
xiv •
And last but not least, thanks are due to our families, particu-
larly to our spouses. Without Linda’s efforts in drafting the numer-
ous graphs and Phil’s repeated proofreading, we would not have
completed this book. Thanks to you all.
John Gowdy
Sabine O’Hara
February, 1995
Copyright © 1995 St. Lucie Press