Economics for the Environment: A Primer
1. WELFARE ECONOMICS AND MARGINAL ANALYSIS Much of what we know as environmental economics can best be thought of as applied economics. The positive side of environmental economics uses micro and macroeconomic theory to learn more about the ways in which economic factors influence the consumption of environmental goods and services. Positive environmental economics is largely descriptive and predictive. The normative aspect of environmental economics is largely prescriptive and applies principles of welfare economics to determine the allocation of environmental goods and services that generates the greatest economic good for society. Normative welfare economics provides a framework to determine how society “should” allocate resources, assuming that economic welfare is a good measure of society’s well-being. Pareto pointed out that an optimal allocation of goods exists when any reallocation would only make one person better off at the expense of another; we call this allocation a Pareto efficient or economically efficient allocation. At sub-optimal allocations, we could potentially reallocate resources to make everyone better off as whole. Reallocations away from the suboptimal towards the optimal are known as Pareto improvements. Using the ideas of Pareto, normative environmental economics provides a framework for finding the economically optimal allocation of environmentalresources. Talking about the greatest good to society and measuring this good are quite different things. To make discussions of well-being more tangible, economists need to fmd concrete ways of capturing the values people give to goods, resources, and even services. Generally, we say that someone values a good if they are willing...
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