Macroeconomics, International Economics, & Green Accounting

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Oct 28, 2013 (3 years and 9 months ago)

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Macroeconomics,
International Economics, &
Green Accounting

How can macroeconomic & int’l
policy affect the environment?

The income effect

Recall theory: Income is an argument
of demand

If consumption of a good:

Increases with
increased Y,
normal good

Decreases with increased Y,
inferior good

Recall Environmental Kuznet’s curve

Pollution is first (+) correlated with income,
then (
-
) correlated.

Individual to societal demand

How translate individual demands into societal
demand and government policy?

Aggregate individual demands, translate into
government demand

Think of
environmental quality

as a
public good

Level of provision depends on form of government.

Democracy more likely to provide public goods?

What is “supply of environmental quality”?

What is “demand for environmental quality”?

Demand and supply for
environmental quality

Demand
: value to consumers

How consumers value (are willing to pay
for) things like clean air, clean water,
biodiversity, ecosystem services, (non)
-
use
values.

Supply
: cost to provide

Richer economies have larger industrial
base, increasing MC of providing
environmental quality (not necessarily)

Interaction of supply and demand

Both supply and demand may shift
when incomes in a country increase.

D
0

D
1

S
0

S
1

Environmental Quality

Q
0

Q
1

$

Drawn this way,

environmental

quality
increases

with

increased

Y.

But environmental quality may


D
0

D
1

S
0

S
1

Environmental Quality

Q
0

Q
1

$

Drawn this way,

environmental

quality decreases

with


Y.

Safe water vs. income

% w/o

safe

water

Income

Regression analysis on 86

Countries from around the world

Shows improvement in drinking

Water quality with


Y.

Why are we studying this?

How to improve environmental quality in
poor countries?

Could focus international effort on protecting
resources, improving environment directly

If we believe Kuznet’s curve, could focus
attention on increasing incomes of poor
people, who will then demand increased
environmental quality.

Insufficient data to be certain about outcome.

Transboundary pollution

Pollution that migrates beyond
jurisdiction of source.

GHGs, SO2 (acid rain), water pollution,
some biodiversity loss, exotic species.

Possible policy instruments

Tariffs, standards for cleanliness,
international environmental agreements,
non
-
targeted international agreements.

Green national accounting

Measures of national income: GNP, GDP

Don’t account for environmental
degradation and resource depletion

Can give misleading measure of
national “well
-
being”, may lead to
wrong policy.

Many adjustments have been proposed
to “correct” standard measures.

“Natural capital” depreciation

Natural capital
: the available endowment
of land and natural resources

Measure depletion of natural resources
(oil, timber, minerals, soils)

Subtract from standard measures

Result: many developing nations show
substantial effect

Indonesia example: “Adjusted
Net Domestic Product”

Pollution control & cleanup

How should pollution control and
cleanup costs be accounted for in
developed nations?

Should cleanup expenditures contribute
to GNP? Some think not.

Main issue
: don’t double count. These
are legitimate expenditures in order to
maintain environmental values.

How are national accounts used?

Primary use: assist policy makers in
government.

E.g. Gov’t expenditures on scientific
research are linked to current economic
performance and climate.

United Nations has proposed a “System
of Environmental and Economic
Accounting”, some adjustments
underway.

Paying for public goods

Public goods

will be under
-
provided,
externalities

will not be internalized in
free market.

Government intervention: tax revenues
can pay for cleanup, regulation, public
goods provision

But many taxes “distortionary”

E.g.
Income tax discourages work!

Costs $1.40 to raise $1 in revenue

Double dividend

If we substitute distortionary taxes with
pollution taxes, we may earn a “double
dividend”

Reduce pollution (and therefore damage
from pollution)

Reduce distortionary taxes on labor and
thus the DWL from those taxes


This is called the “revenue recycling effect”

A 3
rd

effect of pollution taxes

“Tax interaction effect”

Polluting good and leisure are substitutes

Tax pollution, demand for leisure shifts out

If labor is still taxed, shift introduces an additional DWL
attributed to


pollution

Decreases social welfare.

Overall size of tax interaction effect varies among
polluting industries

Estimate: pollution tax should be set at 63% of
marginal damage.