Economics 2680 Fall Semester 2006 ENVIRONMENTAL AND NATURAL RESOURCE ECONOMICS

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1 Economics 2680 Fall Semester 2006 ENVIRONMENTAL AND NATURAL RESOURCE ECONOMICS Professor Martin L. Weitzman Office: Littauer 313; Tel: , mweitzman@harvard.edu Office hours: Wed, 2:30-3:30 and by appointment (readily granted, just ask) Catalogue Description: Basic theory and models, including externalities, common property, instruments for controlling pollution. Applications of optimal control theory to renewable and non-renewable natural resources. Analysis of cost-benefit, discounting, uncertainty, environmental accounting, sustainability, and biodiversity preservation. Prerequisite: Graduate price theory at level of 2010 or Introduction to Course: Intended as a graduate-level course in the economic theory of the environment. About how an economist structures and looks at environmental issues from a perspective of economic theory. Essentially a graduate course in applied economic theory, where the application is to the environment and natural resources. Emphasis on fundamental economic principles. This provides an important framework for understanding, but is far from the entire story. Leave aside many issues on the side of the political, sociological, psychological, ecological, general scientific, ideological, philosophical, policy, practical, empirical to concentrate on core issues of economic theory. In this sense, it does not pretend to be a balanced or complete course on the environment. Concentrate on core economic issues or basic principles, abstracting away from almost all else. Useful as a framework or guide to policy, but sometimes difficult to translate directly and operationally into policy. While core economic analysis is arguably the one single most important part of environmental economics, it is not the only part. Violin may be the most important single instrument in the orchestra, but it is not the entire orchestra. A student will come away from this course knowing well at the graduate level all of the basic workhorse models of environmental economics and natural resource economics. I would like to think that this is the best course on the economic theory of the environment and natural resources available anywhere. We cover all of the important standard theory that is out there, and then a little more. After this course, a graduate student should be well prepared with a solid introduction to all of the major conceptual and theoretical aspects of environmental and natural resource economics. Nature of the course: This course is a graduate version of what was previously an undergraduate course that I had taught for some ten years. In preparing this graduate course, I was surprised to find very little change in the contents from the undergraduate course. The core issues are very similar.

2 The main difference concerns the packaging, presentation, and absorption by the student. Being a graduate course, there is somewhat more emphasis in lectures on a grand overview of the material, leaving the student to work out some of the details. Also, because the class is smaller than the undergraduate version, there is much more emphasis on class discussion. Remember, in graduate school the object is to learn the material and, perhaps even more important, to learn how to distill essential messages from a variety of articles, lectures, and other sources. Although grad students never believe this (no matter how many times it is repeated), grades are relatively unimportant in graduate school you will be judged almost exclusively on your thesis. So, the object is to learn basic material that will be useful in research, including some topics that, like the research itself, do not come pre-packaged in a neat container. This means you should be sure to ask questions in class about any aspect of the course that is unclear, puzzling, or just piques your interest. So, definitely please raise questions (about details or anything else) in class as part of the learning process. The kind of dialogue that is possible in a small advanced graduate course is an essential part of graduate education that you should not deprive yourself of. The main prerequisite for this course is a good graduate economic theory course (equivalent of 2010 or 2020). Also a solid mathematical background consisting of multi-variable calculus, basic analysis, some exposure to differential equations and linear algebra. Math is used here as a means to an end, not an end in itself. We will develop specific tools as we go along (especially optimal control theory). You do not have to know very advanced math or economics, but you need to know some (at the graduate level). Most importantly, you must be able to follow the links in the chain of a mathematical argument, and you must develop or acquire the graduateschool-level ability and mentality to sift through complicated-looking articles to discover what is important. Also when needed, you must be able to learn new things in math and econ, since that is what a PhD-level economist must do all the time. Mechanics: There will be a final exam, as well as some problem sets. Some parts of the problem sets will show up on exams. Before the exam I will try to prepare and make available some examples of questions that are likely to be used. Course Overview: The heart of the course begins with Section II. Part I is basic background material that we will first go over quickly, but carefully, to make sure we are all operating at the same level of understanding about what parts of economics will be used, and how. In covering section I, be patient. We will get to environmental economics, but we first need to attain a common level of understanding of the basic underlying principles of economics and mathematics that are being applied to problems in environmental and natural-resource economics. Course Textbooks: The closest thing to a text for this course is a book I have just written entitled Income, Wealth, and the Maximum Principle, which will be used extensively for the dynamic parts of the course. This book is available for purchase from Harvard University Press, and is also on reserve at Hilles, Lamont, and Littauer libraries. A lot of use will also be made of the book by Jon M. Conrad entitled Resource Economics (Cambridge University Press, 1999), which is available for purchase at the COOP. Syllabus and Reading List All readings are on reserve at Littauer Library. Most readings will also be available on line through EReserves, reached through the library web page or our Economics Department Course

3 Fall 2006 Econ 2680 Environmental and Natural Resource Economics page 3 Home Page: Reading List I. Economic Background 1. Introduction and Motivation 2. General Equilibrium and Welfare Economics A good reference text is Hal R. Varian [1992] Microeconomic Analysis, 3 rd edition. You should already know, but may wish to review, the sections on general equilibrium and welfare. 3. Cost-Benefit Analysis and Consumer and Producer Surplus Make sure you understand the relevant parts of Varian [1992]. 4. Capital Theory and Discount Rates (first pass) William D. Nordhaus [1994], Managing the Global Commons, section on discounting. Martin L. Weitzman, Gamma Discounting AER, March Risk and Uncertainty Relevant sections of Varian [1992]. Charles D. Kolstad [2000] Environmental Economics, Chapter 12. II. Environmental Externalities 1. Externalities Varian [1992] sections on Externalities, William J. Baumol and Wallace E. Oates. THE THEORY OF ENVIRONMENTAL POLICY, 2 nd ed. Cambridge University Press, 1988, Chapters 1, 2, and 3. Charles D. Kolstad [2000] Environmental Economics, Chapters 5 & Pure Public Goods Varian [1992], relevant sections. 3. Common Property M.L. Weitzman. Free Access vs. Private Ownership as Alternative Systems for Managing Common Property, Journal of Economic Theory, 8 (2) June 1974, Economics of Pollution Control Baumol and Oates. Ch. 5, Uncertainty and the choice of policy instruments: price or quantity controls? pp and Ch.12, Marketable emission permits for protection of the environment, pp Kolstad [2000], Chapters 7, 8, 9, 10.

4 Fall 2006 Econ 2680 Environmental and Natural Resource Economics page 4 M.L. Weitzman, Prices vs. Quantities, Review of Economic Studies, 41 (4) October 1994, III. Natural Resources and Capital Theory 1. Control Theory Overview Weitzman, Income, Wealth, and the Maximum Principle, skim-read through Part I (chapters 1-4). Read for general understanding and background to what follows. 2. Non-Renewable Resources (Minerals) Robert M. Solow. The Economics of Resources or the Resources of Economics, American Economic Review, 64 (2), May 1974, pp (Reprinted as Ch. 10 in Dorfman and Dorfman.) Jon Conrad [1999] Resource Economics, Chapter Renewable Resources (Fisheries) Conrad [1999], Chapter 3. Martin L. Weitzman, Landing Fees vs. Harvest Quotas with Uncertain Fish Stocks (JEEM, 2002) (skim-read for general understanding). 4. Storable Renewable Resources (Forests) Conrad, chapter Stock Pollutants, such as Greenhouse Gases Nordhaus, Managing the Global Commons (skim for understanding). Conrad, chapter Irreversible Investments Conrad, chapter 7. IV. Environmental Macro-Economics 1. Economic Growth with Limiting Factors William Nordhaus, Lethal Model 2: The Limits to Growth Revisited, BROOKINGS PAPERS ON ECONOMIC ACTIVITY, Washington, D.C.: The Brookings Institution, (2) 1992, pp P.S. Dasgupta and G.M. Heal. ECONOMIC THEORY AND EXHAUSTIBLE RESOURCES, Cambridge University Press, Ch. 7, pp

5 Fall 2006 Econ 2680 Environmental and Natural Resource Economics page 5 M.L. Weitzman. Recombinant Growth. Quarterly Journal of Economics, CXIII (2), May 1998 (skim-read for general understanding). M.L. Weitzman, Pricing the Limits to Growth from Minerals Depletion. QJE, 1999 (skim-read for general understanding). 2. Sustainable Development and Green Accounting Robert M. Solow, Sustainability: An Economist s Perspective. Ch. 11 in Dorfman and Dorfman, pp Robert M. Solow, An Almost Practical Step Toward Sustainability, Resources for the Future (Invited Lecture), October 8, 1992, 5-22 (reprinted in Resources Policy 19 (3), September 1993, ). William D. Nordhaus, New Directions in National Economic Accounting, AER, May 2000, NATURE S NUMBERS, National Academy Press, chapters 1, 2. Weitzman Book, chapters 5 & 6 (skim-read for general understanding). Conrad, chapter 8. The last section of the course (if we have time) will be the following: V. Some Biodiversity Issues Andrew Metrick and Martin L. Weitzman, Conflicts and Choices in Biodiversity Preservation. Journal of Economic Perspectives, 12 (3), Summer 1998, Andrew Metrick and Martin L. Weitzman. Patterns of Behavior in Endangered Species Preservation, Land Economics 72 (1), February 1996, M. L. Weitzman. What to Preserve: An Application of Diversity Theory to Crane Conservation, Quarterly Journal of Economics, 108 (1) February 1993, M.L. Weitzman, The Noah s Ark Problem. Econometrica, (skim-read for general understanding)