Editing Environmental economics (section)

== Topics and concepts ==
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=== Market failure ===
[[File:Pollution de l'air.jpg|thumb|right|230px|Air pollution is an example of market failure, as the factory is imposing a negative external cost on the community.]]
Central to environmental economics is the concept of market failure. [[Market failure]] means that markets fail to allocate resources efficiently. As stated by Hanley, Shogren, and White (2007):<ref>Hanley, N., J. Shogren, and B. White (2007). Environmental Economics in Theory and Practice, Palgrave, London.</ref> "A market failure occurs when the market does not allocate scarce resources to generate the greatest social welfare. A wedge exists between what a private person does given market prices and what society might want him or her to do to protect the environment. Such a wedge implies wastefulness or economic inefficiency; resources can be reallocated to make at least one person better off without making anyone else worse off." This results in a inefficient market that needs to be corrected through avenues such as government intervention. Common forms of market failure include externalities, non-excludability and [[Rivalry (economics)|non-rivalry]].<ref name=":3">{{Cite journal |last=Omer |first=Abdeen Mustafa |date=March 17, 2023 |title=Environmental and Ecological Economics |url=https://www.heraldopenaccess.us/openaccess/environmental-and-ecological-economics |journal=HSOA Journal of Environmental Science: Current Research}}</ref>

=== Externality ===
An [[externality]] exists when a person makes a choice that affects other people in a way that is not accounted for in the market price. An externality can be positive or negative but is usually associated with negative externalities in environmental economics. For instance, water seepage in residential buildings occurring in upper floors affect the lower floors.<ref>Rita Yi Man Li (2012), The Internalisation Of Environmental Externalities Affecting Dwellings: A Review Of Court Cases In Hong Kong, Economic Affairs, Volume 32, Issue 2, pages 81–87</ref> Another example concerns how the sale of Amazon timber disregards the amount of carbon dioxide released in the cutting.<ref>{{Cite news|title=Environmental degradation replaces classic imperialism|last=Chapman|first=Same|date=May 3, 2012|work=The Whitman College Pioneer: Whitman College}}</ref>{{Better source|date=July 2018}} Or a firm emitting [[pollution]] will typically not take into account the costs that its pollution imposes on others. As a result, pollution may occur in excess of the 'socially efficient' level, which is the level that would exist if the market was required to account for the pollution. A classic definition influenced by [[Kenneth Arrow]] and [[James Meade]] is provided by Heller and Starrett (1976), who define an externality as "a situation in which the private economy lacks sufficient incentives to create a potential market in some good and the nonexistence of this market results in losses of [[Pareto efficiency]]".<ref>Heller, Walter P. and David A. Starrett (1976), On the Nature of Externalities, in: Lin, Stephen A.Y. (ed.), Theory and Measurement of Economic Externalities, Academic Press, New York, p.10</ref> In economic terminology, externalities are examples of [[market failure]]s, in which the unfettered market does not lead to an efficient outcome.

=== Common goods and public goods ===
When it is too costly to exclude some people from access to an environmental resource, the resource is either called a [[common-pool resource|common property resource]] (when there is rivalry for the resource, such that one person's use of the resource reduces others' opportunity to use the resource) or a [[Public good (economics)|public good]] (when use of the resource is [[rivalry (economics)|non-rivalrous]]). In either case of non-exclusion, market allocation is likely to be inefficient.

These challenges have long been recognized. [[Garrett Hardin|Hardin]]'s (1968) concept of the [[tragedy of the commons]] popularized the challenges involved in non-exclusion and common property. "Commons" refers to the environmental asset itself, "common property resource" or "common pool resource" refers to a property right regime that allows for some collective body to devise schemes to exclude others, thereby allowing the capture of future benefit streams; and "open-access" implies no ownership in the sense that property everyone owns nobody owns.<ref name="Ostrom, E 1990">Ostrom, E. 1990. Governing the Commons. Cambridge: Cambridge University Press.</ref>

The basic problem is that if people ignore the scarcity value of the commons, they can end up expending too much effort, [[over harvesting]] a resource (e.g., a fishery). Hardin theorizes that in the absence of restrictions, users of an open-access resource will use it more than if they had to pay for it and had exclusive rights, leading to [[environmental degradation]]. See, however, [[Elinor Ostrom|Ostrom]]'s (1990) work on how people using real common property resources have worked to establish self-governing rules to reduce the risk of the tragedy of the commons.<ref name="Ostrom, E 1990" />

The [[mitigation of climate change]] effects is an example of a public good, where the social benefits are not reflected completely in the market price. Because the personal marginal benefits are less than the social benefits the market under-provides climate change mitigation. This is a public good since the [[Climate risk|risks of climate change]] are both non-rival and non-excludable. Such efforts are non-rival since climate mitigation provided to one does not reduce the level of mitigation that anyone else enjoys. They are non-excludable actions as they will have global consequences from which no one can be excluded. A country's incentive to invest in carbon abatement is reduced because it can "[[Free rider problem|free ride]]" off the efforts of other countries. Over a century ago, Swedish economist [[Knut Wicksell]] (1896) first discussed how public goods can be under-provided by the market because people might conceal their preferences for the good, but still enjoy the benefits without paying for them.
<gallery caption="Global biochemical cycles" widths="140px" heights="80px" perrow="4">
File:Nitrogen Cycle.jpg|[[Nitrogen cycle]]
File:Water cycle.png|[[Water cycle]]
File:Carbon cycle-cute diagram.svg|[[Carbon cycle]]
File:Oxygen Cycle.jpg|[[Oxygen cycle]]
</gallery>

=== Valuation ===
Assessing the economic value of the environment is a major topic within the field. The values of [[natural resource]]s often are not reflected in prices that markets set and, in fact, many of them are available at no monetary charge. This mismatch frequently causes distortions in pricing of natural assets: both overuse of them and underinvestment in them.<ref>UK Government Official Documents, February 2021, [https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/957629/Dasgupta_Review_-_Headline_Messages.pdf "The Economics of Biodiversity: The Dasgupta Review Headline Messages"]</ref> Economic value or tangible benefits of [[ecosystem services]] and, more generally, of natural resources, include both use and indirect (see the [[Ecological economics#Nature|nature section]] of ecological economics). Non-use values include existence, option, and bequest values. For example, some people may value the existence of a diverse set of species, regardless of the effect of the loss of a species on ecosystem services. The existence of these species may have an option value, as there may be the possibility of using it for some human purpose. For example, certain plants may be researched for drugs. Individuals may value the ability to leave a pristine environment for their children.

Use and indirect use values can often be inferred from revealed behavior, such as the cost of taking [[travel cost analysis|recreational trips]] or using [[hedonic model|hedonic methods]] in which values are estimated based on observed prices. These use values can also be predicted through defensive behavior against pollution or environmental hazards, which can reveal how much people are willing to spend on healthcare and other preventative measures to avoid these hazards.<ref>{{Cite journal |last=Williams |first=Austin M. |date=2019-09-01 |title=Understanding the micro-determinants of defensive behaviors against pollution |url=https://www.sciencedirect.com/science/article/abs/pii/S0921800918304993#:~:text=%E2%80%9CDefensive%20behavior%E2%80%9D%20in%20this%20context,such%20as%20taking%20respiratory%20medications. |journal=Ecological Economics |volume=163 |pages=42–51 |doi=10.1016/j.ecolecon.2019.05.007 |issn=0921-8009}}</ref> Another health-based predictor of environmental use value is the [[Value of life|value of a statistical life]] (VSL), which provides an estimate of how much people are willing to pay for small reductions in their risk of dying from environmental hazards.<ref>{{Cite web |last=US EPA |first=OP |date=2014-04-20 |title=Mortality Risk Valuation |url=https://www.epa.gov/environmental-economics/mortality-risk-valuation#:~:text=In%20the%20scientific%20literature,%20these,would%20be%20willing%20to%20pay |access-date=2025-05-07 |website=www.epa.gov |language=en}}</ref> Non-use values are usually estimated using stated preference methods such as [[contingent valuation]] or [[choice modelling]]. Contingent valuation typically takes the form of surveys in which people are asked how much they would pay to observe and recreate in the environment ([[willingness to pay]]) or their willingness to accept (WTA) compensation for the destruction of the environmental good. [[Hedonic pricing]] examines the effect the environment has on economic decisions through housing prices, traveling expenses, and payments to visit parks.<ref>Harris J. (2006). ''[https://books.google.com/books?id=I8seDAAAQBAJ&q=%22Environmental+economics%22 Environmental and Natural Resource Economics: A Contemporary Approach]''. Houghton Mifflin Company.</ref>

=== State subsidy ===
Almost all governments and states magnify environmental harm by providing various types of subsidies that have the effect of paying companies and other economic actors more to exploit natural resources than to protect them. The damage to nature of such public subsidies has been conservatively estimated at $4-$6 trillion U.S. dollars per year.<ref>UK Government Official Documents, February 2021, [https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/957629/Dasgupta_Review_-_Headline_Messages.pdf "The Economics of Biodiversity: The Dasgupta Review Headline Messages"] p. 2</ref>