Environmental Economics

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Course TypeCourse CodeNo. Of Credits
Foundation ElectiveSLS2EC2314

Semester and Year Offered:

Course Coordinator and Team: Dr. Robin Singhal

Email of course coordinator: rsinghal[at]aud[dot]ac[dot]in

Pre-requisites: Microeconomics I and II for 1st Year MA in Economics


This course aims to provide a comprehensive introduction to the economic analysis of issues arising from the interactions between the natural environment and the human economy. It underscores the role of entropy laws in this process of interaction. It focusses on the ecosystem-services and discusses comprehensively the challenges arising due to externalities, public-good character and non-tradability of such services. In particular, it highlights the resulting nature of market failure along with issues for social welfare and distributive implications in determining human well-being.

The course adapts both micro- and macro-economic perspectives to the environmental issues. On the microeconomic aspect, the course will introduce and analyse the concepts, method, and techniques of valuation of non-tradable environmental goods and services on the one hand and economics of pollution control and regulations on the other. On the macroeconomic aspect, the course introduces (a) the concept of sustainable development and accounting in a dynamic capital-theoretic framework of analysis and (b) the approach to green national accounting and estimation of genuine savings and investment. Further, the course introduces developmental issues relating to trans-boundary and global pollution (climate change) and policies for their mitigation and control.

Course Outcomes:

On the successful completion of this course, the students will be able to

  1. Discuss the environmental issues in relation to the theory of externalities, public goods, and welfare.
  2. Illustrate and examine economic principles concerning the choice of instruments for controlling pollution and the relative strength and weaknesses of environmental policies based on command-and-control vis-à-vis market-based instruments.
  3. Discuss various approaches and methods developed for valuing environmental goods and services.
  4. Examine issues in the contemporary environmental discourse from an economists’ point of view.

Brief description of modules/ Main modules:

1. Economy and the natural environment

  • The human economy – natural environment interaction. Biophysical Foundations of production and consumption of human economy Sources and Sink functions of the ecosystem. Material Balance approach: the concept and conditions of sustainability of the human economy.
  • Classification and characterization of resources and pollution as a public good or bad, Role of Externalities as the fundamental determinants.
  • Property Rights, Market, Spatial-temporal dimensions of externality.

2. Theory of Environmental Regulation and Policy

  • The socially optimal level of pollution and Pareto optimal allocation of resources. How to ensure the attainment of optimal pollution :
  • Assignment of Property Rights: Coase Theorem and its limitations
  • Government interventions - Command and Control: standard setting, Market based instruments: Pigouvian taxes - emission charges, ambient charges, product charges, subsidies, noncompliance fees, Tradable pollution permits.
  • Uncertainty and choice of regulatory instrument

3. An overview of the economy and the natural environment interaction using an input-output based general equilibrium approach to show how ecological limits and scarcity of eco-services would affect the resource allocation and prices. Approach to environmentally adjusted national income.

4. Valuation of Environmental Goods and Services

  1. Theory of environmental valuation and conceptual basis of its methods: Compensating Variations and Surplus, Equivalent Variations and Surplus, Willingness to pay or accept for improvement or loss of environmental goods and services
  2. Empirical approaches in environmental valuation: Indirect Methods of environmental valuation: The following topics will be discussed with illustrations from some case studies and refer to the econometric or statistical methods to be applied.
  3. Revealed Preference Methods: (a) Hedonic Pricing, (b) Household Production Function approach - defensive cost, health cost and travel cost methods
  4. The direct method of environmental valuation: Stated preference: Contingent valuation method.

5. Sustainable Economic Development

  1. Capital theoretic basis of the notion of sustainable development: Sustainable Development as non-declining intertemporal utility or that of the value of the wealth. Concepts of Genuine investment or savings and Green National Income
  2. Natural capital stock and sustainable resource accounting. Strong and weak Sustainability, Environmental Adjustment of National Income.

6. Economic Development and Environment

  1. The relation between Development Environmental Quality: Environmental Kuznets Curve
  2. Development vs conservation of environmental resources: Ecosystem flips and irreversibility: Krutilla-Fisher equation
  3. Environmental Cost-Benefit Analysis under strong and weak conditions of sustainability: Choice of time discount rate for evaluation. Sustainability premium.

7. Trade and Environment

  1. Environmental standard as a determinant of (a) pattern of trade and its welfare implications, (b) the locational distribution of polluting industries across the developed and developing countries and (c) that of the direction of flow of foreign direct investment.
  2. WTO and global convergence of environmental standard. Analysis of three cases in GATT/WTO: Tuna-Dolphin, Beef-Hormone, and Shrimp-Turtle

8. Trans-boundary and global pollution Problems: Cases of Ozone Depletion, Acid Rains and Climate change. Theory and policy for the control of such pollution externalities.

Assessment Details with weights:

The assessment pattern would consist of a mid-semester exam (30%), end-semester examination (35%), term paper and class presentations (35%).

The mid-semester would be subjective in nature and would aim to test the students for their application of microeconomics principles to environmental economics.

The end-semester examination would examine the students for their understanding of methods and approaches taught and their application to the range of environmental issues.

In term paper and class presentations, the underlying emphasis would be on developing the attitude of independent thinking on contemporary environmental issues and critical evaluation of public policy for addressing environmental problems.

Reading List:

  1. Nick Hanley, Jason F Shorgen and Ben White, 1997/2006, Environmental Economics
  2. Theory and Practice, First/Second Edition, MacMillan.
  3. Charles D Kolstad, 2012, Intermediate Environmental Economics, Indian Edition, Oxford University Press, New Delhi
  4. David W Pearce and R Kerry Turner, 1990, Economics of Natural Resources and the
  5. Environment, Harvester Wheatsheaf
  6. Ecott J. Callan and Janet M. Thomas, 2013, Environmental Economics and Management: Theory, Policy and Applications, Cengage Learning, Delhi.
  7. Ramprasad Sengupta, 2013, Ecological Limits and Economic Development, Oxford University Press, New Delhi
  8. Ahmed Hussen, 2013, Principles of Environmental Economics and Sustainability: An integrated economic and ecological approach, Routledge, UK.
  9. Per-Olov Johansson, 1987, The Economic Theory and Measurement of Environmental benefits, Cambridge University Press.
  11. Robert U Ayres and Allen V Kneese, 1969, ‘Production, Consumption, and Externalities’, American Economic Review, LIX (June): 282-97.
  12. William J Baumol, 1972, ‘On Taxation and the Control of Externalities’, American Economic Review, LXII (3): 307-22
  13. R H Coase, 1960, ‘The Problem of Social Cost’, The Journal of Law and Economics, III: 1-44
  14. G M Grossman and Alan B Krueger, 1995, ‘Economic Growth and the Environment’, The Quarterly Journal of Economics, CX (2): 353-377.
  15. Thomas M Parris and Robert W Kates, 2003, ‘Characterizing and Measuring Sustainable Development’, Annual review of Environment and Resources, XXVIII (1): 559-586.
  16. Peter Bartelmus, Ernst Lutz and Jan Van Tongeren, 2001, ‘Environmental Accounting: An Operational Perspective’, in Ulanganathan Sankar (ed.) Environmental Economics, Oxford University Press, New Delhi.
  17. David I Stern, 1998, ‘Progress on the environmental Kuznets curve?’, Environment and Development Economics, III (2): 173-196.
  18. Michael Trebilcock, Robert Howse and Antaria Eliason, 2013, The Regulation of International Trade, Routledge, Abingdon, OX14 4RN, (Chapter 17: Trade and the environment): 656-715
  19. * This is a tentative reading list. Additional reading material would be provided in the class.