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316-663Environmental Economics and Strategy
Unit coordinator: ProfessorHarry Clarkeis contactable at this - and please only this - email address or, at an absolute pinch, on mobile 0400857951, office at 94791732, home at 94993212. I prefer email inquiries so that I can collect my thoughts before responding to an inquiry.
Consultation times to be arranged at University of Melbourne by appointment preferably before or after the weekly classes. Again I prefer to arrange appointments by email.
I will seek to meet with every student during the unit to discuss their progress and any problems they may be encountering. These meetings will begin after week 3. Generally I will arrive early for each class _ I typically have a coffee before each class in the student Union - and welcome discussion of materials and questions about unit content then.
If you have problems with course material see me immediately. I am paid to help you. There are no silly questions!
Purpose of this unit. There are three main objectives of this unit:
(i) To provide all participants with enough knowledge so that they can appreciate the way economists view environmental problems. In a practical sense participants will be taught enough environmental economics so that they can appreciate the broad perspective that economists take.
(ii) To provide participants with enough background knowledge so that they can apply important fundamental parts of economics to analyzing environmental problems.
(iii) To provide participants with an introduction to the analysis of environmental policies from an economics viewpoint.
Prerequisite: Knowledge of some basic economicsis helpful but not at all essential - no prior knowledge is assumed. Those without any economics need to make an initial sustained effort. The initial class of three hours will be held revising basic ideas of microeconomics.
Timetable for classes: Tuesday 5-15pm – 7-15pm (lecture), 7-15pm-8.15pm (tutorial) all in Architecture 103.
Contact: 2 lectures and 1 tutorial per week.
Assessment: Final 2 hour exam (70%), seminar/tutorial performance (15%) and a2,500 word essay (15%). Regular attendance at lectures and especially tutorials is expected. Those with good economics backgrounds can skip the first couple of tutorials but thereafter attendance is required. Failure to complete any component of the unit will result in grade zero being assigned to that component.
Text: Comprehensive notes are provided online and any of the texts below can be utilized. The book by Tietenberg is good and I draw on parts of the Ward text but each of these books adopts an approach different from mine.
The online material is provided at LMS which can be accessed at:
Students will need to then login and the subjects they are enrolled in will appear for them to choose from. Note that there are live links in many parts of this document.
You will need to copy an electronic version of this document onto your computer to access this material simply by clicking on it.
References– Books
MichaelCommons & Sigrid Stagl, Ecological Economics: An Introduction, CambridgeUniversity Press, Cambridge, 2005.
Tom Tietenberg, Environmental and Natural Resource Economics, Addison-Wesley, 7th edition, 2006.
Frank .A. Ward, Environmental and Natural Resource Economics, Person, Prentice Hall, New Jersey, 2006.
Bjørn Lomborg, The Skeptical Environmentalist, CambridgeUniversity Press, Cambridge 2001.
References – Academic Journals
Many environmental and resource economic issues are published in mainstream economics journals such as the American Economic Review, Journal of Political Economyor the Australian journal theEconomic Record.
Journals with a specific resource and environmental focus include:
- Journal of Environmental Economics and Management
- Natural Resource Modeling
- Resources and Energy Economics
- Land Economics
- Australian Journal of Agricultural and Resource Economics
- American Journal of Agricultural Economics
For the most part you will not need to consult these now but it is important to know where these key sources are.
Professional Associations
Much environmental economic research in Australia is carried out in the Australian Agricultural and Resource Economics Society which publishes the Australian Journal of Agricultural and Resource Economics. This society runs an excellent Annual Conference in February each year. For further information see
Course Outline
The main sources used in writing up class materials are listed. You are not expected to read all references though you will know where to find additional information should you need it. Required reading for examination purposes is denoted (**) while recommended reading is denoted (*).
Further references will be provided during class.
My PowerPointsand lecture note material are provided at (you need your username and password) as well as detailed background reading. All lecture notes have selected material deleted to encourage students to attend class. Copying the PowerPoints and then skipping classes is not the path to success in this unit.
Topic 1. Basic Economics (2 classes).
The main ideas of microeconomics. Supply, demand and market equilibrium. Producer, consumer and social surpluses are explained and used to assess market efficiency. Elasticities of demand. Willingness-to-pay and willingness-to-accept-compensation. Production possibility frontiers. Those without an economics background need to make an effort here
(**) H. Clarke, Powerpointsand notes.
J. Gans, S. King & N. G. Mankiw, Principles of Economics, Thomson, Second Edition, 2005, pps 59-104, 126-145.
(An excellent microeconomics text) J. Hirshleifer, A. Glazer, D. Hirshleifer, Price Theory and Applications, CambridgeUniversity Press, Cambridge 2006.
Ward, pps 35-68. (Discussion from a distinctively environmental perspective).
Tietenberg Chapter 2.
S. C. Callan & J.M. Thomas, Environmental Economics and Management, Thomson, Mason Ohio, 4th edition, 2007. (I nearly set this as a text – it does not discuss agricultural issues or urban congestion issues but it is otherwise very good). See pages 22 -45.
Topic 2. Economics, Resources and the Rationale for Government Action (2 classes).
What is distinctive about resource and environmental economics? The market failure rationale for government intervention to deal with environmental problems. The first and second theorems of welfare economics. Merit goods and income distribution. This starts you on a path to looking at resource and environmental issues from an economic perspective.
(**) H. Clarke, Powerpoints and notes.
A reasonable Wikipedia entry here.
A. Randall, Resource Economics, Wiley, Second Edition, 1987, Chapters 1-3.
N. Georgescu-Roegen, The Entropy Law and the Economic Process, HarvardUniversity Press, 1971. (Opinionated but excellent reading.)
J.E. Stiglitz, Economics of the Public Sector, 3rd Edition, W.W. Norton & Co, New York, London, 2000.
Topic 3. Basic Externality Modelling (2 classes)
What is an externality? A simple model of externalities. Pigovian taxes, market creation and bargaining solutions to externality issues. The Coase theorem and the role of property law. Tradeable permits. Optimal pollution abatement. The most important class in this course. Fundamental.
(**) H. Clarke Powerpointsand notes.
(*) Tietenberg Chapter 4.
(*) R.H. Coase, ‘The Problem of Social Cost’, Journal of Law and Economics, 1960, 3, pps.1-44.
Topic 4. Road Congestion, parking and pricing (2 classes)
The basic economics of congestion, hypercongestion and congestion tolls. Parking economics and ‘free’ parking. Supply policies. Policies for Melbourne. This is an accessible application of externality modeling which is of intrinsic importance.
(**) H. Clarke, Powerpointsand notes.
(**)The only reference on congestion pricing you need is Timothy D. Hau (1998), "Congestion Pricing and Road Investment," in K. J. Button & E.T. Verhoef (eds), Road Pricing, Traffic Congestion and the Environment, Edward Elgar, Cheltenham, pp. 39-78 (available online here). See also Timothy D. Hau (1992), Economic Fundamentals of Road Pricing: A Diagrammatic Analysis, World Bank Working Paper 1070, here – a very clear and comprehensive discussion.
(*) D. Shoup, The High Cost of Free Parking, Planner’s Press, ChicagoIllinois, 2005. (Excellent!)
(*) W. Harrington, A.J. Krupnick & A. Alberini, ‘Overcoming Public Aversion to Congestion Pricing’, Discussion Paper 98-27, April 1998, Resources for the Future. (Downloadable at
(*) A. Downs, Stuck in Traffic: Coping with Peak-Hour Traffic Congestion, The Brookings Institution. Washington, DC, 1992.
A recent paper that also addresses pollution externalities is:
G.R. Timilsina & H.B. Dulal, ‘Fiscal Policy Instruments for Reducing Congestion and Atmospheric Emissions in the Transport Sector: A Review’ (June 1, 2008). World Bank Policy Research Working Paper No. 4652 (At
For good discussion of the Braess Paradox see the wikipedia entry here.
On parking see:
H. Clarke & A. Hawkins, ‘Economic Framework for Melbourne Traffic Planning’, Agenda, 13, 1, 2006, 63-80 (maybe here).
H. Clarke, ‘Targeting Urban Congestion: Equity and Second-Best Issues’, The Australian Economic Review, 41, 2, 2008, 177–86 (maybe, here).
Victorian Competition and Efficiency Commission, Making the Right Choices: Options for Managing Transport Congestion, Final Report, September 2006 (here).
Topic 5: Cigarette smoke – internalities and externalities (1 class)
Cigarette smoking is the major preventable cause of death in the world today. The externality issues are not as significant however as are issues of consumer irrationality. An exercise in thinking clearly about what motivates policy.
H. Clarke, Powerpoints and article by Clarke/Collis.
U.S. Department of Health and Human Services. The Health Consequences of Involuntary
Exposure to Tobacco Smoke: A Report of the Surgeon General. Atlanta, GA: U.S. Department
of Health and Human Services, 2006. (here at 19.8MB). Executive summary here).
J. Gruber, ‘Smoking Internalities’, Regulation, 2002-2003, 52-57. (here). Short and excellent - required reading.
H. Clarke, Taxing sin: Some Economics of Smoking, Gambling and Alcohol, The Melbourne Review, 4, 2, November 2008, 30-36 (here).
H. Clarke & L. Collis, Policies for Reducing the Costs of Cigarette Smoking, mimeographed, 2008. (copies provided).
Topic 6. Public Goods - Applications to Global Environmental Issues (1 class).
Public goods, private goods and club goods. The provision of global environmental goods using public goods modeling (ozone deletion, global warming, global biodiversity conservation). The Montreal and Kyoto Protocols.
(**) H. Clarke, Powerpoints and notes.
(**) Tietenberg Chapter 17.
H. Clarke, ‘International Species Protection Agreements: Migratory Shorebirds on the East-Asian Australasian Flyway’ The Stilt, 35, October, 1999, pps. 18-24.
Most microeconomics texts contain a discussion of property right regimes. They may not include discussion of club goods but this is straightforward and the class materials should be sufficient to cover this.
A reasonable Wikipedia discussion of public goods is here. On common property here.
A nice game theoretic model is P. K. Dutta, Strategies and Games, The MIT Press, 2001, p 91-102. This however uses maths.
An excellent Wikipedia article on the ozone layer is here.
Topic 7: Global Public Goods and Climate Change (4 classes)
Climate change is the most significant environmental issue to ever confront humanity.
We discuss various topics herebut start with the basic science, then some economics, then various adaptation problems. We will discuss the emissions trading scheme. The major references on climate change are available online. In fact there is enough reading here to keep you going for a year. Among the references cited I think the Baker et al. report is a practically useful – and not over-lengthy way of getting into the modern debate. You can then try the other reading.
(**) H. Clarke, Powerpoints.
N. Stern, The Economics of Climate Change: The Stern Review, Cambridge University Press, Cambridge, 2007 (here).
Intergovernmental Panel on Climate Change (IPCC) (here). There are three recent reports here: The physical science basis; Impacts adaptation and vulnerability; and, Mitigation of climate change. There is a lot of material here summarized in the Synthesis Report (here).
R. Garnaut, Garnaut Climate Change Review, 2008. (here).
For an assessment of the Stern Review methodologies see:
R. Baker, A. Barker, A. Johnston & M. Kohlhaas, The Stern Review: An Assessment of its Methodology, Productivity Commission Staff Working Paper, January 2008. (here).
W. D. Nordhaus, ‘The Stern Review on the Economics of Climate Change’, NBER Working Paper, December 2006. (You may get online access within the university here).
J. Quiggin, ‘Stern and the critics on discounting’ mimeographed. 2006. (hopefully here).
For a critique of Stern based on the perspective that it understates dangers see:
D. Spratt & P. Sutton, Climate Code Red: The Case for Emergency Action, Scribe, Melbourne, 2008.
For an attempted synthesis by an economic theorist:
G.M. Heal, ‘Climate Economics: A Meta-Review and Some Suggestions’ (April 2008). NBER Working Paper No. W13927. (At
Current government policies on emissions trading (hot off press!):
Department of Climate Change, Carbon Pollution Reduction Scheme: Green Paper, Commonwealth of Australia, 2008. (here).
On biodiversity adaptations you might want to look at:
H. Clarke, “Conserving Biodiversity in the Face of Climate Change”, Agenda, 14, 2, 2007, 157-170. (here).
On climate change adaptation policies under uncertainty:
H. Clarke, ‘Classical Decision Rules and Adaptation to Climate Change’, Australian Journal of Agricultural and Resource Economics, 52, 2008, 487-504. (preprint here).
M. Dunlop & P. Brown, CSIRO, Climate Change and the National Reserve System, CSIRO, 2008 (here).
On strategic issues see:
The excellent wikipedia entry on global emissions (here) and this from Carbon Planet.
S. Barrett, Environment and Statecraft, Oxford University Press, Oxford, 2003.
H. Clarke, Strategic Issues in Global Climate Change Policy, mimeographed, 2008. (copies on website).
Topic 8. Valuing Environments, voting schema and risk (2 classes).
Valuing marketed and non-marketed goods. Non-use values. Valuation using revealed preference techniques (hedonic pricing and wages, travel cost and averting expenditures methods) and using stated preference techniques (contingent valuation, conjoint analysis). Use of environmental values in cost benefit analysis and choice of the discount rate. Non-economic approaches to environmental valuation.
(**) H. Clarke, Powerpoints.
(*) Tietenberg Chapter 3.
Ward 93-126, 127-149, 150-188, 581-590. (Lengthy but very good!)
(*) K.Arrow, R. Solow, E. Leamer, P. Portnoy, R. Radner & H. Schuman, ‘Appendix 1 – Report of the NOAA Panel on Contingent Valuation’, Federal Register, 58, 10, 1993, pps 4601-4614. Available online here. (Important article!)
R.T. Carson, L. Wilks & D. Imber “Valuing the Preservation of Australia’s Kakadu Conservation Zone”, Oxford Economic Papers, 46, 1994, 727-749.
Basic material is available in all environmental economics texts. See e.g.:
Callan & Thomas op cit. Chapters 6-8.
For advanced discussion see:
A. Myrick Freeman, The Measurement of Environmental and Resource Values, Resources for the Future, Washington, 2003.
We discuss in passing:
I. Davidoff & A. Leigh, ‘How Much Do Public Schools Really Cost? Estimating the Relationship Between House Prices and School Quality’, The EconomIc Record, 84, 265, 2008, 193-206.
Topic 9. Exhaustible Resources (2 classes).
Exhaustible resources and increasing scarcity. The Hotelling rule. Resources as a limit to growth. An introduction to dynamic policy modeling of environmental and resource issues. Exhaustible energy resources. Peak oil.
(**) H. Clarke, Powerpointsand notes.
(*) Tietenberg pps. 128-180.
H. Hotelling, ‘The Economics of Exhaustible Resources’, Journal of Political Economy, 39, 1931, pps. 137-175.
M. Adelman, ‘Scarcity and World Oil Prices’ Review of Economics and Statistics, 68, 1986, pps. 387-397.
(*) M. Adelman, The Genie Out of the Bottle, World Oil Since 1970, MIT Press, 1996, Chapts 1 & 2.
D. Meadows et al, The Limits to Growth, New York, Universe Books, 1972.
J.L. Simon, The Ultimate Resource, Princeton University Press, 1981.
H.J. Barnett & C. Morse, Scarcity and Growth: The Economics of Natural Resource Scarcity, Baltimore, Johns Hopkins Press, 1963.
J. E. Tilton, On Borrowed Time? Assessing the Threat of Mineral Depletion, Resources for the Future, Washington, 2003. (highly recommended).
Topic 10. Renewable Resources (2 classes).
The economics of renewable resources (fisheries, forestry, aquifers, self-renewing environments). Modeling of renewable resource management issues. Open access and common property resources.
(**) H. Clarke, Powerpointsand notes.
(*) Tietenberg pps. 258-313.
World Resources Institute & others, pps. 292-302, 313-318.
The standard reference is C.W. Clark, Mathematical Bioeconomics: The Optimal Management of Renewable Resources, Wiley-Interscience, 1976. Very clear.
The classic modern treatment of forestry issues is P.A. Samuelson, ‘The economics of Forestry in an Evolving Society’, Economic Inquiry, 24, 1976, pp. 466–492
Topic 11. Uncertainty and Irreversibility (2 classes)
Decision-making in environmental situations where there is simultaneously risk and uncertainty. Dynamic programming. Endangered species issues. Irreversibilities, uncertainty and climate change. This work is on the frontiers of contemporary work but of immense importance and fairly accessible.
(**) H. Clarke, Powerpointsand notes.
(*) K.J. Arrow & A.C. Fisher, ‘Preservation, Uncertainty and Irreversibility’, Quarterly Journal of Economics, 87, 1974, 312-319.
R.S. Pindyck, ‘Uncertainty in Environmental Economics’, Available online here (*)
R. Bishop, ‘Endangered Species and Uncertainty: the Economics of a Safe Minimum Standard’, American Journal of Agricultural Economics, Feb, 1978.
A.K. Dixit & R.S. Pindyck, Investment Under Uncertainty, Princeton University Press, Princeton, New Jersey 1994.
J.V. Krutilla, ‘Conservation Reconsidered’, American Economic Review, 57, 1967.
V.K. Smith, Technical Change, Relative Prices and Environmental Resource Evaluation, Johns Hopkins University Press, Baltimore, 1974.
Topic 12. Course review.
We will review the contents of the unit. A question I like to pose is whether course participants have come to see the value of the economics approach. What are the limitations of the economic view.
(**) H. Clarke, Powerpoints.
Tutorials
There are eleven tutorials in all. Tutorials commence in week 2 of the course.
Tutorial performance will be assessed as 15% of the total course assessment. This will involve making a short presentation or dealing with a question assigned in the tutorial.
You must maintain a satisfactory attendance at tutorials. A roll will be maintained and grade zero for the tutorial assessment will be assigned to those skipping more than a couple of tutorial classes. Experience has demonstrated to me that students not attending tutorials do have problems. Thus non-attendance at tutorials is penalised but attendance in itself is not rewarded. You need to contribute to the class either by answering questions or by explaining clearly the difficulty you experienced trying to answer them.
It is essential that you spend at least half an hour glancing through the tutorial questions assigned each week and an hour or so thinking about the seminar topics presented. Most of the final examination will be based on questions – and discussion – that occurs during the tutorials.
The first few tutorials involve set questions.Then there are seminar/discussions. In most cases these tasks involve doing Google searches and a search of the economics journal literature.