Fundamentals of Environmental Economics

A PROGRAM OFFERED BY

THE FOUNDATION FOR TEACHING ECONOMICS

IN PARTNERSHIP WITH THE FRASER INSTITUTE

Fundamentals of Environmental Economics A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

1

10/16/2025

Program Mission

• Familiarize participants with a range of environmental economic concepts and provide a critical thinking framework for analyzing environmental issues and policies.

​

Fundamentals of Environmental Economics A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

2

10/27/2022

Program Vision

• To have students graduate from high school with the skills that enable them to critically analyze environmental economic issues.

​

Fundamentals of Environmental Economics A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

3

10/27/2022

Lesson 1

THE FUNDAMENTALS: TERMS CONCEPTS & INSTITUTIONS

Fundamentals of Environmental Economics A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

4

10/27/2022

Objectives

• To provide a working understanding of the major economic concepts as related to environmental economic issues.

Fundamentals of Environmental Economics A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

5

10/27/2022

Is environmental quality different, or is it like other goods and services?

Economic Reasoning Proposition #1

ERP 1: People choose, and individual choices are the source of social outcomes.

Is environmental quality scarce?

(Does it use scarce resources?)

​

Economic Reasoning Proposition #2

ERP 2: Choices impose costs; people receive benefits and incur costs when they make decisions.

Do decisions about the environment have opportunity costs?

​

=Yes

No

Economic Reasoning Proposition #3

ERP-3: People respond to incentives in predictable ways.

Do people’s choices about environmental quality respond to incentives in predictable ways?

​

Yes

No

Economic Reasoning Proposition #4

ERP-4: Institutions are the “rules of the game” that influence choices.

Are the incentives that influence people’s choices about environmental quality shaped by the “rules of the game?

​

​

Yes

No

Economic Reasoning Proposition #5

ERP-5: Understanding based on knowledge and evidence imparts value to opinions.

Is this true of opinions about the environment?

​

​

Yes

No

“The environment” is an economic good

• Environmental quality and natural resources �are fundamentally scarce
• There are alternative uses
• We must choose among those competing uses
• The same goes for public funds
• Economics can help us think more clearly about the environment

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

12

What is economics?

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

13

This Photo by Unknown Author is licensed under CC BY-SA

What is economics?

• Economics is the study of how individuals and groups make choices about how to use scarce resources to achieve their goals.

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

14

Scarcity

• Desires are unlimited
• Resources are fundamentally limited
• “Land”
• Labor
• What else?

​

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

15

This Photo by Unknown Author is licensed under CC BY

Scarcity necessitates choice

• Things have more than one valuable use�
• What is the best use of a given resource?
• How should the city/state/federal government spend its budget?
• Which topics should I cover in 8 lectures?
• Should we use water to grow crops, or take showers?
• Should we use corn to feed people, or make ethanol?

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

16

Questions about choice

• How should we decide?
• Who should decide?

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

17

vs.

The Economic Perspective

18

• Economics is the study of choice,
• assuming that people are:
• rational
• self-interested

​

• This is a predictable element in human behavior

A Three-Step Process

1. Understand people’s choices
2. Evaluate outcome

Good or bad?

3. Consider institutions:

Role for policy?

19

Key Questions for Understanding Choices

• Why do people make the choices they do?��
• If choices have negative consequences, how can we change those choices/behaviors?

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

20

Shaping Choices–Incentives

• Anticipated rewards and penalties associated with choices.

​

​

​

​

​

• People respond to incentives in predictable ways

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

21

• Change incentives → change behavior

​

How should we choose?

• Choices are made at the margin�
• Marginal = “extra” or “one more”�
• Marginal Cost is the added cost of one more�
• Marginal Benefit is the added benefit of one more�

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

22

Opportunity Cost

• To choose is to “deny” something�
• The opportunity cost of a decision is the value of the next best forgone alternative
• “Opportunity cost is the opportunity lost”
• “To choose is to refuse”

​

• Does not include every possible alternative
• Teaching for FTE vs. surfing vs. hiking
• Subdivision vs. open space vs. shopping mall vs. zoo

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

23

How should we choose?

• Optimal use of a resource occurs where MB = MC�
• Note: MC includes opportunity cost

​

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

24

Applying expected marginal cost �vs. expected marginal benefit

​

• …..a digression including questions many of us must consider + “big” environmental questions

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

25

Expected marginal cost vs. expected marginal benefit:

• Full time job after high school
• vs.
• Going to college and working part time.

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

26

Expected marginal cost vs. expected marginal benefit:

How many hours should you study?

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

27

Expected marginal cost vs. expected marginal benefit:

• Endangered species habitat vs. grazing

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

28

What is the optimal amount of pollution?

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

29

Expected marginal cost vs. expected marginal benefit:

The Problem

How to get agreement from all groups related to a specific policy.

​

How to weigh the marginal costs and benefits across different people/groups?

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

30

Institutions

• The “rules of the game” that fundamentally shape economic outcomes by determining incentives

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

31

Markets

• Where buyers and sellers come together to buy/sell goods or services.

​

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

32

Property Rights

• Grant the owner the right to buy, sell, trade, or derive income from their land, natural resources, capital and entrepreneurial talent�
• Contrast to “common ownership”�
• Property rights are fundamental to incentives

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

33

Rule of Law

• The principle that law should govern a nation and include governing those who govern.�
• Contrast to “rule of force” and “rule of man”�
• Provides stable, predictable environment for individual and social choice�
• Prevents resources from being diverted to “rent seeking”

​

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

34

The Importance of Institutions

• Rule of law + property rights + markets = efficient use of resources�
• Making the better use of scarce resources → economic growth�
• Property rights become more complete as MB > MC�
• Dilemmas arise from incomplete/missing property rights or other market failures

​

Environment and the Economy ©The Foundation for Teaching Economics. Permission to copy for classroom use.

35

When do people decide to deal with environmental issues?

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

36

10/27/2022

Maslow’s Hierarchy of Needs (1943)

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

37

10/27/2022

World Per Capita Real GDP: 1500 - 2000

• Source: GDP data from Angus Maddison, "Historical Statistics of the World Economy: 1-2003 AD.“ http://www.ggdc.net/maddison/

​

​

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

38

10/27/2022

World Per Capita Real GDP: 1500 - 2000

• Source: GDP data from Angus Maddison, "Historical Statistics of the World Economy: 1-2003 AD.“ http://www.ggdc.net/maddison/

​

​

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

39

10/27/2022

World Per Capita Real GDP: 1500 - 2000

• Source: GDP data from Angus Maddison, "Historical Statistics of the World Economy: 1-2003 AD.“ http://www.ggdc.net/maddison/

​

​

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

40

10/27/2022

World Per Capita Real GDP: 1500 - 2000

• Source: GDP data from Angus Maddison, "Historical Statistics of the World Economy: 1-2003 AD.“ http://www.ggdc.net/maddison/

​

​

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

41

10/27/2022

World Per Capita Real GDP: 2016-2018

https://www.rug.nl/ggdc/historicaldevelopment/maddison/data/mpd2018.xlsx

​

​

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

42

10/27/2022

Activity: Ah! Ha!

• As you are watching the following video, write down an “Ah! Ha! (something you didn’t know before seeing the video that the video explained).

​

• Be prepared to share your Ah! Ha! following the video.

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

43

10/27/2022

Fundamentals of Environmental Economics

A Collaboration of The Foundation for Teaching Economics & The Fraser Institute

44

10/27/2022