Category Archives: Environmental Economics

This category includes educational materials on environmental economics or economic valuation of environmental and natural resources.

Household Adaptation to Climate Change in the Philippines

How do marginalized people living in vulnerable coastal communities adapt to the effects of climate change such as sea level rise? What is an example of this adaptation at the household level? The following article describes one of these interesting adaptations and its implications.

One of the interesting aspects of research is discovering something new. Although a phenomenon has been there for a long time, it becomes a relevant point of interest once its occurrence is viewed more keenly and becomes a subject of discussion.

Take for instance the cross-country research our group conducted last year in the coastal areas of the Philippines, Indonesia, and Vietnam to document the effects of climate change. One of those inquired in the investigation looked into the adaptation of marginalized fisherfolks to the hazards brought about by typhoon/flooding, coastal erosion and saltwater intrusion.

What I found interesting in this climate change study are the unique ways by which marginalized people try to cope up with changes in their environment. In this particular case that we studied, the fisherfolks’ adaptation to the erosive effects of waves in the gradually advancing seawater was investigated.

We visited three communities (locally called barangays) to find out if there are any signs of initiatives to mitigate the effects of sea level rise. There, indeed, are several interesting adaptations made by fishermen in the tropical regions such as the Philippines. I relate one below.

Household Adaptation to Sea Level Rise

Below is a picture of a household adaptation in response to rising sea levels that erodes the thin strip of land a few hundred meters wide. A series of temporary and permanent houses dot this habitable portion that lies between the sea and the concrete highway running along the irregular coastline.

adaptation to sea level rise
A makeshift structure built of logs, bamboo slats, stones and sand in Binduyan, Puerto Princesa as household adaptation to mitigate the erosive impact of advancing seawater.

I noticed this ingenious way to keep soil from eroding in the beach of Binduyan, a coastal community lying east of Puerto Princesa in the island of Palawan in the Philippines. It may be a common sight to the uninitiated, but to someone who does research this means a lot.

What were the costs involved?

If you will imagine the time, money (although these materials may have been sourced around) and effort devoted by the person to construct this structure, you will be able to appreciate the significance of this adaptation to the life of the builder. Since we are after economic analysis of household adaptations like this, questions like the following arise in my mind:

  • How many people were involved in constructing the makeshift seawall?
  • How much time did it take them to build such structure?
  • What opportunities did they lose as a consequence of working on the structure (see opportunity cost to understand how important this concept is)?
  • What benefits were gained?
  • Did the benefits justify the cost of construction or was it just a waste of time?

Why would this family go to lengths in constructing this makeshift structure made of local materials? It’s unfortunate nobody was there to ask when we passed through as we walked the beach and note down observations. The owners were out somewhere, probably fishing. But these questions helped us design our questionnaire as this visit was part of our scoping activity.

We measured the height of the whole structure. It is 1.2 meters in height! Did seawater rise that high? How many years did it take to reach that level? What is the distance of the water’s edge at high tide from this house since people living in the area took notice of the rising waters?

Questions Lead to Discovery and Informed Actions

Many questions arise as a result of this simple observation. And these questions will propel you to undertake research focused on your specific concern to contribute to the body of knowledge. That, of course, requires publishing your work for others to learn from. Research findings mean nothing if left unpublished.

You may download and read the results of the study I mentioned above from the WorldFish website. It is titled “Economic Analysis of Climate Change Adaptation Strategies in Selected Coastal Areas in Indonesia, Philippines and Vietnam.” It is hoped that the findings of this research will aid policy makers in coming up with actions to mitigate the effects of climate change thus reduce costly damage to vulnerable coastal communities.

© 2013 June 30 P. A. Regoniel

Economic Valuation: What is Change in Income Technique?

One of the interesting topics of environmental economics is economic valuation. What is economic valuation and how does it work? What is change in income technique? This article explains these concepts.

The Meaning of Economic Valuation

Economic valuation entails imputing monetary value to natural and environmental resources that were once regarded free. This is because everyone thought that natural and environmental resources are inexhaustible.

Background on the Rise of Environmental Economics

It was not until around the 1960s, during the height of the industrial revolution, when people realized that natural resources like clean air has value attached to it. Although air may be inexhaustible, its quality can be compromised. Polluted air is associated with various diseases of the respiratory system thus entail cost.

Air is consumed by everyone, and anything that is being consumed is a good. A good can be represented by money.  But the amount of money that corresponds to, say, a liter of fresh air, is not easily determined. Unlike other goods found in the market, air is neither sold nor bought. But we know for sure that clean air is a valuable resource that, just like any resource that we consume, provides benefit to everyone. Clean air is one important good that man could not do without.

The air people consume (by inhaling it in their lungs and deriving oxygen to burn food hence release energy), just like any good, exists at various levels of quality. Air of good quality provides greater benefit to people than air of poor quality. Air of poor quality or polluted air can cause different kinds of illnesses. Thus, a good of excellent quality provides greater benefit to consumers than a good that is of inferior quality.

Why is it necessary to assign monetary value to clean air? The main purpose of assigning value is to be able to manage this important natural resource.  Unless monetary value is given to it, people tend to undermine its importance as anyone could get it free. At best, the value of a consumed good like clean air can only be estimated. This can be done through indirect means.

In environmental economics, one of the tools used in valuing natural resources such as air is the change in income technique. How is this economic valuation tool used?

Change in income technique is discussed in greater detail below using air as an example to demonstrate how this valuation technique works.

Change in Income Technique

In today’s civilized cities, it is expected that some degree of air pollution exists. The value of the ambient air, therefore, lies within a range of air quality, i. e., clean air to highly polluted air. Correspondingly, clean air will be valued more by people than polluted air; but how much will that be?income

Since the value of clean air could not be directly measured, this can be valued indirectly by looking into the change in people’s income due to loss of work from ill health, premature illness or death resulting from polluted air. If the quality of air is improved, there will be improvement in health, illnesses are reduced or avoided, and premature death is prevented.

Therefore, the value of air improvement is equal to the difference in income between people living in a polluted air environment and in another location or state of  better air quality. It is assumed that more income will be gained by people due to better health achieved in a locality with cleaner air. Cleaner air environment is associated with healthier people who are able to do more work, thus more income gained.

Use of the Valuation Technique: Comparing Costs and Benefits

How can the quality of air be improved so that people will gain more income?

This can be done by formulating and implementing pollution control regulations to limit, reduce or eliminate the source of pollution. But the implementation of pollution control regulations entail cost in terms of the personnel required to implement it, equipment to monitor emissions, advocacy through information and education campaign, among others.

If income increases after implementation of pollution control regulations, then it is now possible to compare the cost and the gains. A cost-benefit analysis can then be made. If benefit (B) in terms of increased income far outweigh the cost (C) of implementing pollution control regulations, then the cost of implementing pollution control regulations is justified.

These scenarios may be represented by the generalized equations of cost and benefit below.

1) B – C = 0 POLLUTION CONTROL REGULATION HAS NO EFFECT AT ALL

2) B – C > 0 POLLUTION CONTROL REGULATION IS EFFECTIVE

3) B – C < 0 POLLUTION CONTROL REGULATION IS NOT WORTH IT

It will be desirable to attain condition 2 but the outcome may depend on a given time frame of assessment. It is possible that either condition 1 and 3 may be that outcome during the early stage of implementation of pollution control regulation.

Change in income therefore is a useful economic valuation tool that can be used to measure the relative value of air quality. Its application is straightforward, although a strong link must be established between air quality and health and vice-versa.

Related Reading

What is the value of natural resources?

What is environmental economics?

© 2013 January 31 P. A. Regoniel

What is Environmental Economics?

What is environmental economics? What is the purpose of environmental economics? This article defines the concept in view of sustaining environmental resources.

Students of environmental science will find themselves dealing with environmental economics concepts in their senior years while taking the environmental science course. Thus, it pays to learn the basics of the subject for greater understanding and application of the tools of economics. As the word connotes, environmental economics is about the economics of the environment. But what, specifically, is economics and what is the concern of environmental economics?

First things first; it will be easier to understand the subject by defining some terms for common understanding. Let us define what is economics then before proceeding to the definition of environmental economics.

Definition of Economics

Harper [1] defines economics to literally mean “household management.”  This word was derived from Latin oeconomia and from Greek oikonomia meaning “household management.” Further, Quizlet.com[2] defines economics as the study of how and why individuals and groups make decisions about the use and distribution of valuable human and non-human resources. That’s the longer definition. For simplicity and for our purposes and based on the latter definition, economics can be defined simply as the study of how humans decide on how to dispose of resources.

Economics considers resources, whether human or non-human, as scarce or finite and these are not in abundance. When resources are scarce and tend to get depleted, then people must maximize its use. And when people need these resources badly, then these are valuable resources. Economics then deals with management of scarce resources.

Now, we’ll focus our attention on environmental resources and define environmental economics.

Definition of Environmental Economics

Drawing out from the definition of economics, environmental economics can be defined as the study of how humans decide on how to dispose of environmental resources. At this juncture, the focus of management is mainly on environmental resources.

But what consists environmental resources? To make clear this concept, I enumerate some of the environmental resources below that man derives benefit from and need to be managed:

General: air, water, and land

Specific:

  • trees or plants that supply the life-giving oxygen humans need;environmental economics
  • crops that provide food to humans;
  • clean drinking water to keep human metabolism working and flush out bodily wastes;
  • metals that serve as raw materials for human ingenuity such as creation of tools, rigid structures for abode and cars for transport; and
  • oil to fuel industries that manufacture products that people need.

Of course, the list could go on. There are so many other environmental resources that you can think of that are used to satisfy human needs and wants.

Ideally, all human needs and wants should be fulfilled, but this is far from reality. Why? That’s because human needs and wants vary. Needs may be fulfilled but wants are virtually without limit. But environmental resources have limits; thus, both resources and human needs and wants must be managed.

So what has environmental economics got to do with human needs and wants? The main purpose of environmental economics is to attain environmental resource sustainability. It is only an instrument by which human needs and desires or wants may be addressed, as much as possible, without depleting finite environmental resources.

Related Readings:

What is WTP in environmental economics?

What is the value of natural resources?

References

[1]  Harper, Douglas (November 2001). “Online Etymology Dictionary – Economy“. Retrieved October 27, 2007.

[2] Quizlet.com. Definition of economics.

© 2013 January 11 P. A. Regoniel

Opportunity Cost and Decision Making Plus Examples

What is opportunity cost? How can this economics concept become a useful tool in decision making? Read on to find out.

Opportunity cost is one of the important concepts I have learned in the course of teaching environmental economics. Understanding the concept has helped me a lot especially on those times when I need to make decisions or choices given a set of alternatives.

What is opportunity cost and how can knowledge and application of the opportunity cost concept become useful in decision making?

Opportunity Cost Defined and Example of a Decision Making Situation

Opportunity cost is simply the cost of the next best alternative presented to you during a decision situation. This can be more clearly illustrated by an example of a decision making situation below.

You might, for example, be given the opportunity to decide whether to take that long vacation you longed to take for many years. You find yourself well entrenched in the current work that you are in, where your decision will spell the future direction of your life. The question then is “Will you give up your current preoccupation because of your desire to have that restful respite from the hustle-bustle of work life?”

What is the opportunity cost once you make the decision in this case?

There will be a range of alternatives that will present itself to you. And these alternatives have their own set of advantages and disadvantages.

How will you know which of these is the next best option for you?

It will help if you will enumerate and rate the different alternatives based on your values, preference, or need/want. These values, preferences and needs are expected to vary across individuals; so someone faced with the same circumstance will decide differently from another person.

One way to make clear the value of these alternatives is the use of a decision technique that uses numbers. To sum it up, the technique just makes use of a scale of 1 to 10 where you rate each alternative according to your subjective evaluation of its value.

After rating all the alternatives, you can now choose which among those alternatives have the highest score; just by adding up all the advantages and disadvantages of each alternative. The alternative with the highest value is your next best alternative and is your opportunity cost.

Another Example of Opportunity Cost: What are you going to do with your $100?

Another much simpler example to demonstrate opportunity cost is the following situation.

You have $100 with you. Now, you would want to spend your $100 in a shopping mall in such a way that you will be able to enjoy it to its maximum utility, meaning, you want to make the most of it. You may have a range of choices like the ones given below, each one priced at $100.

  • a lunch with friends
  • an Android phone
  • your medicine for ashtma
  • a pair of branded shoes
  • a pair of glasses

Notice that given this range of choices, your values, preference or need will determine your decision. You might put premium to the camaraderie of your friends and you are willing to give up all the other choices. Once you decide to take lunch with friends as your best choice, you give up your opportunity to buy either an Android phone, your medicine for asthma, a pair of branded shoes, or a pair of glasses which you may likewise need or want. Any of these options will be your opportunity cost, but it is possible that in reality, some of the alternatives presented to you may not really be worth $100 to you.

The real opportunity cost, therefore, is the next best choice which you will mostly take if you did not pay for that first option. Once you give up your $100 for a certain item, you lose your chance to purchase any of the items with likewise similar value to you. What you gave up is your opportunity cost.

© 2012 December 16 P. A. Regoniel

Externalities: The Mango Grower and the Beekeeper

One of the important concepts in environmental economics or economic valuation is the concept of externalities. This concept may sound so sophisticated and complex to understand to the novice in environmental economics. However, while teaching this concept to students I realized that this is a very important concept that everyone must know to be able to come up with informed decisions. Understanding what externalities are and how they can be used in making the most of your decisions can make a difference between “the devil and the deep blue sea” as the popular adage on difficult decision situations say. I narrate the story of the mango grower and the beekeeper to further make clear the concept of externalities.

Definition of Externalities

Externalities are just those unexpected outcomes or third party effects that may arise when someone makes a decision while making transactions with another entity. That entity may be a person, an organization or a company.

The concept of externalities can be made clearer by the classic story of the apple grower and the beekeeper. However, this is a temperate country example so to put it in context in tropical countries, I will relate the story of the mango grower and the beekeeper as an adapted version.

The Mango Grower and the Beekeeper

In a small island in the tropics, two farmers engaged in two different livelihood activities. The first man grows mango trees and produces mangoes for local consumption and exports these mangoes abroad. The other man, a beekeeper, rears bees in culture boxes also for the same purpose, i.e., for local consumption and export.

beekeeping and externalities
The author once engaged in beekeeping.

These activities went on for several years and both businesses thrived until the beekeeper noticed that the bees are no longer bringing in a significant amount of nectar in the culture boxes. This phenomenon happened when the mango grower started to cut down some trees in his farmland to make way for a road to facilitate transport of mangoes from his growing export business.

Due to poor honey production, the beekeeper decided to stop engaging in beekeeping because his income could no longer sustain his once thriving business. Since the decline in honey production, he had to trim down on the number of employees until he could no longer support even two of them.

Back to the mango grower, the farmer noticed a decline in mango production since his neighbor beekeeper stopped his business operation. What could be the reason behind this decline?

The mango grower, concerned that he might likewise stop his mango growing business like the beekeeper, sought the help of a local university knowing that there are faculty members engaged in agricultural research. The university dispatched a veteran researcher to look into the plight of the mango grower (that person could be someone from the environmental science department). The main objective of the researcher is to find out the reason why there was a decline in mango production.

The environmental scientist, knowing the classic story of the apple grower and the beekeeper, related the story to the farmer. He said, the decision of the beekeeper to stop his beekeeping operation affected the mango grower’s agricultural production because the bees pollinate the flowers of the mangoes. Since the mango grower decided to cut down some of his mango trees to make way for the road, the availability of nectar from these mango trees also declined. Hence, less honey for the beekeeper.

Realizing his mistake, the mango grower decided to see the beekeeper and explain the scenario. They were both illuminated of their situation. The mango grower convinced the beekeeper to resume his business and while doing so, he will compensate for the pollination services of the bees. He also assured the beekeeper that he will plant more mango trees to replace the number of trees that was lost. From then on, their business once again thrived and they lived happily ever after.

The Externalities in the Story

What then are the externalities in the story of the mango grower and the beekeeper? These are the unexpected benefits that arose from their business operations. What are these benefits?

Two unexpected benefits are evident in the business operation of the two farmers. These are 1) the pollinating services of the bees, and 2) the mango trees’ flowers as source of nectar.

Once these externalities are recognized and incorporated in decision making, these are internalized externalities and they no longer are considered externalities. So when someone talks about internalizing the externalities, this refers to the incorporation of the third party effects in any transaction. This means that in the story, the mango grower internalized the externality of the pollinating services of the bees.

But is the other externality, that is, the flowers of mango trees that serve as nectar internalized? In this story, it is not. How can this be internalized? The mango grower must also be compensated by the beekeeper because the honey are obtained by the bees from the mango trees. So if honey production is good, the beekeeper must likewise compensate or provide a share to the mango grower to internalize this externality.

Conclusion

From this story and discussion, externalities therefore are the benefits, disadvantages, or third party impacts that may ensue as a result of any situation or transaction that affects the environment. Thus, to come up with sound decisions and to achieve environmental sustainability, these externalities must be internalized.

Externalities may be positive or negative. I illustrate both types of externalities in the gulf oil spill incident in Mexico several years ago that caused not only negative externalities but also positive externalities. You may click here to read the article to further strengthen your understanding of externalities.

© 2013 November 3 P. A. Regoniel