02 July 2012

Environmental Economics

A Very Short Introduction

Stephen Smith
2011, Oxford University Press, 152 pages, £7.99
ISBN 9780199583584

Reviewer: Benedikt Koehler

The OUP’s ‘Very Short Introductions’ cover over 300 topics ranging from Agnosticism to Utopianism. The editorial template for each volume is to ask a leading expert in a given field for a jargon-free but non-gimmicky explanation of their discipline’s key questions. The ‘Very Short Introductions’ provide the right didactic pitch so books can compete against the blogosphere, internet search engines and TED Lectures for introductory explanations of complex material to a non-specialist audience.

Market failure economics provide the toolkit for evaluating the costs and benefits of pollution control, and Stephen Smith illustrates how it works by relating the story of successful interventions in the past. London in 1952 experienced a brush with a ‘pea-souper,’ a dense smog that led to 4,000 deaths. The policy response was to require the conversion of coal fires by the Clean Air Act of 1956. Mitigating market failure through regulation had become the standard policy tool by the time the US created the Environmental Protection Agency in 1970.

Since then, the policy toolkit has expanded. In Ireland, for example, the introduction of a 15 cent levy on plastic bags in 2002 cut their use by 90%. Policymakers have a third tool in addition to regulation and tax at their disposal, namely trading, pioneered by the Bush administration’s Acid Rain Program in 1990. This trading scheme allocated pollution permits for large polluters whilst giving them an option to sell their ration in the market.

When policymakers need to choose between three different tools - regulation, tax, and trading - there is a growing demand for comparative empirics to validate whether policy has actually worked as expected, and for research into incentive structures to help shape policy design. There’s the rub - the environment has a value but not a price. Since the environment has no owner, finding out how to price costs and benefits is a challenge to economists’ ingenuity.

Smith sets out the environmental economist’s stall: assessing use values, option values, or existence values. Assessing these values requires applying diverse techniques, including hedonic price analysis as well as stated preference surveys. This research is challenging on a conceptual level, and robust findings depend on careful survey design. Again, Stephen Smith illustrates the application of economic technique with a real-life example; in this case, a 2003 study in the UK of how proximity to landfill sites affects house prices.

This book aims at general rather than specialist readers and the author does not break new ground. However, even practitioners are likely to find Stephen Smith’s guided tour d’horizon of Environmental Economics refreshing. Another reader-friendly benefit of this slender volume is a bibliography kept sensibly short.