environmental economics

Copyright © 2006 Pearson Education, Inc., publishing as Benjamin Cummings

Unit 1: Environmental Economics


Economics

• Economics studies how people use resources to provide goods and services in the face of variable supply and demand.

• Most environmental and economic problems are linked.

• Root “eco” gave rise to both ecology and economics.


Types of modern economies

• Subsistence economy = people meet needs directly from

nature and agriculture; do not buy most products

• Centrally planned economy = national government

determines how to allocate resources

• Capitalist market economy = buyers and sellers interact

to determine prices and production of goods and services


Government roles in a market economy

• Even in capitalist market economies, governments intervene to:

• Eliminate unfair advantages/monopolies

• Manage the commons

• Mitigate pollution

• Provide safety nets

• Provide social services


Conventional view of economic activity

• Conventional economics focuses on interactions between households and businesses; views the environment only as an external “factor of production.”


Environment and economy are linked

• Economies receive inputs from the environment that enable human society to function.

• Environmental and ecological economics accept that human economies depend on the environment.

• Ecosystem services support the life that makes economic activity possible.


Environmental view of economic activity

• Environmental economists see the human economy as within the environment, receiving resources and services from it.


Ecosystem goods and services (KNOW THIS!)• Natural resources are “goods” we get from our

environment.

• “Ecosystem services” that nature performs for free include:

• Soil formation

• Water purification

• Climate regulation

• Pollination

• Nutrient cycling

• Waste treatment

• etc.


Classical economics

• Adam Smith: Competition between people free to pursue their own economic self-interest will benefit society as a whole (assuming rule of law, private property, competitive markets).

• This idea is a pillar of free-market thought today.

• It is also blamed by many for economic inequality.


Neoclassical economics• Focuses on psychology of consumer choice

The market favors equilibrium between supply and demand.


Marginal benefit and cost

Marginal benefit and cost curves determine an “optimal” level of resource use of pollution mitigation.


Precepts of neoclassical economics

• Resources are infinite or substitutable.

• Long-term effects are discounted.

• Costs and benefits are internal.

• Growth is good.

Each of these can contribute to environmental problems.



• Resources are infinite or substitutable.

• Some certainly can be replaced.

• Others are nonrenewable. Can we count on their replacement once they are exhausted?



• Long-term effects are discounted (the future is given less weight than the present).

• Decisions are made that maximize short-term benefits…

• … even if there are severe long-term costs.



• Costs and benefits are internal.

Market prices do not account for social, environmental, or economics costs of pollution.

Externalities- costs or benefits of a transaction that involve people other than the buyer or seller.


External costs… Ex:

• Human health problems

• Property damage

• Decline in desirable elements of the env. (less fish in stream)

• Aesthetic damage

• Stress and anxiety

• Declining real estate values resulting from above problems


External Costs…

• Are one reason governments develop legislation & regulation.

But external costs are difficult to account for and eliminate. It’s tough to assign a monetary value to illness or death, or degradation of a sacred place.



• Growth is good. (“Growth paradigm”)

Make the overall pie bigger even if some people get smaller slices than other.

Economic growth = progress

“Bigger (more) is better.”


The World economy is 7 times the size it was 50 years ago!

• More & more goods produced

• More material wealth although big gaps between rich and poor.


Criticism of neoclassical economics:

• Runaway growth compared to multiplication of cancer cells that will eventually overwhelm and destroy the organism.

• Resources are limited so nonstop growth is not sustainable.


Why have past “Cassandras” been wrong?

• Technological innovation

But…. 200 years of technology/innovations is not long, history has repeatedly shown that civilizations do not overcome their environmental limitations.


Economists disagree on whether economic growth is sustainable.

• Cornucopians vs. ecological economists

• Ecological economics- applies the principles of ecology and systems science to the analysis of economic systems.

Advocate sustainability and look to self-renewing natural systems as models.

Could we continue this activity forever and be happy with the outcome?


Steady-State Economies

Cornucopians → ENVIRONMENTAL ECONOMISTS → Ecological Economists

Environmental economists- modify the principles of neoclassical economics to address environmental challenges. Believes we can attain sustainability within our current systems.

Reform NOT revolution.


Steady-State Economies

• John Stuart Mill- predicted that as resources become harder to find and extract, economic growth would slow and eventually stabilize.

• Modern economists (Herman Daly) do not think steady state will evolve on its own- they believe we will need to rethink assumptions and fundamentally change the way we conduct economic transactions.


Will an end to growth result in an end to the rising quality of life?

• Tech. advances will not cease

• Behavioral changes that enhance sustainability will not end but probably increase (recycling).


GDP vs. GPI


Spending more money, but are our lives really that much better?


Strategies for Sustainability

• Identify external costs

• Assign value to nonmonetary items

• Attempt to make market prices reflect real costs and benefits


Assign Values to Nonmonetary Items

• Nonmarket values- values not included in the price of a good or service, the worth we ascribe to things


Market failure

• Occurs when markets do not take into account the environment’s positive effect on economy or negative effects on environment or people (external costs).

• Traditionally has been countered by government intervention: laws & regulation, green taxes on environmentally harmful activities, market incentives


Alternative methods

• Ecolabeling (ex. Dolphin-safe tuna, recycled paper, organic foods)

• Permit-trading- allow companies to buy or sell the right to conduct environmentally harmful activities

environmental economics

Education

state economies

economic activity

ecological

neoclassical

marginal benefit

nonmonetary

term effects

external costs