Environmental Economics and Management:

Theory, Policy, and Applications 3e

by Scott Callan and Janet Thomas

© 2004 Thomson Learning/South-Western

The Role of Economics in Environmental Management

Chapter 1

© 2004 Thomson Learning/South-Western

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Economics and the Environment

Economic theory explains what we observe in reality

Microeconomic analysis can also be used to analyze environmental problems

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Economics and the Environment

Circular Flow Model – the basis for modeling the relationship between economic activity and the environment Real Flow Factor Market Output Market Money Flow

Does not explicitly show the linkage between economic activity and the environment

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Economics and the Environment

Figure 1.1 Circular Flow Model of Economic Activity

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Economics and the Environment

Figure 1.2 Materials Balance Model: The Interdependence of Economic Activity and Nature

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Economics and the Environment Materials Balance Model – illustrates the

relationship between economic activity and the environment Flow of Resources

Natural Resource Economics – concerned with flows of resources from nature to economic activity

Flow of Residuals Residuals – by-products released back into the environment Assimilative Capacity – environmental ability to absorb

residuals Recovery Recycling and Reuse – methods to delay the flow

of residuals

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Economics and the Environment

Materials Balance Model Science and Materials Balance

First Law of Thermodynamics – matter and energy can neither be created nor destroyed

Second Law of Thermodynamics – nature’s capacity to convert matter and energy is not without bound

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Fundamental Concepts in Environmental Economics Causes of Environmental Damage: Types of

Pollutants Natural Pollutants – nonartificial Anthropogenic Pollutants – human induced and

include all residuals associated with consumption and production

Of greater concern to environmental economists

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Fundamental Concepts in Environmental Economics Sources of Pollution: Classifying Polluting

Sources Source Grouped by Mobility

Stationary Sources – fixed site Mobile Source – any non-stationary source

Sources Grouped by Identifiability Point source – single identifiable source Nonpoint Source – a source that cannot be

accurately identified

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Fundamental Concepts in Environmental Economics Identifying the Scope of Environmental

Damage: Local, Regional, and Global Pollution Global Pollution – widespread environmental effects

with global implications Examples:

• Global warming• Ozone depletion

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Identifying Environmental Objectives

Environmental Quality – reduction in anthropogenic contamination to socially acceptable levels

Sustainable Development – management of resources to ensure long-term quality and abundance

Biodiversity – the variety of distinct species, genetic variability, and variety of inhabitable ecosystems

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Environmental Policy Planning: An Overview

Figure 1.4 Parties Involved in Environmental Policy Planning

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Environmental Policy Planning: An Overview

National Environmental Policy Act Risk Analysis

Risk Assessment – qualitative and quantitative evaluation of risk posed by an environmental hazard

Risk Management – decision process of choosing from alternative responses to environmental risk

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Environmental Policy Planning: An Overview

Policy Evaluation Criteria Allocative Efficiency – requires resources be

appropriated such that benefits are equal to costs Cost-effectiveness – requires the least amount of

resources be used to achieve an objective Environmental Quality – concerned with the fairness

of the environmental risk burden across segments of society or geographic region

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Environmental Policy Planning: An Overview

Government’s Overall Policy Approach Command-and-control Approach – regulates polluters

through the use of rules Market Approach – incentive policy that encourages

conservation or pollution reduction “Polluter-pays Principle” – polluter pays for the damage

caused

Setting the Time Horizon Management Strategies – a short-term strategy intended to

manage an existing problem Pollution prevention – long-term strategy aimed at

reducing the amount of toxicity of residuals released to nature