ight © 2006 Pearson Education, Inc., publishing as Benjamin Cummings Unit 1: Environmental Economics
Oct 29, 2014
Copyright © 2006 Pearson Education, Inc., publishing as Benjamin Cummings
Unit 1: Environmental Economics
Copyright © 2006 Pearson Education, Inc., publishing as Benjamin Cummings
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.
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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
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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
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Conventional view of economic activity
• Conventional economics focuses on interactions between households and businesses; views the environment only as an external “factor of production.”
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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.
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Environmental view of economic activity
• Environmental economists see the human economy as within the environment, receiving resources and services from it.
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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.
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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.
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Neoclassical economics• Focuses on psychology of consumer choice
The market favors equilibrium between supply and demand.
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Marginal benefit and cost
Marginal benefit and cost curves determine an “optimal” level of resource use of pollution mitigation.
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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.
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Precepts of neoclassical economics
• Resources are infinite or substitutable.
• Some certainly can be replaced.
• Others are nonrenewable. Can we count on their replacement once they are exhausted?
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Precepts of neoclassical economics
• 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.
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Precepts of neoclassical economics
• 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.
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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
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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.
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Precepts of neoclassical economics
• 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.”
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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.
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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.
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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.
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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?
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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.
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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.
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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).
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GDP vs. GPI
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Spending more money, but are our lives really that much better?
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Strategies for Sustainability
• Identify external costs
• Assign value to nonmonetary items
• Attempt to make market prices reflect real costs and benefits
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Assign Values to Nonmonetary Items
• Nonmarket values- values not included in the price of a good or service, the worth we ascribe to things
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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
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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