Scott J. Callan and Janet M. Thomas Environmental Economics & Management: Theory, Policy, and Applications 5e.

Scott J. Callan and Janet M. Thomas

Environmental Economics & Management: Theory, Policy, and Applications 5e

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MODULE 1 Modeling Environmental Problems

Chapter 1

The Role of Economics in Environmental Management

“We can lead the world, secure our nation, and leave our children a planet that is safer and cleaner and healthier than the one we inherited.”

Barack Obama (1961- )p. 2, our textbook

1. Economics and the Environment

• Economic theory _______ what we observe in reality, including environmental problems

• Recognize the link between economic activity and the environment using ________– Circular Flow Model– Materials Balance Model

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A model is an abstract representation of reality; built with words, diagrams, and mathematical statements; should be as simple as possible to accomplish its purpose

Circular Flow Model

• Shows the real and monetary _______ of economic activity through the _______ and ________ markets– Forms the basis for modeling the relationship

between economic activity and the environment– But does not explicitly show the linkage between

economic activity and the environment

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Circular Flow Model

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Outer arrows:

Firms supply goods/services to householdsHouseholds demand goods/services

Households supply resources to firmsFirms demand resources

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Inner arrows:

Households pay for goods/servicesFirms receive revenue

Firms make factor payments to householdsHouseholds receive income

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Materials Balance Model• Places the circular flow within a larger schematic to

show links between economic activity and the natural environment via two sets of flows– Flow of ___________________ from the environment to

the economy• The focus of Natural Resource Economics

– Flow of ________ from the economy to the environment• The focus of Environmental Economics

• Residuals are pollution remaining in the environment after some process has occurred – Residuals can be delayed, but not prevented, through

recovery, recycling, and reuse 8

Materials Balance ModelThe Interdependence of Economic Activity and Nature

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Source: Adapted from Kneese, Ayres, and D'Arge (1970).

Science and the Materials Balance Model

• The flow of resources and residuals are balanced according to laws of science

• _____________________________– Matter and energy can neither be created nor

destroyed

• _____________________________– Nature’s capacity to convert matter and energy is

not without bound

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Thermodynamics: physics that deals with the mechanical action or relations of heat

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2. Fundamental Concepts in Environmental Economics

Terms and Definitions

Environmental damage, or pollution—the presence of matter or energy whose nature, location, or quantity has undesired effects on the environment.

Causes of Environmental Damage

• Natural Pollutants arise from ____________ processes in nature

• e.g., ocean salt spray, pollen

• Anthropogenic Pollutants are _____________ and include all residuals associated with consumption and production

• e.g., chemical wastes, gases from combustion • Of greater concern to environmental economists

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Agricultural runoff from farmland: a nonpoint polluting source if rainwater transports chemical pesticides and fertilizers to nearby lakes and streams.

Sources of Pollution• Sources grouped by mobility

– ____________ Source: fixed-site

– _________ Source: any nonstationary source

• Sources grouped by identifiability– _______ source: single identifiable source

– _________ Source: a source that cannot be accurately identified, degrading in a diffuse way

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Point sources are discrete conveyances such as pipes or man-made ditches.

Scope of Environmental Damage• ________Pollution

– Damage not far from the source • e.g., urban smog

• __________ Pollution– Damage extends well beyond the source

• e.g., acidic deposition• ________ Pollution

– Involving widespread environmental effects with global implications• e.g., global warming, ozone depletion

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3. Identifying Environmental Objectives

• _______________________ – reduction in anthropogenic contamination to socially acceptable levels

• ______________________ – management of resources to ensure long-term quality and abundance

• __________ – assuring the variety of distinct species, genetic variability, and variety of inhabitable ecosystems

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4. Environmental Policy Planning: An Overview

• Environmental planning involves many segments of society

• In the U.S., the Environmental Protection Agency (EPA) acts as liaison to numerous constituents within each sector

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Environmental Policy Planning

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EPA headquarters are in Washington, D.C., and there are 10 regional offices across the nation.

Source: Adapted from Vaupel (1978), Figure 5-3, p. 75.

National Environmental Policy Act (NEPA) of 1969

• Directs the integration of effort across agencies, executive departments, and branches of government in the U.S.

• Guides U.S. federal environmental policy• Requires that environmental impact of public

policy proposals be addressed– Calls for an Environmental Impact Statement (EIS)

on proposals or major federal actions

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Risk Analysis --Chief Tool Guiding Policy Planning

• Two decision-making procedures– _______________– qualitative and quantitative

evaluation of risk posed by an environmental hazard

– ________________– decision process of choosing from alternative responses to environmental risk

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Risk Management

a. Policy Evaluation Criteria

• Economic 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

• Equity Criterion– Environmental Justice – concerned with the

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

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b. Government Policy Approach

• ___________________________– regulates polluters through the use of rules

• ________________– incentive-based policy that encourages conservation or pollution reduction– Can follow the “polluter-pays principle” whereby

the polluter pays for the damage caused

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see page 19

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• In theory, the price assigned to pollution is set to cover any damages to health or the ecology caused by pollution. The polluter is made to pay this price for every unit of pollution released to nature. The full costs of production are captured. The profit-maximizing producer has an incentive to reduce residuals.

c. Setting the Time Horizon

• Management Strategies – a short-term strategy intended to manage an existing problem

• Pollution Prevention (P2) – a long-term strategy aimed at reducing the amount of toxicity of residuals released to nature

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