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Environmental economics


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Environmental economics

  1. 1. Unit 1: Environmental Economics
  2. 2. Economics <ul><li>Economics studies how people use resources to provide goods and services in the face of variable supply and demand. </li></ul><ul><li>Most environmental and economic problems are linked. </li></ul><ul><li>Root “eco” gave rise to both ecology and economics . </li></ul>
  3. 3. Types of modern economies <ul><li>Subsistence economy = people meet needs directly from nature and agriculture; do not buy most products </li></ul><ul><li>Centrally planned economy = national government determines how to allocate resources </li></ul><ul><li>Capitalist market economy = buyers and sellers interact to determine prices and production of goods and services </li></ul>
  4. 4. Government roles in a market economy <ul><li>Even in capitalist market economies, governments intervene to: </li></ul><ul><ul><ul><li>• Eliminate unfair advantages/monopolies </li></ul></ul></ul><ul><ul><ul><li>• Manage the commons </li></ul></ul></ul><ul><ul><ul><li>• Mitigate pollution </li></ul></ul></ul><ul><ul><ul><li>• Provide safety nets </li></ul></ul></ul><ul><ul><ul><li>• Provide social services </li></ul></ul></ul>
  5. 5. Conventional view of economic activity <ul><li>Conventional economics focuses on interactions between households and businesses; views the environment only as an external “factor of production.” </li></ul>
  6. 6. Environment and economy are linked <ul><li>Economies receive inputs from the environment that enable human society to function. </li></ul><ul><li>Environmental and ecological economics accept that human economies depend on the environment. </li></ul><ul><li>Ecosystem services support the life that makes economic activity possible. </li></ul>
  7. 7. Environmental view of economic activity <ul><li>Environmental economists see the human economy as within the environment, receiving resources and services from it. </li></ul>
  8. 8. Ecosystem goods and services (KNOW THIS!) <ul><li>Natural resources are “goods” we get from our environment. </li></ul><ul><li>“ Ecosystem services” that nature performs for free include: </li></ul><ul><ul><ul><ul><li>• Soil formation </li></ul></ul></ul></ul><ul><ul><ul><ul><li>• Water purification </li></ul></ul></ul></ul><ul><ul><ul><ul><li>• Climate regulation </li></ul></ul></ul></ul><ul><ul><ul><ul><li>• Pollination </li></ul></ul></ul></ul><ul><ul><ul><ul><li>• Nutrient cycling </li></ul></ul></ul></ul><ul><ul><ul><ul><li>• Waste treatment </li></ul></ul></ul></ul><ul><ul><ul><ul><li>• etc. </li></ul></ul></ul></ul>
  9. 9. Classical economics <ul><li>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). </li></ul><ul><li>This idea is a pillar of free-market thought today. </li></ul><ul><li>It is also blamed by many for economic inequality. </li></ul>
  10. 10. Neoclassical economics <ul><li>Focuses on psychology of consumer choice The market favors equilibrium between supply and demand. </li></ul>
  11. 11. Marginal benefit and cost <ul><li>Marginal benefit and cost curves determine an “optimal” level of resource use of pollution mitigation. </li></ul>
  12. 12. Precepts of neoclassical economics <ul><li>Resources are infinite or substitutable. </li></ul><ul><li>Long-term effects are discounted. </li></ul><ul><li>Costs and benefits are internal. </li></ul><ul><li>Growth is good. </li></ul>Each of these can contribute to environmental problems.
  13. 13. Precepts of neoclassical economics <ul><li>Resources are infinite or substitutable. </li></ul><ul><ul><ul><ul><li>Some certainly can be replaced. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Others are nonrenewable. Can we count on their replacement once they are exhausted? </li></ul></ul></ul></ul>
  14. 14. Precepts of neoclassical economics <ul><li>Long-term effects are discounted (the future is given less weight than the present). </li></ul><ul><ul><ul><ul><li>Decisions are made that maximize short-term benefits… </li></ul></ul></ul></ul><ul><ul><ul><ul><li>… even if there are severe long-term costs. </li></ul></ul></ul></ul>
  15. 15. Precepts of neoclassical economics <ul><li>Costs and benefits are internal. </li></ul><ul><ul><li>Market prices do not account for social, environmental, or economics costs of pollution. </li></ul></ul><ul><ul><li>Externalities - costs or benefits of a transaction that involve people other than the buyer or seller. </li></ul></ul>
  16. 16. External costs… Ex: <ul><li>Human health problems </li></ul><ul><li>Property damage </li></ul><ul><li>Decline in desirable elements of the env. (less fish in stream) </li></ul><ul><li>Aesthetic damage </li></ul><ul><li>Stress and anxiety </li></ul><ul><li>Declining real estate values resulting from above problems </li></ul>
  17. 17. External Costs… <ul><li>Are one reason governments develop legislation & regulation. </li></ul><ul><li>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. </li></ul>
  18. 18. Precepts of neoclassical economics <ul><li>Growth is good. (“Growth paradigm”) </li></ul><ul><li>Make the overall pie bigger even if some people get smaller slices than other. </li></ul><ul><li>Economic growth = progress </li></ul><ul><li>“ Bigger (more) is better.” </li></ul>
  19. 19. The World economy is 7 times the size it was 50 years ago! <ul><li>More & more goods produced </li></ul><ul><li>More material wealth although big gaps between rich and poor. </li></ul>
  20. 20. Criticism of neoclassical economics: <ul><li>Runaway growth compared to multiplication of cancer cells that will eventually overwhelm and destroy the organism. </li></ul><ul><li>Resources are limited so nonstop growth is not sustainable. </li></ul>
  21. 21. Why have past “Cassandras” been wrong? <ul><li>Technological innovation </li></ul><ul><li>But…. 200 years of technology/innovations is not long, history has repeatedly shown that civilizations do not overcome their environmental limitations. </li></ul>
  22. 22. Economists disagree on whether economic growth is sustainable . <ul><li>Cornucopians vs. ecological economists </li></ul><ul><li>Ecological economics - applies the principles of ecology and systems science to the analysis of economic systems. </li></ul><ul><ul><li>Advocate sustainability and look to self-renewing natural systems as models. </li></ul></ul><ul><ul><li>Could we continue this activity forever and be happy with the outcome? </li></ul></ul>
  23. 23. Steady-State Economies <ul><li>Cornucopians -> ENVIRONMENTAL ECONOMISTS -> Ecological Economists </li></ul><ul><li>Environmental economists - modify the principles of neoclassical economics to address environmental challenges. Believes we can attain sustainability within our current systems. </li></ul><ul><li>Reform NOT revolution. </li></ul>
  24. 24. Steady-State Economies <ul><li>John Stuart Mill- predicted that as resources become harder to find and extract, economic growth would slow and eventually stabilize. </li></ul><ul><li>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. </li></ul>
  25. 25. Will an end to growth result in an end to the rising quality of life? <ul><li>Tech. advances will not cease </li></ul><ul><li>Behavioral changes that enhance sustainability will not end but probably increase (recycling). </li></ul>
  26. 26. GDP vs. GPI
  27. 27. Spending more money, but are our lives really that much better?
  28. 28. Strategies for Sustainability <ul><li>Identify external costs </li></ul><ul><li>Assign value to nonmonetary items </li></ul><ul><li>Attempt to make market prices reflect real costs and benefits </li></ul>
  29. 29. Assign Values to Nonmonetary Items <ul><li>Nonmarket values- values not included in the price of a good or service, the worth we ascribe to things </li></ul>
  30. 30. Market failure <ul><li>Occurs when markets do not take into account the environment’s positive effect on economy or negative effects on environment or people (external costs). </li></ul><ul><li>Traditionally has been countered by government intervention: laws & regulation, green taxes on environmentally harmful activities, market incentives </li></ul>
  31. 31. Alternative methods <ul><li>Ecolabeling (ex. Dolphin-safe tuna, recycled paper, organic foods) </li></ul><ul><li>Permit-trading - allow companies to buy or sell the right to conduct environmentally harmful activities </li></ul>