Introduction to environmental economics
Chapter 1
Chapter overview
Meaning and importance of environment
Definition and scope of environmental economics
The rationale of environmental economics
Environmental economics vs. traditional economics
Environmental economics vs. ecological economics
Revisiting materials balance model
Important events in modern environmental history
Some typical environmental issues and questions
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Meaning and importance of environment
By the term ‘environment’ we mean the natural environment which includes all biotic (renewable resources) and abiotic (fossil fuels, mineral
resource, water, solar energy et.) elements that form our surroundings
Air, water, land, forests, seas, animals and all other living and non-living elements on the earth
Without the environment none of us can survive
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Meaning and importance of environment
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Meaning and importance of environment
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Meaning and importance of environment
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Meaning and importance of environment
Functions /role of the natural environment
As a supplier of natural resource inputs
Land, water, and stocks of raw materials are important inputs to production.
Natural resources are either renewable (e.g. trees) or non- renewable (e.g. crude oil).
Can you think of an example from your country where a natural resource is used in a production process,
resulting in both a product for use by consumers and a waste product?
Meaning and importance of environment
Functions /role of the natural environment
As a provider of amenities to consumers (e.g. recreation)
Some countries enjoy beautiful landscapes and the public benefit from these via their associated recreational services and tourism.
Many people get enjoyment from the biodiversity that exists in the environment.
As a waste sink
This is the capacity of the environment to assimilate the waste products of production and consumption and convert them into harmless or ecologically useful products.
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Definition and scope of
environmental economics
Environmental economics is the study of
environmental problems with the perspective and analytical ideas of economics.
Economics is the study of how and why people—
whether they are consumers, firms, non-profit organizations, or government agencies—make decisions about the use of valuable resources.
EE is the application of the principles of economics to the study of how environmental resources are managed
Definition and scope of
environmental economics
Main principles of environmental economics
The theory of environmental externalities
The optimal management of common property and public goods
The optimal management of natural resources over time
The economic valuation of environmental goods and services
Definition and scope of
environmental economics
Environmental economics has two branches
Positive environmental economics (PEE)
Normative environmental economics (NEE)
The PEE draws upon microeconomic theories and macroeconomic theories to describe and explain the ways in which economic factors influence the
consumption and production of environmental goods and services.
The NEE attempts to prescribe what ought to be done to protect and conserve the environment. It applies the principles of welfare economics to determine the
optimal level of pollution.
Some typical environmental issues and questions
Air pollution
Why is air polluted?
How clean should air be?
What policy measures could reduce air pollution?
Water pollution
Why are rivers, lakes and groundwater aquifers polluted?
How clean should rivers be?
What policy measures could reduce water pollution?
Some typical environmental issues and questions
Land degradation
Questions………..?
Deforestation
Questions?...
Climate change
What is the right amount of CO2 in the atmosphere?
How can the emission of GHGs be reduced?
Why do nations not cooperate and act collectively to reduce the emission of GHGs?
The rationale of environmental economics
EE will be/ is the only source of answering to all those questions.
Traditional economics begins with the interaction of supply and demand
But for many environmental goods and services there is no market or imperfect markets
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Traditional vs. environmental economics
Traditional economics does not deal with the interaction between environment and
economic activities. EE deals with ….
Traditional economics deals with private
goods that are bought and sold in markets.
EE deals with public or collective goods with no or imperfect markets
TE is not concerned with externalities but EE does deal with externalities
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Environmental economics vs.
ecological economics
Ecology is the study of the interactions of organisms with each other and their
environment
Ecology, as it is currently practiced,
sometimes deals with human impacts on
ecosystems, but the more common tendency is to stick to “natural” systems.
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Environmental economics vs.
ecological economics
The linkages between ecosystems and economic systems are the focus of
ecological economics
Ecosystems- the environment in which organisms (including humans) live
linkages between humans and the rest of nature
Environmental and resource economics covers only the application of neoclassical economics to environmental and resource
problems. 18
Environmental economics vs.
ecological economics
The linkages between ecosystems and economic systems are the focus of
ecological economics
Ecosystems can be defined as the environment in which organisms (including humans) live.
The economic system includes the economic activities of man, such as production, exchange and consumption.
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Environmental economics vs.
ecological economics
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Environmental economics vs.
ecological economics
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Environmental economics vs.
ecological economics
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Economics and the Environment
Economic theory explains what we observe in reality, including environmental problems
Recognize the link between economic activity and the environment using models
Circular Flow Model
Materials Balance Model
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Circular Flow Model
Shows the real and monetary flows of
economic activity through the output and factor markets (see next slide)
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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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 resources from the environment to the economy
The focus of Natural Resource Economics
Flow of residuals 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
Shown as inner flows in the model
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Materials Balance Model
The Interdependence of Economic Activity and Nature
Source: Adapted from Kneese, Ayres, and D'Arge (1970).
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Science and the Materials Balance Model
The flow of resources and residuals are balanced according to laws of science
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
Fundamental Concepts
Terms and Definitions
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Causes of Environmental Damage
Natural Pollutants arise from nonartificial processes in nature
e.g., ocean salt spray, pollen
Anthropogenic Pollutants are human induced 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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Sources grouped by mobility
Stationary Sources: fixed-site
Mobile Source: any nonstationary source
Sources grouped by identifiability
Point source: single identifiable source
Nonpoint Source: a source that cannot be
accurately identified, degrading in a diffuse way
Sources of Pollution
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Sources of Pollution
Agricultural runoff
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Urban runoff
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Scope of Environmental Damage
Local Pollution
Damage not far from the source
e.g., urban smog
Regional Pollution
Damage extends well beyond the source
e.g., acidic deposition
Global Pollution
Involving widespread environmental effects with global implications
e.g., global warming, ozone depletion
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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 – assuring the variety of distinct species, genetic variability, and variety of
inhabitable ecosystems
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Environmental Policy Planning
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
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.
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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
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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Risk Management
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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Government Policy Approach
Command-and-Control Approach – regulates polluters through the use of rules
Market Approach – 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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Setting the Time Horizon
Management Strategies – a short-term strategy intended to manage an existing problem
An ameliorative intent
Pollution prevention (P2) – a long-term strategy aimed at reducing the amount of toxicity of
residuals released to nature
A preventive intent