ECONOMICS- APPROACHES AND ENVIRONMENTAL IMPLICATIONS

Chapter 5

Economics

People say protection threatens economic growth But environmental protection is good for the

economy• Economics studies how people use

resources to provide goods and services in the face of demand

• Environmental problems are also economic problems

• Ecology and economics come from oikos (household)

Economy: a social system that converts resources into: Goods: manufactured materials that are

bought, and Services: work done for others as a form of

business

Types of modern economies

Subsistence economy: people get their daily needs directly from nature or their own production– They do not purchase or trade products

Capitalist market economy: buyers and sellers interact to determine prices and production of goods and services

Centrally planned economy: the government determines how to allocate resources

Mixed economy: governments intervene in the market

Governments intervene in a market economy In mixed market economies, governments

intervene to:– Eliminate unfair advantages held by single

buyers or sellers

– Provide social services (national defense, medical care, education)

– Provide safety nets for elderly, disaster victims, etc.

– Manage the commons

– Reduce pollution and other threats to health and quality of life

The economy relies on the environment Economies receive inputs (resources)

Process them Discharge outputs (waste)

Traditional economics ignores the environment But still drives

most policy decisions

Environmental view of economics

Human economies are subsets of the environment and depend crucially on it for

goods and services

Environmental systems support economies

Economic activity uses natural resources (sun’s energy, water, trees, rocks, fossil fuels) as “goods”

Ecosystem services: essential services support the life that makes economic activities possible

* Soil formation * Pollination

* Water purification * Nutrient cycling

* Climate regulation * Waste recycling

Economic activities affect the environment Resource depletion and generating pollution

reduces the functioning of ecological systems

Degradation of ecosystem services disrupts economies Pollution depresses economic opportunities

Ecological degradation hurts poor people the most

Restoring ecosystem services is a prime way to alleviate poverty15 of 24 global ecosystem services are being degraded

or used unsustainably

Adam Smith’s “invisible hand”• Adam Smith believed that self-interested behavior could benefit society If laws were followed and markets were

competitive

• Classical economics: when people pursue economic self-interest in a competitive marketplace … The market is guided by an “invisible hand”

and … Society benefits

This idea is a pillar of free-market thought today

Neoclassical economics includes psychology Neoclassical economics examines the

psychological factors that underlie consumer choices

Market prices reflect consumer preference– Supply vs. demand

Conflict between buyers and sellers leads to ….– Production of the

“right” quantities of a product

Assumption: resources are infinite

Economic models treat resources and workers as infinite, substitutable, and interchangeable Once used up, a replacement resource will be

found

Some resources can be replaced but some cannot Nonrenewable resources (fossil fuels) can be

depleted Renewable resources (forests) can also be

used up

A future event has less value than a present one

Future events are discounted: Short-term costs and benefits are more

important than long-term costs and benefits Present conditions are more important than

future ones We ignore the long-term consequences of

policy decisions Environmental problems unfold gradually

Discounting causes us to downplay environmental impacts of pollution and resource degradation

Assumption: discount long-term effects

Only the buyer and seller experience costs and benefits associated with exchanging goods or services Pricing ignores social, environmental, or

economic costs of pollution and degradation Taxpayers bear the burden of paying these

costs

External costs: affect people other than buyers or sellers Health problems, resource depletion, property

damage

Ignoring external costs creates a false impression of the consequences of choices

Laws and regulations address external costs

Assumption: costs and benefits are internal

People suffer from external costsPeople who do not participate in a transaction suffer from external costs (health problems,

property and aesthetic damage, stress, lower real estate values)

Assumption: all growth is good Economic growth is needed to keep jobs and social order It creates opportunities for poor to become

wealthier Progress is measured by economic growth

But economic growth does not ensure well-being Affluenza: material goods do not always bring

contentment to those who can afford them Runaway growth can destroy our economic

system Resources are ultimately limited

We live in a growth-oriented economy Modern global economic growth is

unprecedented Americans are in a frenzy of consumption

Economic growth comes from: Increased inputs (labor, natural resources) Economic development: improved efficiency of

production (technology, ideas, equipment)

Uncontrolled economic growth is unsustainable Technology can push back limits, but not

forever Resources are finite or have limited rates of

extraction

The dramatic rise in per-person consumption has severe environmental

consequences

Is the growth paradigm good for us?

Ecological economics Ecological economics: civilizations cannot

overcome environmental limitations Uses principles of ecology and systems science Natural systems are models for sustainability Calls for revolution

Ecological economists advocate steady-state economies: Economies that mirror natural ecological

systems They don’t grow nor shrink but stay stable

Quality of life increases through technological and behavioral changes

Environmental economics Environmental economics: unsustainable economies have high population growth and inefficient resource use We can attain sustainability within current

economic systems Calls for reform

Economies grow by modifying neoclassical economics to increase efficiency through technology

Environmental economists assign monetary values to ecosystem goods and services Integrating them into traditional cost-benefit

analysis

Valuing ecosystem goods and services The market ignores/undervalues ecosystem

services Nonmarket values: values (e.g.,

ecological, cultural, spiritual) not included in the price of a good or service Hard to quantify, since

there is no traditional measure of economic worthNatural cycles are vital

to our existence but markets impose no penalties when we disturb them

How do we quantify an ecosystem’s value? Surveys determine how much people are

willing to pay to protect or restore a resource

Measure the money, time, or effort expended to travel to parks for recreation

Compare housing prices in different areas to infer the dollar value of landscapes, views, and peace and quiet

Measure the cost to restore natural systems, replace systems with technology, or reduce harm from pollution

The global value of ecosystem services The global economic value of 17 ecosystem

services equals $46 trillion More than the GDP

of all nations combined

Protecting land gives 100 times more value than converting it to agriculture, logging, or fish farming

Businesses are responding to concerns Industries, businesses, and corporations

make money by “greening” their operations Recycling, cutting energy use, etc., reduces

costs, and increases profits Greenwashing: consumers

are misled into thinking companies are acting more sustainably than they are Example: “Pure” bottled

water may not be safer or better People must support

sustainable economics

Markets can fail Market failure occurs when markets

ignore: The environment’s positive impacts on

economies (ecosystem services) The negative effects of activities on the

environment or people (external costs)

Government intervention counters market failure through: Laws and regulations Taxing harmful activities Designing economic incentives to promote

fairness, conservation, and sustainability