The Natural Environment and The Human Economy:

The Neoclassical Economic Perspective

Fundamental Assumptions

• Environmental (natural) resources are “essential” factors of production. A certain minimum amount of natural resources is needed to produce goods and services.

• Environmental resources are of economic concern to the extent that they are scarce.

• The economic value of a natural resource (including the services of the natural ecosystems) is determined by consumers’ preferences, and these preferences are best expressed by a freely operating private market system.

• Market price can be used as a measure (indicator) of resource scarcity.

Price ($)

Membership at a golf course

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D

Pe

Qe

Figure 1.2 Demand and supply and market clearing (equilibrium) price, Pe,for a local gulf club membership. The service of a local gulf club is scarcebecause at zero price quantity demanded far exceeds quantity supplied—creating a shortage.

Price($)

Availability of oxygen from theambient air

SD

Figure 1.3 Demand and supply of oxygen. Oxygen is treated as afree good because at zero price quantity supply exceeds quantitydemanded—a surplus.

Time

Price($)

Figure 1.4: Long-run price trend of a hypothetical naturalresource. A declining price trend over time indicates increasingabundance of the resource under consideration.

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• In both the production and the consumption sectors of an economy, a specific natural resource can always be replaced (partially or fully) by the use of other resources that are either man-made (manufactured) or natural.

• Technological advances continually augment the scarcity of natural resources.

Figure 1.5: A graphical illustration of factor substitution possibilities

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Q0

Q0 = Isoquant

Q0

(A) (B) (C)

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Figure 1.6: A graphical illustration of advances in production techniques

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• Nothing is lost in treating the human economy in isolation of the natural ecosystems (the physical, chemical and biological surroundings that humans and other living species depend on as life support). That is, the natural ecosystem is treated as being outside the human economy and exogenously determined.

-Firms-Producers of Goods

Employers of resources

Figure 1.7: Circular flow diagram of the economic process. An economy is composed of aflow of commodities (in the form of basic resources, goods and services); socialinstitutions primarily markets and legal tenders; and people (broadly identifies ashouseholds and firms).

-Households-Consumers of goodsOwners of Resources

FactorMarket

ProductMarket S.I.

An Economy

IMPLICATIONS

• The human economy is composed of three entities: people, social institutions, and commodities.

• Since the value of resources is assumed to emanate exclusively from their usefulness to human, the economic notion of resource is strictly anthropocentric, i.e., basic resources have no intrinsic value.

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• In the production sector of an economy, what is being continually created is value. Similarly, in the consumption sector, what is continually being created is an influx of utility from the final use (consumption) of good and services. Hence, in the human economy, matter and energy from the natural environment are continually transformed to create an immaterial (psychic) flow of value and utility.

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• No explicit consideration is given to the extent in which the material flow (commodities) in the human economy is dependent on the natural ecosystems. More specifically, the natural ecosystems are simply viewed as a “gift of nature” ready to be exploited by humans and in strict accordance of the laws of demand and supply.