Environmental Economics

Economics Uncategorized

“Environmental problems are really social problems…They begin with the people as the cause and end with people as victims”.
–Sir Edmund Hillary


Environmental economics (EE) is the study of interactions between human economic activity and the natural environment. EE is the subset of economics that is concerned with the efficient allocation of environmental resources. The environment provides both a direct value as well as raw material intended for economic activity, thus
making the environment and the economy
interdependent.EE takes into consideration issues such as the conservation and valuation of natural resources, pollution control, waste
management and recycling. Since resources – whether human, natural, or monetary –are finite, these public policies are most effective only when they achieve the maximum possible benefit in the most efficient way.The key objective of EE is to identify 10.3 those particular tools or policy alternatives that will move the market towards the most efficient allocation of natural resources.

Meaning of Environment:

The term environment has been derived from a French word “Environia” means to surround. Environment means “all the conditions, circumstances, and influences surrounding and affecting the development of an organism or group of organisms”. It also means that the complex of physical, chemical and biotic factors that act upon an organism or an ecological community ultimately determine its form and survival.

Eco System:

An ecosystem includes all living things (plants, animals and organisms) in a given area, interacting with each other,and also with their non-living environments (weather, earth, sun, soil,climate, atmosphere). Ecosystems are the foundations of the Biosphere and they
determine the health of the entire earth system.

Linkage between Economy and Environment:

Man’s life is interconnected with various other living and non-living things.The life also depends on social,political,ethical, philosophical and other aspects of economic system. In fact, the life of human beings is shaped by his living environment.The relationship between the economy and the environment is generally explained in the form of a “Material Balance Model’’developed by AlenKneese and R.V. Ayres.The model considers the total economic process as a physically balanced flow between inputs and outputs. Inputs are bestowed with physical property of energy which is received from the environment.The interdependence of economics and environment is given in the figure10.1 and flow diagram.The first law of thermodynamics,i.e. the law of conservation of matter and energy, emphasizes that in any
production system “what goes in must come out”. This is known as the Material Balance Approach or Material Balance Principle. The material flow diagram implies that mass inputs must equal mass outputs for every process. Moreover, all resources extracted from the environment eventually become unwanted wastes and pollutants. Production of output by firms from inputs resulting in discharge of solid, liquid and gaseous wastes. Similarly, waste results from consumption activities by
households. In short, material and energy
are drawn from environment, used for
production and consumption activities and returned back to the environment as wastes. In its simple form the Material Balance Approach can be put in form equation.Is it alright? Environment is the supplier of all forms of resources like renewable and non-renewable, and it is also acting as a sink for cleaning up of wastes. Households and firms are connected to environment, and they
are interconnected too. Households and
firms depend on nature for resources.Both households and firms send out residuals of consumption and production respectively to nature. Nature has the power to assimilate all forms of waste. But this power is conditional. There is a limit for everything. The earth has reached the saturation point and it is unable to cleanup several forms of wastes. Remember, the earth can also non-cooperate!

Environmental Goods:

Environmental goods are typically non-market goods, including clear air,clean water, landscape, green transport infrastructure (footpaths, cycle ways,
greenways, etc.), public parks, urban parks,
rivers, mountains, forests, and beaches. Concerns with environmental goods focus on the effects that the exploitation of ecological systems have on the economy,the well-being of humans and other species, and on the environment.

Environmental Quality:

Environmental quality is a set of
properties and characteristics of the
environment either generalized or local,as they impinge on human beings and other organisms. It is a measure of the condition of an environment relative to the requirements of one or more species and to any human need. Environmental quality has been continuously declining due to capitalistic mode of functioning. Environment is a pure public good that can be consumed simultaneously by everyone and from which no one can be excluded. A pure public good is one for which consumption is non-revival and from which it is impossible to exclude a
consumer. Pure public goods pose a free-
rider problem. As a result, resources are
depleted. The contribution of the nature
to GDP as well as depletion of natural
resources are not accounted in the present
system of National Income Enumeration.

Externalities and the environment:
In Environmental Economics, one of the most important market failures is caused by negative externalities arising from production and consumption of goods and services. Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid. Externalities occur outside of the market i.e. they affect people not directly involved in the production and
consumption of a good or service. They are also known as spill-over effects.

Meaning of Externalities: Externalities refer to external effects or spillover effects resulting from the act of production or consumption on the third parties. Externalities arise due to interdependence between economic units.

Definition :

Externality may be defined as“thecostorbenefitimposed by the consumption and production activities of
the individuals on the rest of the society
not directly involved in these activity and
towards which no payment is made”.The externalities arise from both production and consumption activities and their impact could be beneficial or adverse. Beneficial externalities are called “positive externalities” and adverse ones are called “negative externalities”.

Positive Consumption Externality:
When some residents of a locality
hire a private security agency to patrol their area, the other residents of the area also benefit from better security without bearing cost.
Negative Consumption Externality:
A person smoking cigarette gets may
gives satisfaction to that person, but this act causes hardship (dissatisfaction) to the non-smokers who are driven to passive
Positive Production Externality:
The ideal location for beehives is
orchards (first growing fields). While bees make honey, they also help in the pollination of apple blossoms. The benefits accrue to both producers (honey as well as apple). This is called ‘reciprocal un traded interdependence. Suppose training is given for the workers in a company. If those trained
workers leave the company to join some
other company, the later company gets
the benefit of skilled workers without
incurring the cost of training.The emissions and effluents of a factory cause air and water pollution. Water becomes contaminated and unfit for drinking e.g. Tanneries. The innocent
community bears the external cost for which it is not compensated.

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