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Terence Wong
Terence C. Wong
Dr Thomas Wier
Environmental Economics
“The whole gist of the study of economics is the how and why of individuals and
groups make decisions in relation to the usage and the distribution of valuable human and
non-human resources. It is not solely the study of profit-making businesses making decisions
in a capitalist economy. On a closer examination, the entire scope of study is definitely
broader than this; it provides a set of analytical tools that therefore can be used to study any
form of situation in which the scarcity of means requires the balancing of the competing
In essential, when we emphasize on environmental economics – it is the application of
the principles in economics to the study of how environmental resources are managed.
Economics is divided into microeconomics, the study of the behaviour of individuals and
small groups, and macroeconomics, on the other hand, deals with the study of the economic
performance of economies as a whole. The entire idea is that environmental economics draw
essence from both sides, although much more from the aspect of microeconomics than from
that of macroeconomics. It focuses primarily on how and why people make decisions that
bear consequences for the natural environment. It is concerned also with how economics
institutions and policies can be changed to bring about these environmental impacts more into
the balance with human desires and the actual needs of the ecosystem itself.
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The main thing about pursuing economic growth over the environment has caused
problems and tension between industrialists and avid environmentalists. All in all, there is a
sense of urgency in which the global environmental problems have recently taken on greater
importance. Globalization is technically a term used to encapsulate the reference to the
perceived changes that are taking place in the world economy today, including the rapid
growth of trade amongst nations, the privatization of economic institutions, massive
international flows of financial capital, and the growth in the numbers and sizes of the
multinational firms.
One other important aspect of globalization is the growth of the multinational firms
and the relocation of these industrial firms from the developed to the developing countries.
The environmental regulations are often less stringent in the latter than in the former. Hence,
the actual fear comes in the sense that some of these developing countries could end up
becoming pollution havens, and the places to which these firms move in order to have to
spend less on the pollution control measures.
To understand the entire context of the economics issues revolving around the
environment, we must first understand that the economy is a collection of technological, legal,
and social arrangements through which individuals in society seek to increase their material
and spiritual well-being. The two elementary economic functions pursued by the society are
production and distribution. The production refers to all those activities that therefore
determine the quantities of goods and services that are produced and the technological and
managerial means by which this production is carried out. Distribution refers to the way in
which goods and services are divided up among individuals and groups that make up society.
Any economic system that exists within, and is encompassed by, the natural world. Its
processes and changes are obviously governed by the laws of nature. In addition to that,
economies also make full use directly of natural assets of all types. One major role the natural
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world plays are that the case of the provider of raw materials and the energy inputs, without
which the production and consumption would therefore be impossible. Therefore, one typer
of implication that an economic system has on the nature is by drawing upon raw materials to
maintain the functioning system.
As such, in the modern industrial societies, it is convenient to overlook the fact that a
huge part of the total economic activity still relies upon the extraction and utilization of
natural resources. Natural resource economics is the application of the economic principles to
the study of these activities.
A fundamental distinction in the study of natural resource economics is that of
renewable and non-renewable resources. The living resources, such as the fisheries and
timber, are renewable; they grow in time according to biological processes. Certain nonliving resources are also renewable – the classic example being the sun’s energy that reaches
the earth. Non-renewable resources are those for which there aren’t any process of
replenishment. Classic example of these are petroleum reservoirs and of course the nonenergy mineral deposits.
The main issue we deal with the entire subject in environmental economics is the
examination of the cause of environmental damages, and the economic implications and
solutions to it. Primarily, we deal with these issues by steering towards sound policy-making
Before developing a simply policy model, we firstly need to stress again that effective
public policy depends on good information on how the economic and environmental systems
actually work. This might be called the scientific basis of the environmental policy – that is,
the study of how firms and the consumers normally make decisions in the market economy,
and how residuals are emitted into the natural environment, and also finding the ways in
which these residuals behave in that environment to produce human and nonhuman damages.
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Thousands of scientists have actually worked and continue to work on those issues to further
clarify these diverse linkages. Greater effort thus is needed to continue to be required in order
to expand the scientific base on which to develop environmental policy.
The main components when dealing with the economic implications of pollution and
that affects the environment is the damage functions and the abatement costs. In general, the
greater the pollution, the greater the damages it produces. A damage function shows the
relationship between the quantity of a residual and the damage that residual causes. There are
technically two types of damage functions, namely the emission damage functions. These
show the connection between the quantity of a residual emitted from a source or group of
sources and the resulting damage. Next up, it is the ambient damage functions and it shows
the relationship between the concentration of particular pollutants in the ambient environment
and the resulting damages.
The damage functions can be expressed in a variety of ways, but our primary model
will make use of marginal damage functions. A marginal damage functions shows the change
in damages stemming from a unit change in emissions or ambient concentration. When it is
necessary, we also can use these relationships to discuss total damages because we know that,
graphically, the areas under marginal damage functions correspond to total damages.
Of course, when we deal with the abatement costs. It is the costs of reducing the
quantity of residuals being emitted into the environment, or of lowering ambient
concentrations. Think of the pulp mill located upstream. Therefore, in its normal course of
the operation, it produces a large quantity of organic wastes. On the assumption that it has the
free access to the river, the cheapest way to get rid of these wastes is therefore to pump them
into the river, however, the firm usually has the technological and managerial means to
reduce these emissions. The costs of engaging in these activities are termed as “abatement
costs”, because they are the actual costs that is in relation to the abatement, reduction of the
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quantity of residuals put into the river. By spending an appropriate amount of resources on
this step, the pulp mill mentioned above will thereafter be able to abate its emissions, and
generally, the greater the abatement, the higher the costs involved.
Always bear in mind, the abatement costs normally vary according to different
sources. It dependable on a myriad of factors. The costs of reducing emissions of SO2 from
electric power plants obviously will be different from the costs of reducing. Even for the
sources producing the same type of effluent, the costs of abatement are likely to be different
because of differences in the technological features of the operation. One major source may
be relatively new, using the modern production technology, whereas another one may be
utilising the highly polluting technology.
To solve these environmental issues associated with economical activities,
government frequently applied “decentralized” policies to allow the culprits involved to work
it out themselves. A decentralized approach to finding the efficient level of ambient water
quality in the lake is simply to let the two chemical plants to work it out themselves.
Decentralized policies have two major advantages:  Because the parties involved are the ones producing and suffering the
environment externalities, they therefore own strong incentives to seek out
solutions to the said environmental problems.
 The people involved may be the ones with the best knowledge of damages and
abatement costs; therefore, they may be best able to find the right balance among
them, that is, therefore to find the most efficient solutions.
First up, we’ve liability laws. Almost everybody has an intuitive notion of liability and
compensation. To be liable for some behaviour is to be held responsible for whatever
untoward consequences result from that behaviour. Compensation requires that those causing
the damage compensate those damaged in amounts appropriate to the extent of the injury.
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One approach to the environmental issues, therefore, is to rely on liability laws. This would
work simply by making polluters liable for the damages they cause. The purpose of this is not
simply to compensate people after they’ve been injured, although that is vital. The actual
purpose is to get would-be-polluters to make careful decisions.
On top of that, the more stringent policy-based solutions will be to apply command-andcontrol strategies. A command-and-control approach to public policy is one where, in order
to bring about behaviour thought to be socially desirable, political authorities simply mandate
the behaviour in law, then use whatever enforcement machinery that is necessary to get
people to obey the law. In the case of environmental policy, this particular approach consists
of relying on standards of various types to bring about improvements in environmental
quality. Generally, a standard is simply a mandated level of performance that is enforced in
There are three main types of environmental standards: (i) Ambient
(ii) Emission
An ambient standard is the ambient environmental quality that refers to the qualitative
dimensions of the surrounding environment; it could be the ambient quality of the air over a
particular city or the ambient quality of the water in a particular river. Hence, the ambient
standard is a never-exceed level for some pollutant in the ambient environment.
The emission standards, on the other hand, are never-exceed levels applied directly to the
quantities of emissions coming from pollution sources. Emission standards are normally
expressed in terms of quantity of material per some unit of time – for instance, the grams per
minute or tons per week. Continuous emissions streams may be subject to standards on
“instantaneous” rates of flow.
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There are important note to keep in mind as there are distinctions between ambient standards
and emission standards. Setting the emission standards at a certain level doesn’t necessarily
entail meeting a set of ambient standards. Between emission and ambient quality stands the
nature, particularly the meteorological and hydrological phenomena that links the both. All in
all, the link between emissions and ambient quality also can be vitally affected by human
decisions. A class case is the example of automobiles. As part of the mobile-source air
pollution program, emissions standards have been set for new cars in terms of emissions per
mile of operation.
In this case, emissions standards can be set on a wide array of different bases. For instance: 1. Emission rate
2. Emission concentration
3. Total quantity of residuals
4. Residuals produced per unit of output
5. Residuals content per unit of input.
6. Percentage removal of pollutant.
In the language of regulation, the emission standards are a type of performance standard
because they actually refer to end results that are meant to be achieved by the polluters that
are regulated.
Last but not least, the technology standards. There are numerous standards that don’t actually
specify the end result, but rather the technologies, techniques, or the practices that potential
polluters must therefore adopt. All these were lumped under the umbrella of technology
standards. The requirement that cars be equipped with catalytic converters and seat belts are
some example of technology standards. As such, if all electric utilities were required to install
stack-gas scrubbers to reduce the SO2 emission, these would therefore in effect be a form of
technology standards because a particular type of technology is being specified by the central
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authorities. This type of standard setting is also included in what we often termed as
engineering standards.
On the edge, as a side note, we must note that the difference between a performance standard
and technology standard possibly become blurred. The fundamental point of differentiation is
that a performance standard, such as an emission standard, sets a constraint on some
performance criterion and then it allows people to choose the best means of achieving it. The
important point to note is – a technology standard actually dictates certain decisions and
techniques to be used, such as particular equipment or the operating practices to be used by
the polluters.
Of course, there are incentive based strategies to solve the environmental that is existing.
Although standards seemingly offer direct control of polluting activities, in many applications
they have serious drawbacks by virtue of their tendency to treat all sources alike even though
they may actually be very distinctive. A bigger problem is that they typically are unable to
take advantage of the private information that polluters have about means and procedures
they could use to reduce pollution. Incentive-based environmental policies are designed to
rectify these drawbacks. The plans were to work with having public authorities first setting
the overall objectives and rules, and then after that leaving firms enough latitude that their
normal commercial incentives will lead to the adoption of cost-effective pollution-control
procedures and technologies.
There are basically two types of incentive policies: 1. Charges (taxes) and subsidies, and
2. Market-based systems.
First and foremost, the firms that pollute because they do not consider the social damage their
actions cause. Thus, the most straightforward approach to controlling emissions is for the
authorities to charge a price for these emissions. This can be easily done in two distinct ways:
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by charging for each unit of emissions or by giving a subsidy for each unit of emissions that
the source cuts back.
Primarily, we mainly deal with emissions charges. In a charge system polluter are told: “You
may therefore discharge any amount of residuals as per your wish, but the emissions will be
measured and the polluters will be compelled to pay a certain charge for every unit of effluent
being discharged.”
Hence, when such emissions charges are being put into effect, the firms responsible for
emissions must essentially pay for the services of the environment, just as they must pay for
all other inputs used in their operations. And just as they’ve always had an incentive to
conserve on scarce labour and other conventional production inputs, they will now have an
incentive to conserve on their usage of environmental services.
As a result, by leaving polluters free to determine how best to reduce emissions, this type of
policy attempts to allow creativity and their own initiatives to their desire of cost
minimization. And the whole idea is to find the least-cost way to reducing emissions, the
solution could be any combination of treatment, internal process changes, changes in inputs,
recycling, shifts to less polluting outputs, and so on so forth. In a nutshell, the essence of the
charge approach is to provide an incentive for the polluters themselves to find the best way to
reduce emissions, rather than having one centralized authority to determine the best possible
way to execute this. By doing so, they will possess a strong incentive to use the private
information they’ve in regards to the pollution-control costs of alternative technologies.
The gist of it all in implementing such policies is on grounds that their effects in controlling
multiple sources of emissions in a way that will satisfy the equi-marginal principle. If the
same taxes are being applied to different sources with different marginal abatement cost
functions, and each source reduces its emissions until its marginal abatement costs equal the
tax, then the marginal abatement costs will automatically be equalized across the board.
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One other important justification to the aspect of emissions charges is that they lead to tax
revenues accruing to the government. Carrying this line of thought further has suggested to
many people that the society could thereafter benefit by replacing certain existing taxes with
the emission taxes. Many countries tax the employment, for instance. As a result, the firms
when they do hire workers, they must essentially pay employment taxes to cover such things
as the public costs of unemployment insurance and social security payments. Nevertheless,
the employment taxes that lead to reduced levels of employment because, in effect, they
make hiring workers much more expensive. A government, therefore, might be able to reduce
its employment taxes and go about increasing emission taxes in such a way as to maintain its
total tax revenue the same. This action is called the double-dividend hypothesis, and as such
refers to the fact that society would therefore gain from both the emission taxes and from the
reduced employment tax.
Lastly, my major concern for the environment globally is the fact that climate change is real
and it is deteriorating rapidly. As much as we advanced further technologically, we must not
forget that certain economic activities have long term implications. Green technologies
should be further encouraged and pushed through by various governments, instead of relying
solely on fossil fuels that fuelled the carbon footprints in the world. Recycling of various
resources can be implemented so as to reduce the wastage of resources, besides creating
another new horizon for the green environmental economy. The businesses should therefore
be subsidized and further encouraged to reduce their carbon footprints by involving
themselves in setting up technologies to further the agenda of pollution reduction. One such
example are catalytic converters and filtration system in the effluents emitted by chemical
plants and power plants to ensure that the emissions that were eventually released doesn’t
harm the surrounding environment as much as they did before all these proactive actions and
steps were implemented.
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Intensive R&D processes will further the advancement in environmental conservation
technologies and maybe in future, will bring down the potential abatement costs involved in
pollution reduction. Assume the firm has a reasonably good idea of what the results of the
R&D will be, although of course nothing is ever certain. We can therefore use it to measure
the strength if the incentives for this firm to put money into the R&D program.”
Field, B. C., & Field, M. K. (2021). Environmental economics: An introduction. McGrawHill Education.