Economics- Approaches
and Environmental
Implications
Chapter 5
What is Economics and how is it
related to the Environment?
• 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
What are the different 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
When does the government
intervene?
• 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
What does the economy rely
on the environment for?
• Economies receive inputs (resources)
•
•
Process them
Discharge outputs (waste)
• Traditional economics
ignores the
environment
• But still drives most
policy decisions
What is
the Economic view of the Environment?
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”
* Soil formation
* Pollination
* Water purification * Nutrient cycling
* Climate regulation * Waste recycling
How do 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 poverty
15 of 24 global ecosystem services are being degraded
or used unsustainably
Father of Classic Economics
• 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
What is Neoclassic Economics?
• 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
Neoclassic Economic
Assumptions:
• 1. Resources are finite
• 2. Events in the future are not as important as
today
• 3. Only the buyer and seller experience costs
and benefits associated with exchanging goods
or services
• 4. Economic Growth is good to keep
employment high and maintain social order
What is our economy like
today?
• 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
Is the growth paradigm good for us?
The dramatic rise in per-person consumption has severe environmental
consequences
What is Ecologic Economics?
• Ecological economics: civilizations cannot overcome
environmental limitations
• Uses principles of ecology and systems science
• Natural systems are models for sustainability
• Calls for revolution in thinking
• 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
Why is it important to value
ecosystem 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
worth
Natural 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
What is 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
• GDP=Gross Domestic
• Product
Protecting land gives
100 times more value
than converting it to
agriculture, logging, or
fish farming
What are businesses doing to respond to
environmental 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
When can markets 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