Chapter 3
Tradeoffs: Economic Activity versus Environmental Quality
Chapter Summary
This chapter dealt with the tradeoff between human economic activities (i.e., the extraction,
production and consumption of goods and services) and environmental quality (i.e., degradation). It
does this by addressing the following three critical issues: (i) the ecological and technological
determinants of the trade-off between economic activity and environmental quality, (ii) the analysis
and understanding of market failure as it applies to environmental resources, and (iii) the
fundamental awareness of the complexity of the alternative institutional arrangements that are
available to correct market failure.
Review and Discussion Questions
This chapter uncovers the ecological, technological, economics and institutional factors relevant to
the understanding of the tradeoffs between economic activities and environmental quality.
A. The Ecological and technological determinants of the tradeoffs between economic activity
(production of goods and services) and environmental quality
1. Refer to Figure 3.1 of your textbook (p. 47) and observe how the tradeoffs between economic
activity (production of goods and services) and environmental damage (i.e., a loss of
environmental quality) are conceptualized. With this in mind, list ten possible environmental
damages that may be associated with economic activities such as mining, farming, fishing,
manufacturing, retailing, transportation, production of electricity, recreation, and so on.
2. What do ecologists mean by the ‘assimilative or absorptive’ capacity of an environment?
Provide three concrete examples to illustrate this concept.
3. While the capacity of a given natural ecosystem (such as a big body of water) to assimilate waste
is limited, the efficacy of any natural environment to withstand damage from pollution depends
on the rate of discharge, volume pollution, and the nature (type) of the pollutants. Explain.
4. Pollution reduced the capacity of the environment to withstand further pollution. Explain.
5. What is the implication of question #4 to the damage function—the relationship between
economic activity and environmental damage? Can you represent this relationship in the form of
a graph? Show.
6. In this chapter, two specific ways of ameliorating (reducing) the harmful side-effects (pollution
damages) are discussed. The first approach relies on the improvement in waste process, for
example, the application of activated charcoals in a sewage treatment facility to accelerate the
waste decomposition process. Another example will be the building of high smokestack to solve
the acid rain problem through dilution. The second approach dealt with input switching or factor
substitution, for example, the switch from high sulfur to low sulfur content coal in the
production of electricity using a coal-burning power plant. Do Figures 3.2b and 3.2c help you to
have a better understanding of the difference between these two technological ways of coping
with environmental pollution? Can you provide two additional examples of your own to further
© 2014 Ahmed Hussen
illustrate each one of the above two types of technological remedies to pollution problem?
Please try to be specific.
7. Environmentalists are generally skeptical of technological solutions to environmental damages
(pollution). Are they justified to do so? What are some of the examples given by the
environmentalists to support their skepticisms?
B. The Institutional Determinants of the trade-offs between economics activity and
environmental damages
1. Applying the four criteria outlined to describe a clearly defined ownership rights on page 52 of
the textbook, explain why most major environmental resources such as the atmosphere, the
ocean, the genetic diversity of plants and animals species in the biosphere, and the ozone layer
in the upper stratum of the atmosphere, are regarded as ‘commons’— resources that are owned
by everyone and as such owned by no one.
2. Carefully delineate the differences between public goods and common property resources. Why
would knowing the difference between these two concepts matter in the study of the
environment? In other words, would it matter if one views the environment as a public good or
a common property resource? Explain.
3. What is externality, in general? How is externality associated with the fact that environmental
resources lack a clearly defined ownership rights? For help, read page 54–55.
4. It is said that consequence of externality (i.e., unaccounted costs or benefits) is the divergence
between private and social costs or private and social benefits. This fact alone is considered to
be the root causes of market failure. Do you have a full understanding of the intricacy of market
failure and its implications? You may find it helpful to read the textbook starting from the last
paragraph of page 55 to 58 (including Figure 3.3).
5. What is a transaction cost? For help read the first two paragraphs of page 55.
6. The choice of institutions in order to correct market failure (such as internalize environmental
externality) should be primarily based on consideration of ‘transaction costs’. This is a view
espoused by ‘institutional economists’. Would you agree with this this view? Why or why not?
You may find it helpful to read the material from the textbook, Section 3.4, pages 58–63.
© 2014 Ahmed Hussen