TOPIC 9
ECONOMIC SUSTAINABILITY
The Definition of Economy
The wealth and resources of a country or region,
especially in terms of the production and
consumption of goods and services.
Economic Systems
Economic systems is a system/mechanism of
production and exchange of goods and services
as well as allocation of resources in a society.
Economic Unsustainability Issues
Worldwide
The Meaning of Economic
Sustainability
• Relationships of economic system to
environmental and social sustainability
• Comparison with static and dynamic economic
efficiency
• Weak versus strong sustainability
• Approaches to pervasive uncertainty
Relationships of economic system to environmental
and social sustainability
THE FOUR TYPES OF ECONOMIC SYSTEMS
Comparison with static and dynamic economic
efficiency
Weak versus strong sustainability
Approaches to pervasive uncertainty
• Uncertainty is the enemy of effective planning and ultimately,
economic success.
• Yet uncertainty has become a pervasive part of the economic
activities.
– Examples of economic uncertainty:
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Financial crisis
Rapid change
New demand
Globalization
• Approaches:
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Operational effectiveness
Proactive change management
Product innovation
Flexibility and adaptability
Why Study the Economics of
Sustainability
• Roles of economic systems and their effects
• Linked environmental, social and economic issues
• Natural capitalism
• Ecological economics
• Globalization and international trade
Causes of Environmental Degradation
and Social Problems
• Externalities
– A side effect or consequence of an industrial or
commercial activity that affects other parties
without this being reflected in the cost of the
goods or services involved, such as the pollination
of surrounding crops by bees kept for honey.
• Negative Externalities
– Negative externalities occur when the consumption or production of a
good causes a harmful effect to a third party.
– Examples of negative externalities:
• If you play loud music at night your neighbour may not be able to sleep.
• If you produce chemicals and cause pollution as a side effect, then local
fishermen will not be able to catch fish. This loss of income will be the
negative externality.
• If you drive a car, it creates air pollution and contributes to congestion. These
are both external costs imposed on other people who live in the city.
• If you build a new road, the external cost is the loss of a beautiful landscape
which people can no longer enjoy.
– Implications of negative externalities
• If goods or services have negative externalities, then we will get market failure.
This is because individuals fail to take into account the costs to other people.
• To achieve a more socially efficient outcome, the government could try tax the
good with negative externalities. This means that consumers pay the full social
cost.
• Positive Externalities
– This occurs when the consumption or production of a good
causes a benefit to a third party.
– Examples of positive externalities:
• When you consume education you get a private benefit. But there
are also benefits to the rest of society. E.g you are able to educate
other people and therefore they benefit as a result of your
education.
• A farmer who grows apple trees provides a benefit to a beekeeper.
The beekeeper gets a good source of nectar to help make more
honey.
• If you walk to work, it will reduce congestion and pollution,
benefiting everyone else in the city.
– Implications of positive externalities:
• With positive externalities the benefit to society is greater than
personal benefit.
• Public goods
• Government policy failures
• Incomplete environmental and social service
measurement and accounting
Approaches to Solve Environmental
and Social Degradation
• Property rights, markets and macroeconomic
relationships
• Criteria for policy approaches
– economic
– non-economic
• Choosing policy instruments
What can economists do?
• While science and technology will do much of the
work there is still a need to better understand the
interaction between economy and environment.
• Formulate appropriate government policy – taxes
and subsidy
• Understand equity implication of economic
policies and climate change and devise corrective
measures (such as taxes on carbon and
technology transfer).