Environmental

Economics
Economics Approaches And
Environmental Impact
economics is a study of how people decide to use resources to
provide goods and services in the face of demand for them.
Environmental problems are also economic problems that
vary with population and per capita resource consumption.
Several types of economies exist.
Economy is a social system that converts resources into goods,
material commodities manufactured for and brought by
individuals and business.
Subsistence economy;
Oldest type of economy
People meet their daily needs by subsisting on what they can gather
from nature or produce on their own.
non-monetary economy which relies on natural resources to provide
for basic needs, through hunting, gathering, and subsistence
agriculture
 Several types of economies exist.
Economy is a social system that converts resources into goods,
material commodities manufactured for and brought by
individuals and business.
Subsistence economy;
Oldest type of economy
People meet their daily needs by subsisting on what they can gather
from nature or produce on their own.
non-monetary economy which relies on natural resources to provide
for basic needs, through hunting, gathering, and subsistence
agriculture
Capitalist market economy
Interaction among buyers and sellers determine which goods and
services are produced, how much is produced, and how these are
produced and distributed.
 In modern mixed economies, government typically
intervene in the market for several reason
(1)to eliminate unfair advantages held by single buyers
or sellers;
(2) to provide social services. Such as national defense,
medical care and education
(3) to provide safety nets for the elderly, victims of
natural disasters
(4) to manage the commons The Tragedy of
commons
(5) to reduce pollution and other threats to health and
quality of life.
The Tragedy of Commons
In 1968, ecologist Garrett Hardin explored this social
dilemma in his article "The Tragedy of the Commons",
published in the journal Science.

Basing his argument on scenario described in a 19th

century pamphlet, Hardin explained that in 1833, the
English economist William Forster Lloyd published a
pamphlet which included an example of herders sharing
a common parcel of land on which they are each entitled
to let their cows graze
 In English villages, shepherds had sometimes grazed their
sheep in common areas, and sheep ate grass more severely
than cows. He suggested overgrazing could result because for
each additional sheep, a herder could receive benefits, while
the group shared damage to the commons. If all herders made
this individually rational economic decision, the common
could be depleted or even destroyed, to the detriment of all.
 Hardin discussed problems that cannot be solved by technical
means, as distinct from those with solutions that require "a change
only in the techniques of the natural sciences, demanding little or
nothing in the way of change in human values or ideas of morality".
Hardin focused on human population growth, the use of the Earth's
natural resources, and the welfare state.
Hardin argued that if individuals relied on themselves alone, and not
on the relationship of society and man, then the number of children
had by each family would not be of public concern.
Parents breeding excessively would leave fewer descendants
because they would be unable to provide for each child adequately.
Such negative feedback is found in the animal kingdom.[4]
Hardin says that if the children of improvident parents starved to
death, if overbreeding was its own punishment, then there would be
no public interest in controlling the breeding of families.
Hardin blamed the welfare state for allowing the tragedy of the
commons; where the state provides for children and supports
overbreeding as a fundamental human right.
Neoclassical economics incorporates
psychology and cost benefit analysis.
Neoclassic economics examines the psychological factors
underlying consumer choices, explaining market prices in
terms of consumer choices for units of particular
commodities.
Buyer desire the lowest possible prices whereas sellers desire
the highest possible price
As a result of this conflict, a compromise price is reached and
the right quantities of commodities are brought and sold.
This balance is often phrased in terms of supply, the amount
of a product offered for sale at a given price, and demand, the
amount of a product people will buy at a given price if free to
do so.
Cost-Benefit Analysis-
Neoclassic economists often use CBA to evaluate an action or
decision.
systematic approach to estimating the strengths and weaknesses
of alternatives that satisfy transactions, activities or functional
requirements for a business.
The CBA is also defined as a systematic process for calculating
and comparing benefits and costs of a project, decision or
government policy
CBA is related to, but distinct from cost-effectiveness analysis.
Economics and Environment
Through microeconomic analysis we can understand the
behavior of consumers and firms and the decision making that
defines the marketplaces.

Same application of economics theory can be used to analyse

environmental problem why the pollution occur, what is the
sources of pollution, how long the pollution has been going
on?
Circular Flow Model
Basis modelling the relationship between economics activity
and the environment
First model learns about in introductory economics
Circular flow model illustrates the real and monetary flows of
economic activity through the factor market and the output
market.
Household (consumer) supply resources or factors of
production to the factor market, where they demand by firms
(producer) to produce good and services
 These commodities are then supplied to the Product Market,
where they demanded by households.
The exchange of inputs in the factor market generates an
income flow to households and that flow represents costs
incurred by firms.
The money flow through the product market shows how
households expenditures on goods and services are revenue
to firms
How the volume of economic activity and size of the flow if the population
growth, technology change, labor productivity, capital accumulation and
natural phenomena such as drought or floods happens?
Materials Balance Model
The explicit relationship between economic activity and the
natural environment
Materials balance model is positions the circular flow within a
larger schematic show the connections between economic
decision making and the natural environment.
2 flow circular :
(1) Flow of Resources : Natural Resource Economics
(2) Flow of Residuals : Environmental Economics

Residual: the amount of pollutant

remaining in the environment after a
natural or technological process has
occurred
Flow of Resources : Natural Resource Economics

A field of study concerned with the flow of resources from

nature to economic activity.
One way an economic system is linked to nature is through a
flow of materials or natural resources that runs from the
environment to the economy, specifically through the
household
The flow described hoe economic activity draws on earths
stock of natural resources such as soil, minerals and water.
Flow of Residuals : Environmental Economics
Opposite direction, from economy to the environment
The raw materials entering the system eventually are released
back to nature as by-products or residuals.
The residuals can be harmful (scheduled waste) or not
harmful. (Eg. CO2, other gases).
The residual arise from both consumption and production
activity. This set of flows is the chief concern of environmental
economics
Not to prevent but to delay the flow of residuals back to
nature through recovery, recycling and reuse.
Some residuals can be recovered from the stream and either
recycled into another usable form or reuse in their existing
form.
Recycled efforts are only short term measures, because even
recycled and reuse products eventually become residuals that
are returned to nature.
Fundamental Concepts in Environmental Economics
Environmental economics is concerned with identifying and
solving the problem of environmental damage or pollution
associated with the flow of residuals
The environmental damage can be from natural pollution or
anthropogenic pollutions.
Natural pollution arise from nonartifial processes in nature
such as particles from volcanic eruptions, salt spray from the
ocean, and pollen.
Anthropogenic pollutions are human induced and include all
residuals associated with consumption and production.
Example include gases combustion and chemical wastes from
certain manufacturing processes.
Sources of Environmental Damages
Polluting sources are many and varied, ranging from
automobiles to waste disposal sites.
Because polluting sources are so diverse, they are usually
classified into broad categories that are meaningful to policy
development.
Sources of pollution generally can be grouped by (1) their
mobility (stationery sources or mobile sources) or (2) their
identifiability (point sources or non-point source)

Stationery source : A fixed-site producer of pollution

Mobile source: Any nonstationery polluting sources

Point source : Any single identifiable source from which pollutants are
release

Nonpoint source: A source that cannot be identified accurately and degrades

the environment in a diffuse, indirect way over a broad area
International Environmental
Policy
Environmental Systems pay no heed to political boundaries
International law is vital to solving transboundary problems.
International law known as conventional law rises from
conventions, or treaties into which nation enter.
Types of International law.
Basel Convention on the Control of Transboundary Movements
of Hazardous Wastes and Their Disposal
Convention on Biological Diversity
Ramsar Convention on Wetlands of International Importance
Stockholm Convention on Persistent Organic Pollutants
Kyoto Protocol, of the U.N Framework Convention on Climate
Change
The Environmental Policy
Process
Identify a problem

Pinpoint cause of the Implement, assess and

problem interpret policy

Shepherd the solution

Envision a solution
into law

Cultivate access and

Get Organized
influence
Identify a Problem
The first step in the policy process to identify an environmental
problem
Requires curiosity, observation, record keeping and an awareness of
our environmental relationship
Inquiry and data collection play key roles

Pinpoint causes of the problem

To discover specific causes of the problem and often requires scientific
research.

Envision a solution
The better one can pinpoint causes of a problem, the more effectively
one can envision solution to it.
Get Organized
When it comes to influencing policy, organization are generally more
effective than individual

Cultivate access and influence

Entails gaining access to policymakers who have the clout to enact
change.
People gain access and influence through lobbying and campaign
contribution
Anyone can spend time or money trying to change an elected
officials mind but this is much more difficult for an ordinary citizen
than for the professional lobbyists employed by businesses and
organization seeking a voice in politics
Shepherd the solution into law
Prepare bill, or draft law, that embodies the desired solution
Anyone can draft a bill, but members of the House and Senate
must introduce the bill and shepherd it from subcommittee
through full committee and on to passage by the full Congress.
If it passes through all of the steps and gains the presidents
signature, the bill become law.

Implement, assess and Interpret policy

Following a laws enactment, administrative agencies (Such as
EPA) implement regulations
Policymaker evaluate the policy success and failure and may
revise the policy necessary.
Economic Policy Tools
Most environmental laws enforced by agencies today, use
command-and-control approaches.
This approaches, where an agency prohibits certain actions, or
sets rules, standards or limits and threatens punishment for
violation.
Despite the successes of command-and-control policy, as the
result many policymakers today exploring alternative
approaches that aim to channel the innovation and economic
efficiency of market capitalism in direction that benefit the
public.
Green taxes discourage
unsustainable activites
In taxation, money passes from private parties to government.
Taxing undesirable activates helps to internalize external
costs by making them part of the cost of doing business.
Taxes on environmentally harmful activates and products are
called green taxes.
Green taxes, it is essentially reimbursing the public for
environmental damage it causes.
A firm owning a factory that pollutes a waterway would pay
taxes on the amount of pollution it discharges- the more
pollution the higher the tax payment.
Subsides Promote certain
activites
A government give away money or resources that is intended
to encourage a particular industry or activity.
Subsides take many forms and one is the tax break
Relieving the tax burden on an industry, firm, or individual
assists it by reducing its expenses.
Permit Trading can save
money and produce result
Permit trading, the government creates a market in permits
for an environmentally harms activity and companies, utilities
or industries are allowed to buy, sell or trade rights to conduct
the activity
For instance, to decrease emissions of air pollutants, a
government might grant emission permits and set up an
emissions trading system, the government first determine s
the overall amount of pollution it will accept and then issues
permits to polluters that allow them each to emit certain
fraction of that amount.
Polluters may exchange these permit with other polluters, and
each year the government may reduce the amount of overall
emission allowed.
Ecolabelling empowers
consumers
When manufacturers designate on their labels how their
products were grown, harvested or manufactured, this
approach- called ecolabelling.
It tells consumers which brands use environmentally benign
process.
By preferentially buying ecolabeled products, consumers
provide businesses a powerful incentive to switch to more
sustainable processes.
Example, organic foods, labelling recycled paper.
Market incentives
Many municipalities charge residentials for waste disposal
according to the amount of waste they generated.
Other cities place taxes or disposal fees on items whose such
as tires and motor oil.
Stills others give rebates to residents who buy water-efficient
appliances, because the rebates cost the city less than
upgrading its wastewater treatment system.