The Natural Environment and The Human

Economy:

The Neoclassical Economic Perspective

The Neoclassical View - where’s the
problem?
Figure 1.1 A Schematic View of the Interrelationship between the Natural
Environment and the Economy

Raw
Materials

The Natural
Environment Wastes The Economy

(Planet Earth) (G & S)

Environmental
Amenities &
Services

Note: Environmental amenity & services implies a passive use of nature (see
Textbook, Exhibit 2.2, on page 33)
 The Economy Depends on the
Environment

• Raw Material Production

• Disposal and Storage of Waste

• Provision of Ecosystem Services

 Fundamental Assumptions
• Environmental (natural) resources are “essential”
factors of production. A certain minimum amount of
natural resources is needed to produce goods and
services.

• Environmental resources are of economic concern to

the extent that they are scarce;

• Market price can be used as a measure (indicator) of

resource scarcity.
 Scarce Resources
• Resources include:

1. Land and other natural resources

2. Labor resources (technical/non-technical)

3. Capital (buildings, machinery and technology)

4. Time
What makes a particular resource scarce?
1. Is desert sand scarce?
Ans: The global supply of desert sand is big enough, relative
to foreseeable human needs, that sand is not “scarce” (even
though people may sometimes experience specific local
“shortages”—e.g., when urgently needing to fill sandbags to
protect a town from a flood).

2. Is the first bucket of herring caught scarce?

 Scarce Resource Example (Labour):
Roman Slaves

• During the millennium from the emergence of the Roman empire to its
eventual decline, at least 100 million people were seized or sold as slaves
throughout the Mediterranean and its hinterlands.

• For the period of the Principate, significant supply constraints and continuing
strong demand for slave labour that encouraged natural reproduction, the
enslavement of insiders, foreign imports, and moderate restraint in
manumission (the act of freeing slaves).
 Scare Resource Example (Water):
Example: Lesotho and S. Africa’s Military Coup

• Facing critical water shortages, South Africa negotiated in vain with Lesotho for 30
years to divert water from Lesotho's mountains to the arid South African province of
Transvaal.
• In 1986, South Africa gave decisive support to a successful military coup against
Lesotho's tribal government. South Africa declared that it helped the coup because
Lesotho had been providing sanctuary to guerrillas of the African National Congress.
• This was undoubtedly a key motivation, but within months the two governments
reached agreement to construct the huge Highlands Water Project to meet South Africa's
needs. It seems likely, therefore, that the desire for water was an ulterior motive behind
South African support for the coup.
• Research suggests that the renewable resource most likely to stimulate interstate
resource war is river water.
 Scarcity and Wealth
• Scarcity is not the same thing as poverty.

• Scarcity can occur among the rich.

• Low incomes do no create more scarcity.

• High income levels do not create less scarcity.

 Scarcity and Wealth - Example
• “The mind boggles: Wealthy couple finds it
impossible to make ends meet on $450K a year”
The Surly Old Man – Mon, 19 Jan, 2015

• In it, Eric, a 41-year-old doctor, and his wife Ilsa, a

39-year-old dentist, find it virtually impossible to
put a roof over the heads of their five children with
their combined $450,000 a year income.
• That’s almost 10 times the median U.S. household
income a year.
 Scarcity Leads to Choices (Trade-offs)
• Scarcity: a good or service which, if priced at zero, would be in
short supply
• Scarcity leads to choices:
1. What goods and services will be produced?
(e.g. more daycares or more football stadiums; more
hospitals or more schools; more heart surgeries or more
cancer treatments)
2. How will the good and services be produced?
(e.g. more labour or more machines; in the U.S. or
offshore)
3. For whom to produce them?
(e.g. a question of income distribution?)
 Example: Choices & Trade-offs
• Which is more effective in preventing deaths from AIDS (in the
developing world):
i) money spend on educating prostitutes OR
ii) the same amount of money spent on retroviral treatments?

• The WHO states that money spend it on educating prostitutes saves at

least 100 times more lives than the same amount of money spent on
empty retroviral treatment.

• Example: The Avahan Project (India)

• The Avahan project works to reduce HIV transmission among sex workers
through the provision of education as well as condom promotion,
sexually transmitted infection management, behaviour change
communication, community mobilisation and advocacy.
• The programme has been highly effective. In 2013, it was announced that
over the previous 10 years, Avahan had averted 57% of HIV infections in
southern India. Avahan is internationally recognised as a cost-effective,
successful, targeted HIV prevention programme.
 Efficiency and Scarcity
• An efficient process is one that uses the minimum
value of resources to achieve the desired result.
• How does the concept of efficiency relate to scarcity?
(hint: is your time scarce?...how do you use it
differently during exam week vs a vacation period?)
• As long as a resource is not scarce, there is no need to
use it efficiently.
E.g. one does not generally need to be concerned
about the quantity of air one breathes because it is
not scarce
• When more demands are put on a resource, the
importance of efficiency increases.
 Ownership of Scarce Resources: Does it
Matter who is Accountable?
Classroom discussion
• In foreign aid, the traditional approach is to announce
good intentions and allocate a lot of money.

• Why then, in the last 50 years in which the West spent

$2.3 trillion on foreign aid, has the West not be able to
able to deliver $4 bed nets to poor families and $0.12
medicines to children to prevent half of all malaria
deaths, but in a single day, on July 16, 2005, the
American and British economies delivered 9 million
copies of the newest Harry Potter book to its fans?
 Ownership of Scarce Resources: Does it Matter
who is Accountable?
Classroom discussion
• The non-profit organization, Population Services International (PSI),
headquartered in Washington, D.C. , gets rewarded for doing things that
work, which enables it to attract more funding.

• PSI they stumbled across a way to get insecticide-treated bed nets to the
poor in Malawi with initial funding and logistical support from official
aide agencies.

• PSI sells beds for $0.50 to mothers & to health clinics in the countryside,
which means it gets the nets to go to both those who value them and
need them (pregnant women and children under 5 are the principal risk
group for malaria).

• The nurse who distributes the net gets $0.09 per net to keep herself. So,
the nets are always in stock. The nets are also sold to rich urban
Malawians through private sector channels for $5 a net.
 Opportunity Cost
• Every time scarcity forces one to make a choice, one is
incurring an opportunity cost.
• Costs are measured in terms of foregone alternatives: a
decision to have more of one thing requires a decision to
have less of something else
 Opportunity Cost
• Take the choice to begin
brewing Taedonggang beer.
• Barley and wheat are used to
brew the beer.
• Opportunity cost: barley and
wheat can be used directly to
feed malnourished citizens.
• The decision to import
expensive brewery equipment
was made amidst a 5-year
famine (3 million people died
between 1994 and 1998).
http://www.wired.co.uk/news/a
rchive/2013-04/29/north-korea-
In Conclusion: is it demand or supply that creates
scarcity?
 Factor Substitution
• In both the production and the consumption
sectors of an economy, a specific natural resource
can always be replaced (partially or fully) by the
use of other resources that are either man-made
(i.e., manufactured) or natural.

• Technological advances continually augment the

scarcity of natural resources.
Perfect Substitutes, Imperfect Substitutes
and Perfect Complements
Perfect Substitutes, Imperfect Substitutes
and Perfect Complements (continued)
Advances in Technology/Production Techniques
 Production Functions and Substitution –
Mathematical Approach
• Nothing is lost in treating the human economy in
isolation of the natural ecosystems—the physical,
chemical and biological surroundings that humans
and other living species depend on as life support.
That is, the natural ecosystem is treated as being
outside the human economy and exogenously
determined.

• See chalkboard notes

 What is an Economy?
• An economy can be viewed as a rather
complex institutional mechanism designed to
facilitate the production, consumption and
exchange of goods and services, given
resource scarcity and technology, the
preference of households, and the legal
system for resource ownership rights.
 IMPLICATIONS
• The human economy is composed of three
entities: people, social institutions, and
commodities.
• Since the value of resources is assumed to
emanate exclusively from their usefulness to
human, the economic notion of resource is
strictly anthropocentric, i.e., basic resources
have no intrinsic value.
continue...

• In the production sector of an economy, what

is being continually created is value. Similarly,
in the consumption sector, what is continually
being created is an influx of utility from the
final use (consumption) of good and services.
Hence, in the human economy, matter and
energy from the natural environment are
continually transformed to create an
immaterial (psychic) flow of value and utility.
continue...

• No explicit consideration is given to the extent

in which the material flow (commodities) in
the human economy is dependent on the
natural ecosystems. More specifically, the
natural ecosystems are simply viewed as a
“gift of nature” ready to be exploited by
humans and in strict accordance of the laws of
demand and supply.