The Environment –Economy

Interaction,
he Materials Balance Model and
Laws of Thermodynamics
Prepared By
Dr. Anup K mishra
DAV PG college. Varanasi
Link between economic activity and
nature
Natural Nature Environmental
Resource Economics
Economic
s
(a) (b)
Econom
y

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 The Economy and the Environment
• (a) represents raw materials flowing into
production and consumption the nature
plays its role as provider
• (b) shows the impact of economic activity on
the quality of the natural environment
the nature acts as a receiver.

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Economics and the Environment

• Economic theory explains what we observe

in reality, including environmental
problems
• Recognize the link between economic
activity and the environment using models
– Circular Flow Model
– Materials Balance Model

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 Circular Flow Model

• Shows the real and monetary flows of

economic activity through the output and
factor markets
– Forms the basis for modeling the relationship
between economic activity and the environment
– But does not explicitly show the linkage between
economic activity and the environment

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Circular Flow Model of Economic Activity

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 Materials Balance Model
• Places the circular flow within a larger
schematic to show links between economic
activity and the natural environment via two
sets of flows
– Flow of resources from the environment to the
economy
• The focus of Natural Resource Economics
– Flow of residuals from the economy to the
environment
• The focus of Environmental Economics
Materials Balance Model (Con’t)
• Residuals are pollution remaining in the
environment after some process has
occurred
– Residuals can be delayed, but not prevented,
through recovery, recycling, and reuse
• Shown as inner flows in the model
 Materials Balance Model: The
Interdependence of Economic Activity and
Nature

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 Science and the Materials Balance
Model
• The flow of resources and residuals are
balanced according to laws of science
• First Law of Thermodynamics
– Matter and energy can neither be created nor
destroyed
• Second Law of Thermodynamics
– Nature’s capacity to convert matter and energy
is not without bound
Using Science to understand the Material Balance

• First law of thermodynamics: matter and

energy can neither be created or destroy.
– This law can apply to the materials balance model
in the long run, the flow of materials and
energy drawn from the nature into consumption
and production must equal the flow of residuals
that run from these activities back into the
environment.
– M = Rdp + R dc
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 Using Science to understand the Material
Balance
• Because matter and energy cannot be
destroyed, then the materials flow can go
forever. The second law of thermodynamics
states that the nature’s capacity to convert
matter and energy is not unlimited.
• Even recycling can delay the disposal of
residuals, but it cannot be perfect, each
cycle must lose some proportion of the
recycled material.
 Theoretical View
• In the words of Ayres and Kneese, 
• “If waste assimilative capacity of the
environment is scarce, the decentralized
voluntary exchange process cannot be free
of uncompensated technological external
diseconomies unless all inputs are fully
converted into outputs, with no unwanted
material residuals along the way and all
final outputs are utterly destroyed in the
process of consumption.”
• The functions of an economy are related to
production, consumption and distribution
activities.
• These activities have a direct relation with nature.
• Nature provides raw materials to the economy for
its production and consumption activities.
• Residuals from both the production and
consumption processes usually remain and they
usually render disservices like killing fish,
reducing public health, soiling and deteriorating
buildings due to industrial pollution.
• Some wastes (residuals) from production
and consumption activities are ultimately
returned to nature.
• Remaining wastages are recycled.
• Further, all emission of residuals do not
cause pollution damage because of
assimilative capacity of the environment.
• Further, energy that is taken out of the
environment must reappear somewhere else
in the economic system.
• Its form may, however, be changed so that it
appears as waste products and gases.
Moreover, waste energy cannot be recycled
but waste materials can be used up to a point.
• It means that economic activity always
affects environment in a direct or indirect
manner.
• Thus the law of conservation of matter and
energy holds that matter can be transformed
to other matter or into energy but can never
vanish.
• All inputs (fuels, raw materials, water and
so forth) used in the economy’s production
processes will ultimately result in an
equivalent residual or waste. 
• The material flow diagram implies that mass inputs must
equal mass outputs for every process.
• Moreover, all resources extracted from the environment
must eventually become unwanted wastes and pollutants.
• This means, among other things, externalities (market
failures) associated with production and consumption of
materials are actually pervasive and they tend to grow in
importance as the economy itself grows.
• Materials recycled can help but recycling is energy
intensive and imperfect, so it cannot fully compensate.