Chapter 5

Environmental
Economics and
Environmental
Policy

Essential Environment:
The Science Behind the Stories
4th Edition

Withgott/Laposata Lecture Presentations prepared by

Heidi Marcum
© 2012 Pearson Education, Inc.
This lecture will help you understand:

• Economic theory
• Economic growth and health, and sustainability
• Environmental and ecological economics
• U.S. and international
environmental policy
• The environmental
policy process
• Science and policy

© 2012 Pearson Education, Inc.

Central Case Study: San Diego and Tijuana
• Rain washes pollutants into Mexico’s Tijuana River
– Then onto U.S and Mexican beaches
• A new sewage treatment facility reached capacity
– In 3 years
• Poor Mexicans suffer most
– Contaminated water, disease, industrial waste

© 2012 Pearson Education, Inc.

Economics

• People say protection threatens economic growth

– But environmental protection is good for the economy
• Economics studies how people use resources to provide
goods and services in the face of demand
• Environmental problems are also economic problems
• Ecology and economics come from oikos (household)
• Economy: a social system that converts resources into:
– Goods: manufactured materials that are bought, and
– Services: work done for others as a form of business

© 2012 Pearson Education, Inc.

Types of modern economies

• Subsistence economy: people get their daily needs

directly from nature or their own production
– They do not purchase or trade products
• Capitalist market economy: buyers and sellers interact
to determine prices and production of goods and services
• Centrally planned economy: the government determines
how to allocate resources
• Mixed economy: governments intervene in the market

© 2012 Pearson Education, Inc.

Governments intervene in a market economy

• In mixed market economies, governments intervene to:

– Eliminate unfair advantages held by single buyers or
sellers
– Provide social services (national defense, medical care,
education)
– Provide safety nets for elderly, disaster victims, etc.
– Manage the commons
– Reduce pollution and other threats to health and quality
of life

© 2012 Pearson Education, Inc.

The economy relies on the environment

• Economies receive inputs (resources)

– Process them
– Discharge outputs (waste)
• Traditional
economics ignores
the environment
– But still drives
most policy
decisions

© 2012 Pearson Education, Inc.

Environmental view of economics

Human economies are subsets of the environment and

depend crucially on it for goods and services
© 2012 Pearson Education, Inc.
Environmental systems support economies

• Economic activity uses natural resources (sun’s energy,

water, trees, rocks, fossil fuels) as “goods”
• Ecosystem services: essential services support the life
that makes economic activities possible
* Soil formation * Pollination
* Water purification * Nutrient cycling
* Climate regulation * Waste recycling

© 2012 Pearson Education, Inc.

Economic activities affect the environment

• Resource depletion and generating pollution reduces the

functioning of ecological systems
• Degradation of ecosystem services disrupts economies
– Pollution depresses economic opportunities
• Ecological degradation hurts poor people the most
• Restoring ecosystem services is a prime way to alleviate
poverty

15 of 24 global ecosystem services are being degraded

or used unsustainably

© 2012 Pearson Education, Inc.

Adam Smith’s “invisible hand”

• Adam Smith believed that self-interested behavior could

benefit society
– If laws were followed and markets were competitive
• Classical economics: when people pursue economic
self-interest in a competitive marketplace …
– The market is guided by an “invisible hand” and …
– Society benefits
• This idea is a pillar of free-market thought today

© 2012 Pearson Education, Inc.

Neoclassical economics includes
psychology
• Neoclassical economics examines the psychological
factors that underlie consumer choices
• Market prices reflect consumer preference
– Supply vs. demand
• Conflict between buyers
and sellers leads to ….
– Production of the
“right” quantities
of a product

© 2012 Pearson Education, Inc.

Cost-benefit analysis: evaluating decisions

• Cost-benefit analysis: costs of a proposed action are

compared to benefits that result from the action
– If benefits > costs: pursue the action
• But not all costs and benefits can be easily identified,
defined, or quantified
– It is easy to quantify the cost of pollution-reducing
equipment or jobs created by an activity
– But hard to assess the effects of pollution on health
• Monetary benefits are overrepresented
– Analysis is biased in favor of economic development
– Biased against environmental protection
© 2012 Pearson Education, Inc.
Neoclassical economics hurts the
environment

• Capitalist market systems operate according to

neoclassical economics
– Enormous material wealth has been created
• Assumptions of neoclassical economics contribute to
environmental degradation:
– Resources are infinite or substitutable
– We should discount the future
– All costs and benefits are internal
– All growth is good
© 2012 Pearson Education, Inc.
Assumption: resources are infinite

• Economic models treat resources and workers as infinite,

substitutable, and interchangeable
– Once used up, a replacement resource will be found
• Some resources can be replaced but some cannot
– Nonrenewable resources (fossil fuels) can be depleted
– Renewable resources (forests) can also be used up

© 2012 Pearson Education, Inc.

Assumption: discount long-term effects

• A future event has less value than a present one

• Future events are discounted:
– Short-term costs and benefits are more important than
long-term costs and benefits
– Present conditions are more important than future ones
• We ignore the long-term consequences of policy
decisions
• Environmental problems unfold gradually
– Discounting causes us to downplay environmental impacts
of pollution and resource degradation

© 2012 Pearson Education, Inc.

Assumption: costs and benefits are internal

• Only the buyer and seller experience costs and benefits

associated with exchanging goods or services
– Pricing ignores social, environmental, or economic costs of
pollution and degradation
– Taxpayers bear the burden of paying these costs
• External costs: affect people other than buyers or sellers
– Health problems, resource depletion, property damage
• Ignoring external costs creates a false impression of the
consequences of choices
• Laws and regulations address external costs
© 2012 Pearson Education, Inc.
People suffer from external costs
People who do not participate in a transaction suffer from
external costs (health problems, property and aesthetic
damage, stress, lower real estate values)

© 2012 Pearson Education, Inc.

Assumption: all growth is good

• Economic growth is needed to keep jobs and social order

– It creates opportunities for poor to become wealthier
– Progress is measured by economic growth
• But economic growth does not ensure well-being
– Affluenza: material goods do not always bring contentment
to those who can afford them
• Runaway growth can destroy our economic system
– Resources are ultimately limited

© 2012 Pearson Education, Inc.

We live in a growth-oriented economy

• Modern global economic growth is unprecedented

– Americans are in a frenzy of consumption
• Economic growth comes from:
– Increased inputs (labor, natural resources)
– Economic development: improved efficiency of production
(technology, ideas, equipment)
• Uncontrolled economic growth is unsustainable
– Technology can push back limits, but not forever
– Resources are finite or have limited rates of extraction

© 2012 Pearson Education, Inc.

Is the growth paradigm good for us?

The dramatic rise in per-person consumption has severe

environmental consequences
© 2012 Pearson Education, Inc.
Ecological economics

• Ecological economics: civilizations cannot overcome

environmental limitations
– Uses principles of ecology and systems science
– Natural systems are models for sustainability
– Calls for revolution
• Ecological economists advocate steady-state economies:
– Economies that mirror natural ecological systems
– They don’t grow nor shrink but stay stable
• Quality of life increases through technological and
behavioral changes

© 2012 Pearson Education, Inc.

Environmental economics

• Environmental economics: unsustainable economies

have high population growth and inefficient resource use
– We can attain sustainability within current economic
systems
– Calls for reform
• Economies grow by modifying neoclassical economics to
increase efficiency through technology
• Environmental economists assign monetary values to
ecosystem goods and services
– Integrating them into traditional cost-benefit analysis

© 2012 Pearson Education, Inc.

Valuing ecosystem goods and services
• The market ignores/undervalues ecosystem services
• Nonmarket values: values (e.g., ecological, cultural,
spiritual) not included in the price of a good or service
– Hard to quantify, since
there is no traditional
measure of economic
worth

Natural cycles are vital

to our existence but
markets impose no
penalties when we
disturb them
© 2012 Pearson Education, Inc.
How do we quantify an ecosystem’s
value?

• Surveys determine how much people are willing to pay to

protect or restore a resource
• Measure the money, time, or effort expended to travel to
parks for recreation
• Compare housing prices in different areas to infer the
dollar value of landscapes, views, and peace and quiet
• Measure the cost to restore natural systems, replace
systems with technology, or reduce harm from pollution

© 2012 Pearson Education, Inc.

The global value of ecosystem services

• The global economic value of 17 ecosystem services

equals $46 trillion
– More than the GDP
of all nations
combined

Protecting land gives

100 times more value
than converting it to
agriculture, logging, or
fish farming
© 2012 Pearson Education, Inc.
Businesses are responding to concerns
• Industries, businesses, and corporations make money by
“greening” their operations
• Recycling, cutting energy use, etc., reduces costs, and
increases profits
• Greenwashing: consumers
are misled into thinking
companies are acting more
sustainably than they are
– Example: “Pure” bottled
water may not be
safer or better People must support
sustainable economics
© 2012 Pearson Education, Inc.
Markets can fail

• Market failure occurs when markets ignore:

– The environment’s positive impacts on economies
(ecosystem services)
– The negative effects of activities on the environment or
people (external costs)
• Government intervention counters market failure
through:
– Laws and regulations
– Taxing harmful activities
– Designing economic incentives to promote fairness,
conservation, and sustainability
© 2012 Pearson Education, Inc.
Environmental policy

• Once society agrees that a problem exists, it may

persuade its leaders to solve it through policy
• Policy: a formal set of general plans and principles to
address problems and guide decision making
• Public policy: governmental laws, regulations, orders,
incentives, and practices to advance societal welfare
• Environmental policy: pertains to human interactions
with the environment
– Regulates resource use or reduces pollution
– To promote human welfare and/or protect resources

© 2012 Pearson Education, Inc.

Policy impacts environmental problems
• Science, ethics, and economics help formulate policy
– Science: provides information and analysis
– Ethics and economics: clarify how society can address
problems
• Government
interacts with
– Citizens,
organizations,
and the private
sector

© 2012 Pearson Education, Inc.

Policies prevent the tragedy of the commons

• Capitalist markets are driven by short-term profit

– Not long-term social or environmental stability
– Little incentive to minimize impacts
– Market failure justifies government intervention
• Environmental policy tries to protect environmental
quality and natural resources
– While promoting equity or fairness in resource use
• Tragedy of the commons: commonly held resources
will become overused and degraded
– Best prevented by restriction of use and management

© 2012 Pearson Education, Inc.

Environmental policies prevent free riders
and external costs

• Free riders: people are tempted to cheat and not

participate in sacrificing to protect the environment
– An entity gets a “free ride” by avoiding sacrifices made by
others
– Private voluntary efforts are less effective than public
policies, where everyone sacrifices
• Environmental policies also promote fairness by
eliminating external costs
– Policies ensure that parties do not use resources in ways
that harm others

© 2012 Pearson Education, Inc.

Framework of U.S. environmental policy

• The U.S. is a good model to understand environmental

policy
– It has pioneered innovative policies
– Its policies serve as models for other countries
– Understanding federal policy helps us understand it at
local, state, and international levels
• Congress passes legislation (statutory law)
– It is signed into law by the president
• Laws are implemented and executed by agencies
– Regulations: specific rules to achieve objectives of
broadly written statutory laws
© 2012 Pearson Education, Inc.
State and local governmental policies

• The structure of the federal government is mirrored at

the state level
• But state laws cannot violate principles of the U.S.
Constitution
– If laws conflict, federal laws take precedence
• California, New York, New Jersey, and Massachusetts
have strong environmental laws
– Well-funded agencies
– Citizens value protecting the environment

© 2012 Pearson Education, Inc.

Early U.S. environmental policy

• From 1780s to the late 1800s, laws promoted settlement

and extraction of resources
• General Land Ordinances of 1785 and 1787:
encouraged people to move west
– The federal government managed unsettled lands
– Surveying and readying them for sale
• Settlement increased prosperity for citizens
– Relieved crowding in eastern cities
– Displaced millions of Native Americans
• People believed the land was infinite and inexhaustible
© 2012 Pearson Education, Inc.
Typical laws from the 1780s to late 1800s

• Homestead Act (1862): anyone could buy or settle on

160 acres of public land

Insert Fig. 5.10a

© 2012 Pearson Education, Inc.

Typical laws from the 1780s to late 1800s

• General Mining Act

(1872): people could mine
on public land for $5/acre
with no government
oversight

© 2012 Pearson Education, Inc.

Typical laws from the 1780s to late 1800s

• Timber Culture Act (1873): encouraged the timber

industry to clear-cut ancient trees with little
government policy to limit logging or encourage
conservation
© 2012 Pearson Education, Inc.
The second wave of U.S. policy

• Public perception and government policy shifted

– Laws addressed problems caused by westward expansion
and encouraged conservation
• Congress created Yellowstone National Park, the
world’s first national park, in 1872
– Also, national parks, forests, and wildlife refuges
• Understood that the nation’s resources were exhaustible
– They required legal protection
• Land management policies addressed soil conservation
• The 1964 Wilderness Act preserves pristine land
© 2012 Pearson Education, Inc.
The third wave of U.S. environmental policy

• In the 20th century, people were better off economically

– But lived with dirtier air, dirtier water, and more waste
and toxic chemicals
• Events increased awareness
of environmental problems
and shifted public priorities
and policies

Rachel Carson’s Silent Spring

(1962) described the ecological
and health effects of pesticides
and chemicals
© 2012 Pearson Education, Inc.
Modern U.S. environmental policy

• Ohio’s Cuyahoga River was so polluted that it caught

fire in the 1950s and 1960s
– The public demanded more environmental protection

Today, U.S. health is better protected and the air and

water are cleaner mainly because of policies of the 1960s
© 2012 Pearson Education, Inc.
The National Environmental Policy Act (1970)

• NEPA began the modern era of environmental policy

– It created the Council on Environmental Quality
• Requires an Environmental Impact Statement (EIS)
– For any federal action that might significantly impact the
environment
– To assess the environmental impacts of any federally-
funded project
• An EIS usually does not halt projects
– Provides incentives to decrease damage
– Grants citizens input into the policy process

© 2012 Pearson Education, Inc.

The EPA shifts environmental policy

• In 1970, President Nixon’s executive order created the

Environmental Protection Agency (EPA)
– To develop an integrated approach to environmental
policy
• The EPA:
– Conducts and evaluates research
– Monitors environmental quality
– Sets and enforces standards for pollution levels
– Assists states in meeting standards and goals
– Educates the public

© 2012 Pearson Education, Inc.

Significant environmental laws

• The public demanded a

cleaner environment
– Environmental
problems needed
tough regulations

Thousands of laws protect

health and environmental
quality in the U.S.

© 2012 Pearson Education, Inc.

Environmental policy changes over time

• Major advances in environmental policy in the 1960s

and 1970s occurred because:
– Strong evidence of environmental problems existed
– People could visualize policies to deal with problems
– The political climate was ripe, with a supportive public
and leaders who were willing to act
• Pictures of Earth from space made us aware that our
planet was finite

© 2012 Pearson Education, Inc.

Many reacted against regulation

• By 1990, many felt that regulations were too strict

– Imposed economic burdens on people and businesses
• George W. Bush and the Republican-controlled
Congresses (1994–2006) tried to weaken laws
• “The Death of Environmentalism” (2004): the
environmental movement has to be reinvented
– It must appeal to core values with an inspiring vision
• This new outlook helped elect President Obama in 2008

© 2012 Pearson Education, Inc.

Current environmental policy
• Other nations have increased attention to issues
– The 1992 Earth Summit in Rio de Janeiro, Brazil
– The 2002 World Summit on Sustainable Development in
Johannesburg, South Africa
• This wave of policy focuses
on sustainability
– Safeguarding ecosystems
while raising living
standards
Climate change dominates
discussion on
environmental policy
© 2012 Pearson Education, Inc.
International environmental policy

• International law is vital to solving transboundary issues

• Customary law: international law arising from long-
standing practices or customs held by most cultures
• Conventional law: arises from conventions or treaties
– Montreal Protocol (1987): 160 nations agreed to reduce
ozone-depleting chemicals
– Kyoto Protocol: reduces greenhouse gas emissions
causing climate change
• North American Free Trade Agreement (NAFTA):
– Addresses U.S.–Mexico issues
© 2012 Pearson Education, Inc.
Organizations shape international policy

• International organizations influence nations through:

– Funding, economic or political pressure, and media
attention
• United Nations (UN): plays an active role in policy
– Sponsors conferences, coordinates treaties, publishes
research
• UNEP (United Nations Environment Programme)
promotes sustainability
– Research, outreach activities
– Provides information to policymakers and scientists

© 2012 Pearson Education, Inc.

The World Bank and European Union

• The World Bank: one of the largest funding sources

for economic development in poor countries
– Dams, irrigation, infrastructure, etc.
– Funds unsustainable, environmentally damaging
projects
• The European Union (EU) seeks to promote
Europe’s unity and its economic and social progress
– Can sign binding treaties and enact regulations
– Sees environmental regulations as barriers to trade

© 2012 Pearson Education, Inc.

The World Trade Organization (WTO)

• Represents multinational corporations

– Promotes free trade
• Can impose penalties on nations that don’t comply with
its directives
• Interprets environmental laws as unfair barriers to trade
– Brazil and Venezuela filed a complaint against U.S.
regulations requiring cleaner-burning fuel
– The WTO agreed with Brazil and Venezuela, despite
threats to human health
• Critics charge the WTO aggravates environmental
problems
© 2012 Pearson Education, Inc.
International treaties can weaken protection

• International treaties allow industries and corporations to

weaken environmental protection laws
– They see laws as barriers to trade
• Under NAFTA, investors can sue a country for lost profits
– Canada sued the U.S. for $300 million for banning beef
after finding mad cow disease in Canada cows
– Canada sued the U.S. for $1 billion for banning MTBE, a
dangerous gasoline additive
– The U.S. forced Mexico to pay $16 million and reopen a
toxic waste dump

© 2012 Pearson Education, Inc.

NGOs

• Nongovernmental organizations (NGOs): entities

that influence international policy
• Some do not get politically involved
– Example: The Nature Conservancy
• Others try to shape policy through research, education,
lobbying, or protest
– Example: Conservation International, the World Wide
Fund for Nature, Greenpeace, Population Connection

© 2012 Pearson Education, Inc.

Seven steps to making environmental policy

• Theoretically, in the U.S.,

everyone has a voice and
can make a difference
– But money wields influence
– Some people and organizations
are more influential than others
• Creating environmental
policy has several steps
– Requires initiative,
dedication, and the
support of many people

© 2012 Pearson Education, Inc.

Step 1: Identify a problem

• Requires scientific inquiry and data collection

© 2012 Pearson Education, Inc.

Step 2: Pinpoint causes of the problem

• Involves scientific research

© 2012 Pearson Education, Inc.

Step 3: Envision a solution

• Science plays a vital role here, too

• Solutions also require social or political action

© 2012 Pearson Education, Inc.

Step 4: Get organized

• Organizations are more effective than individuals

– But a motivated, informed individual can also succeed

© 2012 Pearson Education, Inc.

Step 5: Cultivate access and influence

• People gain access to policymakers and influence them

through lobbying and campaign contributions
– Professional lobbyists are employed by businesses
and organizations
– Anyone can donate money to a candidate
© 2012 Pearson Education, Inc.
Step 6: Shepherd the solution into law

• Prepare a bill, or draft law, containing solutions

• Find members of the House and Senate to introduce the
bill and shepherd it through committees
• The bill may become law or die in various ways
© 2012 Pearson Education, Inc.
How a bill becomes law

Before a bill becomes law, it

must clear multiple hurdles

© 2012 Pearson Education, Inc.

Step 7: Implement, assess, and interpret
policy

• Following a law’s enactment

– Administrative agencies implement regulations
– Policymakers evaluate the policy’s successes or failures
– The courts interpret the law
© 2012 Pearson Education, Inc.
Science plays a role, but can be politicized

• A nation’s strength depends on proper use of science

– Governments use some tax money to fund research
• Sometimes policymakers let ideology determine policy
– Politicians ignore scientists and mislead the public
– Government scientists have had their work censored,
suppressed, or edited and their jobs threatened
– Unqualified people are put into powerful positions
• Scientifically literate citizens must ensure that our
government uses proper use of science
When taxpayer-funded research is suppressed or
distorted for political ends, everyone loses
© 2012 Pearson Education, Inc.
Three major types of policy approaches

• Environmental policy has 3

major approaches:
– Lawsuits
– Command-and-control
– Economic policy tools
© 2012 Pearson Education, Inc.
Strategy: lawsuits in the courts

• Before legislation, lawsuits addressed U.S. policy issues

– Individuals suffering from pollution sued polluters in court
– Courts make polluters stop or pay fines
• Industrialization and population growth made it harder to
control pollution
– Also, justices were reluctant to hinder industry
• People saw legislation and regulation as more effective in
protecting health and safety

© 2012 Pearson Education, Inc.

Strategy: command and control

• Command-and-control approach: a regulating agency

prohibits actions, or sets rules or limits
– Threatening punishment for violators
• This is the approach used for most environmental laws
and regulations enforced by agencies today
• This simple approach has worked well
– It brings cleaner air, water, safer workplaces, and
healthier neighborhoods

© 2012 Pearson Education, Inc.

Strategy: economic policy tools

• People don’t like the top-down approaches that dictate

particular solutions to problems
• Alternative approaches channel innovation and economic
policies to benefit the public:
– Promote desired, and discourage undesired, outcomes
– Encourage market competition to produce new solutions at
lower cost
• Strategies include:
– Green taxes, subsidies, permit trading, and ecolabeling

© 2012 Pearson Education, Inc.

Green taxes discourage unsustainability

• Governments use taxes to benefit the public

– Internalizing harmful external costs makes them part of the
cost of doing business
• Green taxes: tax environmentally harmful activities and
products
– Businesses reimburse the public for damage they cause
– The more pollution, the higher the tax payment
• Companies have financial incentives to reduce pollution
with freedom to decide how to do so
– But costs are passed on to consumers

© 2012 Pearson Education, Inc.

Who should pay for pollution?

• Green taxes are not widely supported in the U.S.

– Other “sin taxes” (e.g., on cigarettes and alcohol) are tools
of U.S. social policy
• Polluter-pays principle: the party that pollutes is held
responsible for covering the costs of its impacts
– Widely used in Europe
• Carbon taxes: controversial taxes on gasoline, coal-based
electricity, and other fossil fuels
– Used to fight climate change

© 2012 Pearson Education, Inc.

Subsidies promote certain activities
• Subsidy: a government giveaway of cash or resources to
encourage a particular industry or activity
– Tax break: helps an entity by relieving its tax burden
• Subsidies can promote sustainability, but they have been
used to support unsustainable activities
• The U.S. subsidizes logging, grazing, and mining
– Benefits private parties while degrading publically held
resources
• Nations give $1.45 trillion per year in harmful subsidies

U.S. fossil fuel companies received $72 billion taxpayer

money (2002–2008)—renewable energy received $29 billion
© 2012 Pearson Education, Inc.
Permit trading saves money

• Permit trading: a government-created market in

permits for an environmentally harmful activity
– Businesses buy, sell, or trade these permits
• Cap-and-trade emissions trading system: the
government sets pollution levels (“caps”)
– Permits let polluters emit some amount of pollution
• Polluters can exchange (sell) permits
– The government can set lower emission levels
• Companies have an economic incentive to reduce
emissions

© 2012 Pearson Education, Inc.

A cap-and-trade system for air pollution

• One U.S. cap-and-trade system decreased sulfur dioxide

emissions
• Cuts were obtained more
cheaply than expected
– With no effects on
electricity supply or
economic growth
• Billions of dollars
per year are saved
– Benefits outweigh costs
40 to 1
© 2012 Pearson Education, Inc.
Ecolabeling empowers consumers

• Uses the marketplace to counteract market failures

• Ecolabeling: tells consumers which brands use
environmentally benign processes
– Dolphin-safe tuna,
labeling recycled
paper, etc.

Ecolabeling is a
powerful incentive for
businesses to change

© 2012 Pearson Education, Inc.

Market incentives work at the local level

• Municipalities charge residents for waste disposal

– According to the amount of waste generated
• Cities tax disposal of costly items (tires, motor oil)
• Some cities give rebates for buying water-efficient
appliances
• Power utilities give discounts to those buying efficient
lightbulbs and appliances
– It is cheaper than expanding generating capacity

© 2012 Pearson Education, Inc.

Conclusion

• Environmental policy is a problem-solving tool

– It uses science, ethics, and economics
• Conventional command-and-control approach uses
legislation and regulations to make policy
– It is the most common approach
– Innovative economic policy tools are being developed
• Environmental and ecological economists quantify the
value of ecosystem services
• Economic well-being does not need a trade-off with
environmental quality

© 2012 Pearson Education, Inc.