The Relationship Between the Economy and the Environment

1
The Relationship Between the Economy and the
Environment
Wednesday, January 12
2
The Environment SPACESHIP EARTH
3
Sun
Environment
4
Environment

• The earths environment consists of air, water,
  land, living organisms, and energy provided by
  the sun. Atmosphere, Hydrosphere, Geosphere and
  Biosphere
• The environment consists of a finite amount of
  matter and a constant flow of energy provided by
  the sun. The suns energy is used in physical,
  chemical, geological, and biological processes
  that transform the quality of matter and energy
  in the environment.

5
The Economy
People, the goods and services people produce
6
Since not all matter and energy in the
environment are in the final form people want,
the economy consists of people organized to
transform that matter and energy into economic
goods and services using a stock of human,
social, natural, and manufactured capital.
7
Sun
Environment
Economy
8
Sun
Environment
Raw matter and energy from the environment
Economy
9
Sun
Environment
Raw matter and energy from the environment
Waste matter and energy into the environment
Economy
RBEE Model
10
Defending against environment

• Physical, chemical, geological, and biological
  processes in the environment can also be
  hazardous to humans.
• Many economic activities are undertaken to defend
  against floods, strong winds, lightning,
  earthquakes, volcanic eruptions, fires, poisons,
  pests, predators, and ultraviolet rays.
• Economic activities may also involve altering the
  environment to prevent harm to humans. Examples
  include drainage systems and eradication of pests
  and predators.

11
The RBEE model highlights three ways the economy
affects the environment

• First, the economy takes matter and energy away
  from the environment.
• Second, economic activity directly transforms the
  environment to increase the availability of raw
  materials, decrease environmental hazards, and to
  provide space for manufactured capital and
  people.
• Third, the economy disposes of waste matter and
  energy into the environment.

12
When done on a very large scale, these three
types of economic activities can alter the
physical, chemical, geological, and biological
processes in the environment upon which life
(including human life) depends.
13
A Large Economy
Sun
Environment
Economy
14
A Small Economy
Sun
Environment
Economy
15
The purpose of an economy is to produce and
distribute goods and services that consumers want
(i.e., final goods and services).
16
Conventional Circular Flow Model of the Economy

17
Functions of an Economic System
Identify goods
Produce goods
Transport goods
Advertise goods
Use goods
Manage wastes
18
Production Function
Q f ( Labor, Materials, Energy, Capital)

19
Production Function

• Q f ( L, M, E, K)
• Use L, K and E to transform the quality or
  location of M

20
Q f ( L, M, E, K)

• Materials come from the environment
• Form or location my be changed by earlier
  economic activity
• Most energy comes from fossil fuels
• Stored solar energy
• Capital is inputs that are not consumed
  (transformed) during the production process

21
Conservation of Mass and Energy

• Laws of conservation of matter and energy
• cant create it
• cant destroy it
• but can transform it.
• In any production process
• Matter (mass) in Matter out
• Energy in Energy out
• Consumption of energy results in
• Work
• Degraded (lower quality) energy

22
Four Types of Capital

• Km - Manufactured capital

• Ks - Social capital

• Kh - Human capital

• Kn - Natural capital

23
Production Function
Q f ( L, M, E, Km, Kn, Kh, Ks)

24
3 Ways The Economy Affects the Environment

• First, the economy takes matter and energy away
  from the environment.
• Second, economic activity directly transforms the
  environment to increase the availability of raw
  materials, decrease environmental hazards, and to
  provide space for manufactured capital and
  people.
• Third, the economy disposes of waste matter and
  energy into the environment.

25
3 Ways The Economy Affects Environment

• Kn - matter and energy taken from the
  environment
• Kn - environment transformed to increase the
  availability of raw materials, decrease
  environmental hazards, and to provide space for
  manufactured capital and people.
• Kn - waste matter and energy disposal

26
Sun
Environment
Raw matter and energy from the environment
Waste matter and energy into the environment
Firms
Consumers
Economy
27
Environment also Produces Goods and Services

• Transforming solar energy into higher quality
  energy (photosynthesis, hydro-potential, etc.)
• Material inputs to production (intermediate
  goods)
• Consumption goods (final goods)
• Converting wastes into usable products

28
Questions

• Given that the Earth/Environment is a finite and
  closed system (except for solar energy input),
  are there limits on the size of the economy that
  the environment can support?
• Do we face a trade-off between economic goods and
  services and environmental goods and services?
• To what degree can we substitute for natural
  capital with manufactured capital and human
  capital?

29
(No Transcript)
30
Production Possibility Frontier

• The production possibility frontier (PPF)
  represents the maximum of two goods that can be
  produced with existing capital infrastructure and
  technology.
• Society could choose to have 6 units of economic
  goods and 5 units of environmental goods
• or it could choose to have no economic goods and
  8 units of environmental goods.
• Any point on the curve is a possibility, but
  society can choose only one point in a given time
  period.

31
A PPF for Agricultural Land

• Economic good Grain output
• Environmental goods
• Biomass
• Diverse flora and fauna
• CO2, Nitrogen, nutrient recycling
• Aesthetic/Recreation value
• Soil formation

32
A
33
A
B
34
B
A
35
B
A
36
Production Possibilities

• At Different Levels of Economic Development

37
(No Transcript)
38
(No Transcript)
39
(No Transcript)
40
(No Transcript)