Economics and the Environment

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Economics and the Environment

• An Influence in Every Issue

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Economics

• Economics is the social science that studies the
  production, distribution, and consumption of
  goods and services. (Wikipedia, 2010)
• ... the science which studies human behaviour
  with regard to the satisfaction of human needs
  and wants from scarce resources that have
  alternative uses. (Lionel Robbins, 1932)

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What is environmental economics?

• Oikos (house, Greek) is the root for both
  economics and ecology
• Economics emphasizes the trade-offs in labor and
  capital that come from processing raw materials
  to provide needs and wants
• Environmental economics explicitly adds
  trade-offs based on the costs of removing raw
  materials and producing waste what are we
  doing with and to our house in the largest sense

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What are the central ideas of EE?

• The global ecosystem provides a vast array of
  indispensable resources and services to human
  beings.
• The Earths natural capital endowment is under
  severe strains from rapidly increasing human
  economic activity and population.

Prugh, Thomas. 1995. Natural capital and Human
Economic Survival.
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Some key elements of our mainstream view of
economics

• Adam Smith (1723-1790) often viewed as founder of
  modern economics
• Moral philosopher concern was about social
  good, moral behavior
• 1776, Inquiry into the Nature and Causes of the
  Wealth of Nations
• Social good is the sum of individual wants, and
  markets automatically guide individual behavior
  to the common good (invisible hand)

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Assumptions of early economic models

• division of labor (and value was largely a
  function of labor)
• all factors of production are freely mobile
• small producers would meet small consumers in
  the market, having equivalent power and
  information
• no nuisance effects (externalities) would spill
  over onto innocent bystanders

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Neo-classical Economics

• Value free in terms of ethics descriptive
• Maximum efficiency is the outcome of market
  economies (the point at which small changes
  cannot make anyone better off without making
  someone else worse off).
• Infinite substitutability as the cost of
  something (manufactured or natural) increases,
  people will invent solutions (better exploitation
  or substitutes)
• Approach was modeled after 19th century
  (Newtonian) physics
• Quantitative and scientific high mathematical
  rigor
• Free of history and social influences (individual
  wants and needs only)
• no contingency

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What are some areas that environmental economists
argue need to be improved?

• EE argue that mainstream economics views natural
  capital as only a single, rather unimportant,
  factor of economic production.
• But, the economy is a subset of the whole world
  (including ecosystems) not separate from the
  global ecosystems

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Primary components of Mainstream economics
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Economics in the context of the natural
environment
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What are some areas that environmental economists
argue need to be improved?

• Natural capital can be indispensable, and all
  economic activity is ultimately enabled by the
  natural environment (there is not infinite
  substitutability)
• Culture evolves in the context of the natural
  environment, and cultural activities impact the
  environment (the stock of natural capital)
• The optimal economy is not necessarily the
  largest economy - we should not measure
  well-being by size

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Measuring success

• GNP -- Gross National Product -- a standard
  measure
• What is not included in GNP?
• Depletion of natural capital and ecosystem
  services
• Value of non-market activities (e.g., homemakers)
• Externalities (pollution, congestion)
• Degree of equality in the distribution of income
• GNP can be deceptive as a measure of well-being,
  especially for countries that export natural
  resources

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Example Costa Rica deforestation

• Since 1970, 30 deforestation for crops cattle

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Economic results of deforestation

• Loss of commercial timber gt400 million
• Exposed soils eroded into oceans (2.2 billion
  tons between 1970 1989)
• Nutrient loss 17 of value of crops, 14 of
  livestock
• Fisheries declined precipitously
• Accumulated depreciation due to deforestation
  was more than the average value of one year of
  GDP for Costa Rica

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What is natural capital?

• A functional definition of capital in general is
  "a stock that yields a flow of valuable goods or
  services into the future".
• Natural capital is thus the stock of natural
  ecosystems that yields a flow of valuable
  ecosystem goods or services into the future.

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Millennium Ecosystem Assessment
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How can we evaluate value?

• Only scarce resources have economic value (and
  it was once thought that ecosystem services were
  unlimited)
• Value is determined by economic agents - it is
  not inherent
• Related to willingness to pay but most
  ecosystem services are not subject to markets
• This is one reason for excessive land conversion,
  pollution, etc.
• Even so, social (community) values exist

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Ecosystems and Human Well-being. A Framework for
Assessment. Millennium Ecosystem Assessment,
2003. p 146