1. Economics, Environment, and Sustainability
Chapter 26
Economics, Environment, and Sustainability

2. Chapter Overview Questions
What are economic systems and how do they work?
How do economists differ in their views of economic systems, pollution control, and resource management?
How can we monitor economic environmental progress?
What economic tools can we use to improve environmental quality?

3. Chapter Overview Questions (cont’d)
How does poverty reduce environmental quality, and how can we reduce poverty?
How can we shift to more environmentally sustainable economies over the next few decades?

4. Lester R. Brown and Christopher Flavin
“Converting the economy of the 21st century into one that is environmentally sustainable represents the greatest investment opportunity in history.”
Lester R. Brown and Christopher Flavin

5. The economy is . . .
a system of production, distribution, and consumption of goods and services that satisfies peoples needs and wants.

6. ECONOMIC SYSTEMS AND SUSTAINABILITY
An economic system produces and distributes goods and services by using natural, human, and manufactured resources.
In a pure free-market system, buyers and sellers interact without any government or other interference.
Actual capitalist market systems deviate from this model.

7. Economic Resources: The Big Three
Three types of resources are used to produce goods and services.
Figure 24-2

8. Market Economic Systems: Pure Free Market and Capitalistic Models
Supply, demand, and market equilibrium for a good or service in a pure market system.
Figure 24-3

9. Quantity supplied Quantity demanded
OIL
Supply curve
Demand curve
Quantity demanded
Quantity supplied
If the price is too high, more of a good is available than buyers are willing to buy.
Surplus
Price (low to high)
At this market equilibrium price, the quantity of a good suppliers are willing to sell is the same as the quantity buyers are willing to buy.
Figure 24.3
Supply, demand, and market equilibrium for a good or service in a pure market system. If all factors except price, supply, and demand are held fixed, market equilibrium occurs at the point at which the demand and supply curves intersect. This is the price at which sellers are willing to sell and buyers are willing to pay for the good or service provided. QUESTION: Suppose that the available supply of oil decreases. How will this shift the market equilibrium point on this diagram?
If the price is too low, buyers want to buy more than suppliers are willing to sell.
Shortage
Quantity supplied
Quantity demanded
Quantity
Fig. 24-3, p. 571

10. Government Intervention in Market Economic Systems: Correcting Market Failures
Governments intervene in market systems to help provide economic stability, national security, and public services such as education, crime protection, and environmental protection.

11. Environmentally Sustainable Economic Development: Copying Nature
Models of ecological economists are built on the following assumptions:
Resources are limited.
Encourage environmentally beneficial and sustainable forms of development.
The harmful environmental and health effects of producing goods and services should be included in market prices.

12. Economic Systems Recycling and reuse
EARTH
Sun
Economic Systems
Heat
Depletion of nonrenewable
resources
Production
Natural Capital
Air, water, land, soil, biodiversity, minerals, raw materials, energy resources; dilution, decomposition, & recycling services
Degradation & depletion
of renewable resources used
faster than replenished
Consumption
Pollution, waste from
overloading nature’s waste
disposal & recycling systems
Figure 24.4
Solutions: ecological economists see all economies as human subsystems that depend on natural resources and services provided by the sun and earth. QUESTION: Do you agree or disagree with this model? Explain.
Recycling
and reuse
Fig. 24-4, p. 573

13. Economic Development
Comparison of unsustainable economic development and environmentally sustainable economic development.
Figure 24-5

14. Unsustainable Economic Growth
Characteristic
Unsustainable Economic Growth
Environmentally Sustainable Economic Development
Production emphasis
Quantity
Quality
Natural resources
Not very important
Very important
Resource productivity
Inefficient (high waste)
Efficient (low waste)
Resource throughput
High
Low
Resource type emphasized
Nonrenewable
Renewable
Resource fate
Matter discarded
Matter recycled, reused, or composted
Figure 24.5
Comparison of unsustainable economic growth and environmentally sustainable economic development according to ecological economists and many environmental economists.
Pollution control
Cleanup (output reduction)
Prevention (input reduction)
Guiding principles
Risk–benefit analysis
Prevention and precaution
Fig. 24-5, p. 573

15. ESTIMATING THE VALUE OF ECOLOGICAL SERVICES AND MONITORING ENVIRONMENTAL PROGRESS
Economists have developed several ways to estimate nonmarket values of the earth’s ecological services based using:
Mitigation cost: how much it takes to offset any environmental damage.
Willingness to pay: determine how much people are willing to pay to keep the environment in tact (e.g. protect an endangered species).

16. ESTIMATING THE VALUE OF ECOLOGICAL SERVICES AND MONITORING ENVIRONMENTAL PROGRESS
Economists use discount rates (estimate resource’s future value compared to current) to estimate the future value of a resource.
The market price you pay for something does not include most of the environmental, health, and other harmful costs associated with its production and use.

18. Estimating the Optimum Levels of Pollution Control and Resource Use
Environmental economists try to determine optimum levels of pollution control and resource use.
Figure 24-6

19. Marginal cost of resource use
High
Marginal cost of resource use
Marginal cost of resource production
Cost
Figure 24.6
Optimum resource use: The marginal cost of mining coal (blue line) from a particular mine rises with each additional unit removed. Mining a certain amount of coal is profitable, but at some point the cost of mining exceeds the monetary benefits (red line). That is, the marginal cost of mining increases while the marginal benefit decreases as more coal is removed. Where the two curves meet is theoretically the optimum level of resource use. QUESTION: How would the location of the optimum level of resource use shift if the price of coal doubled to include its harmful environmental costs?
Optimum level of resource use
Low
Coal removed (%)
Fig. 24-6, p. 575

20. Optimum Pollution Control
The marginal cost of cleaning up pollution rises with each additional unit removed.
Figure 24-7

21. Marginal cost of pollution
High
Marginal cost of pollution
Cost
Marginal cost of pollution control
Figure 24.7
Optimum pollution control: The marginal cost of cleaning up pollution (blue line) rises with each additional unit removed. Cleaning up a certain amount of pollution is affordable, but at some point the marginal cost of pollution control is greater than the harmful costs of the pollution to society. That is, the marginal cost of pollution clean-up increases (blue line) and the marginal benefit decreases (red line) as more pollution is removed. Where the blue curve intersects with any other curve is a level of optimum pollution control for the pollutant represented. QUESTION: How would the optimum pollution clean-up level in this diagram change if the cost of pollution control doubled?
Optimum pollution clean-up level
Low
Pollution removed (%)
Fig. 24-7, p. 576

22. Cost-Benefit Analysis: a Useful but Crude Tool
Comparing likely costs and benefits of an environmental action is useful but involves many uncertainties.
Cost–benefit analyses involves determining:
Who or what might be affected by a particular regulation or project.
Projecting potential outcomes.
Evaluating alternative actions.
Establishing who benefits and who is harmed.

23. Environmental and Economic Indicators: Environmental Radar
We need indicators that reflect changing levels of environmental quality and human health.
Gross domestic product (GDP): measures the annual economic value of all goods and services produced in a country without taking harmful effects into consideration.
Genuine progress indicator (GPI): Subtracts from the GDP costs that lead to a lower quality of life or deplete / degrade natural resources.

24. Environmental and Economic Indicators: Environmental Radar
Comparison of the per capita GDP and the GPI in the U.S. between 1950 and 2002.
Figure 24-8

25. Per capita gross domestic product (GDP)
1996 Dollars per person
Per capita gross domestic product (GDP)
Figure 24.8
Monitoring environmental progress: Comparison of the per capita gross domestic product (GDP) and the per capita genuine progress indicator (GPI) in the United States between 1950 and QUESTIONS: Would you favor making widespread use of this or similar indicators? Why hasn’t this been done? (Data from Redefining Progress, 2004)
Per capita genuine progress indicator (GPI)
Year
Fig. 24-8, p. 577

26. How Would You Vote?
Should full-cost pricing be used in setting market prices for goods and services?
a. No. Low-income people will not be able to afford some essential goods and services.
b. Yes. Full-cost pricing will improve environmental protection.

27. ECONOMIC TOOLS FOR IMPROVING ENVIRONMENTAL QUALITY
Including external costs in market prices informs consumers about the harmful impact of their purchases the earth’s life-support systems and on human health.

28. Eco-Labeling: Informing Consumers So They can Vote with Their Wallets
Certifying and labeling environmentally beneficial goods and resources extracted by more sustainable methods can help consumers decide what goods and services to buy.
Figure 24-9

29. European Union: Eco-label (1992) Germany: Blue Angel (1978)
United States: Green Seal (1989)
Canada: Environmental Choice (1988)
Nordic Council: White Swan (1989)
China: Environmental label (1993)
Figure 24.9
Solutions: symbols used in some of the eco-labeling programs that evaluate green or environmentally favorable products. However, the World Trade Organization (WTO) may ban the use of such labels because some of its member countries view them as unfair barriers to international trade (see Supplement 24 on p. S69). QUESTION: Do you favor providing consumers with labels on all products that rate them on a scale in terms of their impact on the environment? Explain.
Fig. 24-9, p. 579

30. Subsidy Shifting
Taxes on pollution and resource use can move us closer to full-costing pricing.
Shifting taxes from wages and profits to pollution and waste (green taxes) helps make this feasible.
We can improve environmental quality and human health by replacing environmentally harmful government subsidies with environmentally beneficial ones.

31. Environmental Taxes and Fees
Trade-Offs
Environmental Taxes and Fees
Advantages
Disadvantages
Helps bring about full-cost pricing
Penalizes low income groups unless safety nets are provided
Provides incentive for businesses to do better to save money
Hard to determine optimal level for taxes and fees
Need to frequently readjust levels, which is technically and politically difficult
Can change behavior of polluters and consumers if taxes & fees are set at a high enough level
Figure 24.10
Trade-offs: advantages and disadvantages of using green taxes to help reduce pollution and resource waste. QUESTION: Which single advantage and which single disadvantage do you think are the most important?
Gov’ts may see this as a way of increasing general revenue instead of using funds to improve environmental quality and reduce taxes on income, payroll, & profits
Easily administered by existing tax agencies
Fairly easy to detect cheaters
Fig , p. 580

32. How Would You Vote?
Do the advantages of green taxes and fees outweigh the disadvantages?
a. No. Low-income people, farmers, ranchers, and small businesses would suffer from environmental taxes and fees.
b. Yes. They would reduce waste and protect the environment.

33. Green Taxes
Advantages of taxing wages and profits less and pollution and waste more.
Figure 24-11

34. • Decreases depletion and degradation of natural resources
• Improves environmental quality by full-cost pricing
• Encourages pollution prevention & waste reduction
• Stimulates creativity in solving environmental problems to avoid paying pollution taxes and thereby increases profits
• Rewards recycling and reuse
• Relies more on marketplace rather than regulation for environmental protection
Figure 24.11
Solutions: advantages of taxing wages and profits less and pollution and waste more. QUESTION: Which two advantages do you think are the most important?
• Provides jobs
• Can stimulate sustainable economic development
• Allows cuts in income, payroll, and sales taxes
Fig , p. 581

35. How Would You Vote?
Do you favor shifting taxes on wages and profits to pollution and waste?
a. No. This tax system would penalize many farmers, ranchers, and businesses that cannot avoid generating waste.
b. Yes. But, only if we offer subsidies to assist lower income people in meeting their basic needs.
c. Yes. It would promote a cleaner environment.

36. ECONOMIC TOOLS FOR IMPROVING ENVIRONMENTAL QUALITY
Environmental laws and regulations work best if they motivate companies to find innovative ways to control and prevent pollution and reduce resource waste.
Governments can set a limit on pollution emissions or use of a resource, give permits to users, and allow them to trade their permits on the marketplace.

37. Tradable Environmental Permits
Trade-Offs
Tradable Environmental Permits
Advantages
Disadvantages
Flexible
Big polluters and resource wasters can buy their way out
Easy to administer
May not reduce pollution at dirtiest plants
Can exclude small companies from buying permits
Encourages pollution prevention and waste reduction
Caps can be too low
Caps must be gradually reduced to encourage innovation
Can promote achievement of caps
Determining caps is difficult
Permit prices determined by market transactions
Must decide who gets permits and why
Figure 24.12
Trade-offs: advantages and disadvantages of using tradable pollution and resource-use permits to reduce pollution and resource waste. QUESTION: Which two advantages and which two disadvantages do you think are the most important?
Administrative costs high with many participants
Confronts ethical problem of how much pollution or resource waste is acceptable
Emissions and resource wastes must be monitored
Self-monitoring can promote cheating
Confronts problem of how permits should be fairly distributed
Sets bad example by selling legal rights to pollute or waste resources
Fig , p. 582

38. How Would You Vote?
Do the advantages of using tradable pollution and resource-use permits to reduce pollution and resource waste outweigh the disadvantages?
a. No. The policies would allow old and dirty plants to continue polluting local air and water.
b. Yes. The policies are effective ways of capping and then reducing air and water pollution and resource use.

39. Green Economics: Selling Services Instead of Things
Some businesses can greatly decrease their resource use, pollution, and waste by shifting from selling goods and services to selling the services the goods provide.
Carrier has begun shifting selling heating and air conditioning equipment to providing the service itself.
It makes higher profits by having the most energy-efficient units.

40. REDUCING POVERTY TO IMPROVE ENVIRONMENTAL QUALITY AND HUMAN WELL-BEING
We can sharply cut poverty by forgiving the international debts of the poorest countries, greatly increasing international aid and small individual loans to help the poor help themselves.

41. Distribution of the World’s Wealth: a Widening Gap
The global distribution of income shows that most of the world’s income flows up.
Each horizontal band is 1/5th of the world’s population
Figure 24-13

42. Solutions: Achieving the Millennium Development Goals
In 2000, the world’s nations set goals for sharply reducing hunger and poverty, improving health care and moving toward environmental sustainability by 2015.
In 1980 and 2002, developed countries agreed to devote 0.7% of their annual national income towards achieving such goals.
The average amount donated was 0.25%.
The U.S. gives 0.16%.

43. Expenditures per year (2005)
$1 trillion
World military
$492 billion (including Iraq)
U.S. military
$29 billion
U.S. highways
U.S. potato chips & snacks
$22 billion
$19 billion
U.S. pet foods
$8 billion
Figure 24.14
Ethics: what should our priorities be? (Data from United Nations, World Health Organization, U.S. Department of Commerce, and U.S. Office of Management and Budget)
U.S. EPA
$8 billion
U.S. foreign aid
$8 billion
U.S. cosmetics
Fig a, p. 586

44. Total Earth Restoration and Social Budget = $245 billion
Expenditures per year needed to
Eliminate hunger & malnutrition
$48 billion
Provide clean drinking water and sewage treatment for all
$37 billion
$33 billion
Provide basic health care for all
$31 billion
Protect biodiversity
$24 billion
Protect topsoil on cropland
Provide universal primary education and end illiteracy
$16 billion
$13 billion
Restore fisheries
$10 billion
Deal with global HIV/AIDS
Figure 24.14
Ethics: what should our priorities be? (Data from United Nations, World Health Organization, U.S. Department of Commerce, and U.S. Office of Management and Budget)
$10 billion
Stabilize water tables
$9 billion
Restore rangelands
$8 billion
Protect tropical forests
$6 billion
Reforest the earth
Total Earth Restoration and Social Budget = $245 billion
Fig b, p. 586

45. MAKING THE TRANSITION TO MORE ENVIRONMENTALLY SUSTAINABLE ECONOMIES
Nature's four principles of sustainability and a number of environmental and economic strategies can be used to develop more environmentally sustainable economies.
The Netherlands has dedicated itself to making its economy more environmentally sustainable.

46. Eco-Economies
Principles for shifting to more environmentally sustainable economies during this century.
Figure 24-15

47. Environmentally Sustainable Economy (Eco-Economy)
Economics
Environmentally Sustainable Economy (Eco-Economy)
Resource Use & Pollution
Reward (subsidize) earth sustaining behavior
Reduce resource use and waste by refusing, reducing, reusing, and recycling
Penalize (tax and do not subsidize) earth degrading behavior
Improve energy efficiency
Shift taxes from wages and profits to pollution and waste
Rely more on renewable solar and geothermal energy
Use full-cost pricing
Shift from a carbon-based (fossil fuel) economy to a renewable fuel–based economy
Sell more services instead of more things
Do not deplete or degrade natural capital
Live off income from natural capital
Ecology & Population
Figure 24.15
Solutions: principles for shifting to more environmentally sustainable economies or eco-economies during this century. QUESTION: Which five of these solutions do you think are the most important?
Reduce poverty
Mimic nature
Use environmental indicators to measure progress
Preserve biodiversity
Repair ecological damage
Certify sustainable practices and products
Stabilize population by reducing fertility
Use eco-labels on products
Fig , p. 587

48. Jobs, Profits, and the Environment: New Industries and New Jobs
Shifting to more environmentally sustainable economies will create immense profits and huge numbers of jobs.
Figure 24-16

49. Environmentally Sustainable Businesses and Careers
Environmental law
Aquaculture
Environmental nanotechnology
Biodiversity protection
Fuel cell technology
Biofuels
Geographic information systems (GIS)
Climate change research
Geothermal geologist
Conservation biology
Hydrogen energy
Marine science
Eco-industrial design
Pollution prevention
Ecotourism management
Reconciliation ecology
Energy efficient product design
Selling services in place of products
Environmental chemistry
Solar cell technology
Figure 24.16
Green careers: some key environmentally sustainable, or eco-friendly, businesses and careers. These businesses are expected to flourish during this century, while environmentally harmful, or sunset, businesses are expected to decline.
Sustainable agriculture
Environmental design
Sustainable forestry
Environmental economics
Waste reduction
Environmental education
Watershed hydrologist
Environmental engineering
Water conservation
Environmental health
Wind energy
Fig , p. 589