1. Environmental Economics & Management: Theory, Policy, and Applications 5e
Scott J. Callan and Janet M. Thomas

2. The Role of Economics in Environmental Management
MODULE 1
Modeling Environmental Problems
Chapter 1
The Role of Economics in Environmental Management
“We can lead the world, secure our nation, and leave our children a planet that is safer and cleaner and healthier than the one we inherited.”
Barack Obama (1961- )
p. 2, our textbook

3. 1. Economics and the Environment
Economic theory _______ what we observe in reality, including environmental problems
Recognize the link between economic activity and the environment using ________
Circular Flow Model
Materials Balance Model
A model is an abstract representation of reality; built with words, diagrams, and mathematical statements; should be as simple as possible to accomplish its purpose

4. Circular Flow Model
Shows the real and monetary _______ of economic activity through the _______ and ________ 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

5. Circular Flow Model 1 2 a b d c 3 4

6. Outer arrows: Firms supply goods/services to households Households demand goods/services Households supply resources to firms Firms demand resources

7. Inner arrows: Households pay for goods/services Firms receive revenue Firms make factor payments to households Households receive income

8. 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 ___________________ from the environment to the economy
The focus of Natural Resource Economics
Flow of ________ from the economy to the environment
The focus of Environmental Economics
Residuals are pollution remaining in the environment after some process has occurred
Residuals can be delayed, but not prevented, through recovery, recycling, and reuse

9. Materials Balance Model
The Interdependence of Economic Activity and Nature 5 7 6 8 9
Source: Adapted from Kneese, Ayres, and D'Arge (1970).

10. Science and the Materials Balance Model
The flow of resources and residuals are balanced according to laws of science
_____________________________
Matter and energy can neither be created nor destroyed
Nature’s capacity to convert matter and energy is not without bound
Thermodynamics: physics that deals with the mechanical action or relations of heat

11. 2. Fundamental Concepts in Environmental Economics
Terms and Definitions
Environmental damage, or pollution—the presence of matter or energy whose nature, location, or quantity has undesired effects on the environment.

12. Causes of Environmental Damage
Natural Pollutants arise from ____________ processes in nature
e.g., ocean salt spray, pollen
Anthropogenic Pollutants are _____________ and include all residuals associated with consumption and production
e.g., chemical wastes, gases from combustion
Of greater concern to environmental economists

13. Sources of Pollution Sources grouped by mobility
____________ Source: fixed-site
_________ Source: any nonstationary source
Sources grouped by identifiability
_______ source: single identifiable source
_________ Source: a source that cannot be accurately identified, degrading in a diffuse way
Point sources are discrete conveyances such as pipes or man-made ditches.
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Point source pollution is defined by the U.S. Environmental Protection Agency (EPA) as “any single identifiable source of pollution from which pollutants are discharged, such as a pipe...” This image shows a point source of industrial pollution along the Calumet River. Photo: U.S. Environmental Protection Agency, Region V.
Agricultural runoff from farmland: a nonpoint polluting source if rainwater transports chemical pesticides and fertilizers to nearby lakes and streams.

14. Scope of Environmental Damage
________Pollution
Damage not far from the source
e.g., urban smog
__________ Pollution
Damage extends well beyond the source
e.g., acidic deposition
________ Pollution
Involving widespread environmental effects with global implications
e.g., global warming, ozone depletion

15. 3. Identifying Environmental Objectives
_______________________ – reduction in anthropogenic contamination to socially acceptable levels
______________________ – management of resources to ensure long-term quality and abundance
__________ – assuring the variety of distinct species, genetic variability, and variety of inhabitable ecosystems

16. 4. Environmental Policy Planning: An Overview
Environmental planning involves many segments of society
In the U.S., the Environmental Protection Agency (EPA) acts as liaison to numerous constituents within each sector

17. Environmental Policy Planning
Source: Adapted from Vaupel (1978), Figure 5-3, p. 75.
EPA headquarters are in Washington, D.C., and there are 10 regional offices across the nation.

18. National Environmental Policy Act (NEPA) of 1969
FYI
Directs the integration of effort across agencies, executive departments, and branches of government in the U.S.
Guides U.S. federal environmental policy
Requires that environmental impact of public policy proposals be addressed
Calls for an Environmental Impact Statement (EIS) on proposals or major federal actions

19. Risk Analysis --Chief Tool Guiding Policy Planning
Two decision-making procedures
_______________– qualitative and quantitative evaluation of risk posed by an environmental hazard
________________– decision process of choosing from alternative responses to environmental risk

20. Risk Management a. Policy Evaluation Criteria
Economic Criteria
Allocative Efficiency – requires resources be appropriated such that benefits are equal to costs
Cost-effectiveness – requires the least amount of resources be used to achieve an objective
Equity Criterion
Environmental Justice – concerned with the fairness of the environmental risk burden across segments of society or geographic region

21. b. Government Policy Approach
___________________________– regulates polluters through the use of rules
________________– incentive-based policy that encourages conservation or pollution reduction
Can follow the “polluter-pays principle” whereby the polluter pays for the damage caused
see page 19

22. In theory, the price assigned to pollution is set to cover any damages to health or the ecology caused by pollution. The polluter is made to pay this price for every unit of pollution released to nature. The full costs of production are captured. The profit-maximizing producer has an incentive to reduce residuals.

23. c. Setting the Time Horizon
FYI
c. Setting the Time Horizon
Management Strategies – a short-term strategy intended to manage an existing problem
Pollution Prevention (P2) – a long-term strategy aimed at reducing the amount of toxicity of residuals released to nature