Economics and the Environment An Influence in Every Issue

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)

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

What are the central ideas of EE ? “The global ecosystem provides a vast array of indispensable resources and services to human beings.” “The Earth’s natural capital endowment is under severe strains from rapidly increasing human economic activity and population.” Prugh, Thomas Natural capital and Human Economic Survival.

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Some key elements of our “mainstream” view of economics Adam Smith ( ) 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)

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 12

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 19 th century (Newtonian) physics  Quantitative and “scientific” – high mathematical rigor  Free of history and social influences (individual wants and needs only)  = no contingency

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

Primary components of “Mainstream” economics

Economics in the context of the natural environment

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

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

Example: Costa Rica deforestation Since 1970, ~30% deforestation for crops & cattle 19

Economic results of deforestation Loss of commercial timber >$400 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

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.

Millennium Ecosystem Assessment

26 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

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