Economics- Approaches and Environmental Implications Chapter 5

What is Economics and how is it related to the Environment? People say protection threatens economic growth But environmental protection is good for the economy Economics studies how people use resources to provide goods and services in the face of demand Environmental problems are also economic problems Ecology and economics come from oikos (household) Economy: a social system that converts resources into: Goods: manufactured materials that are bought, and Services: work done for others as a form of business

What are the different types of modern economies? Subsistence economy: people get their daily needs directly from nature or their own production They do not purchase or trade products Capitalist market economy: buyers and sellers interact to determine prices and production of goods and services Centrally planned economy: the government determines how to allocate resources Mixed economy: governments intervene in the market

When does the government intervene? In mixed market economies, governments intervene to: Eliminate unfair advantages held by single buyers or sellers Provide social services (national defense, medical care, education) Provide safety nets for elderly, disaster victims, etc. Manage the commons Reduce pollution and other threats to health and quality of life

What does the economy rely on the environment for? Economies receive inputs (resources) Process them Discharge outputs (waste) Traditional economics ignores the environment But still drives most policy decisions

What is the Economic view of the Environment? Human economies are subsets of the environment and depend crucially on it for goods and services

Environmental systems support economies Economic activity uses natural resources (sun’s energy, water, trees, rocks, fossil fuels) as “goods” Ecosystem services: essential services support the life that makes economic activities possible: (for example) * Soil formation * Pollination * Water purification * Nutrient cycling * Climate regulation * Waste recycling

How do Economic Activities Affect the Environment? Resource depletion and generating pollution reduces the functioning of ecological systems Degradation of ecosystem services disrupts economies Pollution depresses economic opportunities Ecological degradation hurts poor people the most Restoring ecosystem services is a prime way to alleviate poverty 15 of 24 global ecosystem services are being degraded or used unsustainably

Father of Classic Economics Adam Smith believed that self-interested behavior could benefit society If laws were followed and markets were competitive Classical economics: when people pursue economic self-interest in a competitive marketplace … The market is guided by an “invisible hand” and … Society benefits This idea is a pillar of free-market thought today

What is Neoclassic Economics? Neoclassical economics examines the psychological factors that underlie consumer choices Market prices reflect consumer preference Supply vs. demand Conflict between buyers and sellers leads to …. Production of the “right” quantities of a product

Neoclassic Economic Assumptions: 1. Resources are finite 2. Events in the future are not as important as today 3. Only the buyer and seller experience costs and benefits associated with exchanging goods or services 4. Economic Growth is good to keep employment high and maintain social order

What is our economy like today? Modern global economic growth is unprecedented Americans are in a frenzy of consumption Economic growth comes from: Increased inputs (labor, natural resources) Economic development: improved efficiency of production (technology, ideas, equipment) Uncontrolled economic growth is unsustainable Technology can push back limits, but not forever Resources are finite or have limited rates of extraction

Is the growth paradigm good for us? The dramatic rise in per-person consumption has severe environmental consequences

What is Ecologic Economics? Ecological economics: civilizations cannot overcome environmental limitations Uses principles of ecology and systems science Natural systems are models for sustainability Calls for revolution in thinking Ecological economists advocate steady-state economies: Economies that mirror natural ecological systems They don’t grow nor shrink but stay stable Quality of life increases through technological and behavioral changes 14

Why is it important to value ecosystem services? The market ignores/undervalues ecosystem services Nonmarket values: values (e.g., ecological, cultural, spiritual) not included in the price of a good or service Hard to quantify, since there is no traditional measure of economic worth Natural cycles are vital to our existence but markets impose no penalties when we disturb them

How do we quantify an ecosystem’s value? Surveys determine how much people are willing to pay to protect or restore a resource Measure the money, time, or effort expended to travel to parks for recreation Compare housing prices in different areas to infer the dollar value of landscapes, views, and peace and quiet Measure the cost to restore natural systems, replace systems with technology, or reduce harm from pollution

What is the Global Value of Ecosystem Services? The global economic value of 17 ecosystem services equals $46 trillion More than the GDP of all nations combined GDP=Gross Domestic Product Protecting land gives 100 times more value than converting it to agriculture, logging, or fish farming

What are businesses doing to respond to environmental concerns? Industries, businesses, and corporations make money by “greening” their operations Recycling, cutting energy use, etc., reduces costs, and increases profits Greenwashing: consumers are misled into thinking companies are acting more sustainably than they are Example: “Pure” bottled water may not be safer or better People must support sustainable economics 18

When can markets fail? Market failure occurs when markets ignore: The environment’s positive impacts on economies (ecosystem services) The negative effects of activities on the environment or people (external costs) Government intervention counters market failure through: Laws and regulations Taxing harmful activities Designing economic incentives to promote fairness, conservation, and sustainability