Ch. 26 Economics and the Environment

EconomySystem of production, distribution and consumption of goods and services that satisfies people’s wants or needs

Economic Resources

Natural resources

Human resourcesFinancial resources

Manufactured resources

Economic Systems

Command and MarketCommand – Government makes all economic decisions

Two types of Market systems

Pure Free Market – All economic decisions are based solely on competitive interactions of demand, supply and price. All other factors are constant.

Capitalist Market – Reality based, designed to subvert many of the theoretical conditions of the Pure Free Market

Economists and the Environmental Viewpoint

Conventional Economists -

• Environment is a subsystem of the economy

• Natural resources are important but not vital – can find substitutes

• Because of human ingenuity – depletion and degradation of natural resources will not hinder economic growth

Capitalist Market Economic System

Flow of money

Flow of money

Households

Money flows fromhouseholds to businesses

to pay for products

Products flow frombusinesses to households

Flow of products

Flow of factors of production

Labor and other factors ofproduction flow from

households to businesses

Money flows from businessesto households to pay for

labor and other production

Businesses

Figure 26-6Page 694

Ecological Economist -

• Economy is a subsystem of the environment

• Natural resources are vital

• Conventional economic growth is unsustainable because it depletes or degrades the environment on which it depends

• Integrates ecology with economy

sunEARTH

NaturalCapital

Air; water, land, soil, biodiversity,minerals, raw materials, energy resources, and dilution, degradation,and recyclingservices

EconomicSystems

Production

Consumption

Heat

Depletion ofnonrenewableresources

Degradation and depletion of renewable resources used faster than replenished

Pollution and waste from overloading nature’s waste disposal and recycling systems

Recycling and reuse

Figure 26-7Page 694

Eco - economy• Uses renewable solar energy

• Mimics nutrient cycles by replenishing nutrients, disposes of waste, pollution prevention based on reuse and recycling

• Doesn’t deplete the earths net primary productivity

• Does not exceed the sustainable yields of ecosystems that support all economies

• Preserves biodiversity

• Stabilizes population growth to be “in-balance” with resource consumption

What will it take?

• Use eco-labeling to identify environmentally friendly products and services

• Shift taxes to pollution and waste from income and wealth

• Shift subsidies – reward sustainability, discourage harmful forms of growth

• Pricing that includes harmful environmental effects

• Use ecological indicators to monitor economic and ecological health

Characteristic

Production emphasis

Natural resources

Resource productivity

Resource throughput

Resource typeemphasized

Resource fate

Pollution control

Guiding principles

UnsustainableEconomic Growth

Quantity

Not very important

Inefficient (high waste)

High

Nonrenewable

Matter discarded

Cleanup(output reduction)

Risk–benefitanalysis

EnvironmentallySustainableEconomic

Development

Quality

Very important

Efficient(low waste)

Low

Renewable

Matter recycled,reused, or composted

Prevention(input reduction)

Prevention andprecaution Figure 26-8

Page 695

Reasons GNI(P) and GDP are poor measures of economic and environmental health and human well-being

• They tell us nothing about income distribution and economic justice

• They hide enormous waste of natural and human resources because they measure only money spent, not value received

• They do not include many beneficial transactions that meet basic needs in which no money changes hands

• They do not include the depletion and degradation of natural resources or assets on which all economies depend

• They hide the harmful environmental and social effects of producing goods and services

Costs and Pricing

Internal Costs -

All of the costs associated with manufacturing, marketing, maintaining, delivery, and sales of goods or services.

External Costs -

Harmful effects of producing the goods and services, such as depletion of non-renewable resources, production of solid and hazardous waste, air and water pollution, land disruption, reduction of biodiversity, and contributions to climate change.

Full-cost Pricing

Results of internalizing external costs

Currently dealing with harmful external costs by:

• Levy taxes

• Pass laws and develop regulations

• Provide subsidies

• Using strategies that encourage or force producers to include most, if not all, of the costs in their market price

Results of full-cost pricing

• Prevention would be more profitable than clean-up

• Waste reduction, recycling and reuse would be more profitable than dealing with the waste after the fact.

Bad news:• Market prices for most things would rise

Government would have to reduce taxes for consumers, and stop subsidies for producers to off-set rise in prices

Good news:

• Overall price will be the same.

• More information on products for consideration by consumers

• Encourages more resource-efficient and less-polluting methods of production

• More “Green” products

What’s Holding us back?

• Many producers of wasteful or harmful products would price themselves out of business

• Producers would have to give up current subsidies that support the ability to hide harmful external costs

• Prices of harmful but desirable goods and services would rise

• Hard to put a price tag on many harmful environmental and health costs.

• Many are unaware they are paying external costs

Economics of Pollution

Cost of removing pollutants goes up as we try to remove all pollutants.

At some point the cost of pollution control is greater than the harmful costs of pollution to society

Very difficult to determine the actual harmful costs of pollution

Assigning monetary values to resources and pollution costs

Mitigation costs- Costs of offsetting the damages

Willingness to pay - Survey public as to how much they would pay to avoid the problem

Maintenance and protection costs -

Cost of protecting the quality of various natural resources

Costs Associated with Pollution

Direct costs

Indirect costs

Associated with prevention or clean-up.

Incurred by governments in regulating pollution and damages to private revenues affected by pollution.

Repercussion costsCosts to polluting company because of image damage.

Factors affecting how a natural resource is used or managed

Discount rates

Time preferences

Opportunity costs

Gov’t subsidies and tax breaks

Taxes

Ethics

Benefit-Cost AnalysisCompares the estimated short-term and long-term benefits and costs for various courses of action

Issues with the benefit-cost analysis

• Who benefits and who is harmed?

• Many things we value cannot be reduced to monetary value.

• Can be manipulated to desired outcome for either side of the issue.

Using Regulation and Market Forces to Improve Environmental Quality.

Regulations - set pollution standards, regulate harmful activities, ban release of toxic materials, protect finite resources

Need to be “innovation-friendly”

• Emphasize pollution control and waste reduction• Requires affected parties to participate in the

developing regulations and timetables• Sets goals, but allows freedom in meeting those goals• Sets strict enough standards to promote real

innovation• Establishes well-defined deadlines• Uses market incentives to encourage compliance and

innovation

Economic Incentives - rewards

What we reward, we tend to get more of, and what we discourage we tend to get less of.

Phase in government subsidies and tax breaks that encourage environmentally beneficial behavior and phase out those that encourage harmful behaviors

Eco-labeling – encourages development of green products and services and helps consumers make decisions.

Economic disincentives - punishments

Green taxes or effluent fees – used as a tax shift, not an additional burden.

User fees – for removal of materials from, or use of public lands

Posting pollution-prevention bonds for new major projects

Tradable Pollution and Resource Rights

Government sets total limit on emissions or resource use

• Issue permits or auction off to manufacturers or users

Permit holders can:

• Use as credit against future expansion• Use it in another part of their operation• Sell it to other companies

Table 26-1 Economic Solutions to Pollution and Resource Use Pg. 706

Resistance to Change Management

Phase 1

Pollution controland confrontation

Acceptance withoutinnovation

Phase 2

Innovation-Directed Management

Phase 3

Total qualitymanagement

Pollution preventionand increasedresourceproductivity

Phase 4

Life cyclemanagement

Productstewardship and selling servicesinstead ofthings

Phase 5

Processdesignmanagement

Cleantechnology

Phase 6

Total life qualitymanagement

Ecoindustrialwebs, environmentallysustainableeconomiesand societies

Figure 26-12Page 706

Reducing Poverty to Improve Environmental Quality and Well-being

• Causes premature deaths and preventable health problems

• Increases birthrates• Pushes the poor to use resources unsustainably

to survive

Poverty:

Richest fifth85%

Poorest fifth1.3%

Figure 26-13Page 708

How can we reduce poverty?

Developing countries governments policy changes:

• Shift more of the national budget to help rural and urban poor work their way out of poverty

• Give villages, villagers, and urban poor title to common land and to the crops and trees they plant on them.

Developed Countries could:

• Forgive at least 60% of the debt form developing countries

• Increase nonmilitary government and private aid directly to the poor from developing countries, to make them more self-reliant.

• Encourage banks and other organizations to make small loans to those poor wanting to increase their income

• Require international lending agencies to use standard environmental and social impact analysis to evaluate and proposed development project before it is funded

• Carefully monitor all projects, and halt funding if environmental safeguards are not followed

• Help developing countries increase resource productivity

• Establish policies that stabilize populations of all countries

Figure 26-14Page 710

Economics EnvironmentallySustainable

Economy(Eco-Economy)

Resource Useand Pollution

Ecology andPopulation

Reward (subsidize) earth-sustaining behavior

Penalize (tax and do notsubsidize) earth-degrading behavior

Tax pollution and wasteinstead of wages andprofits

Use full-cost pricing

Sell more services insteadof more things

Do not deplete naturalcapital

Live off income fromnatural capital

Reduce poverty

Reduce resource useand waste by refusing,reducing, reusing, andrecycling

Improve energyefficiency

Rely more onrenewable solar andgeothermal energy

Shift from a carbonbased (fossil fuel)economy to asolar–hydrogen basedeconomy

Mimic nature

Preserve biodiversity

Repair ecologicaldamage

Stabilize population by reducing fertility

Figure 26-15Page 711

Sunset Business Eco-Friendly Business

Coal mining

Oil production

Nuclear power

Energy-wasting motorvehicles

Mining

Throwaway products

Clearcut logging

Paper production

Conventional pesticideproduction

Unsustainable farming

Water well drilling

Conventional economics

Conventional engineering,design, and architecture

Business travel

Solar cell production

Hydrogen production

Fuel-cell production

Wind turbine production

Wind farm construction

Geothermal energyproduction

Production of energy-efficient fuel-cell cars,trucks, and buses

Conventional and electricbicycle production

Light-rail construction

Sustainable agriculture

Integrated pestManagement

Agriculture

Recycling, reuse, andcomposting

Soil conservation

Water conservation

Pollution prevention

Ecoindustrial design

Biodiversitymanagement andprotection

Ecological restoration

Disease prevention

Environmentalengineering, design,and architecture

Ecocity urban design

Environmental science

Environmentaleducation

Ecological economics

Environmentalaccounting

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