What Is Environmental Economics

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What Is Environmental Economics?

Economics is the study of how and why individuals and groups make de- cisions about the use and
distribution of valuable human and nonhuman resources. It provides a set of analyti- cal tools that
can be used to study any situation in which the scarcity of means requires the balancing of
competing objectives.

Environmental economics is the application of the principles of econom- ics to the study of how
environmental resources are managed. Environmental focuses primarily on how and why people
make decisions that have consequences for the natural environment. It is concerned also with how
economic institutions and policies can be changed to bring these environ- mental impacts more into
balance with human desires and the needs of the ecosystem itself.

Economic Analysis
Environmental economics is an analytical subject. expressing connections between important
factors that are involved in the envi- ronmental quality issues we explore. To do this, economists
use what are called analytical models. A model is a simplified representation of reality, in the sense
that it isolates and focuses on the most important elements of a situation and neglects the others

It is important to distinguish between positive economics and normative economics. Positive


economics is the study of what is; normative econom- ics is the study of what ought to be.

The economic approach to environmental issues is to be contrasted with what might be called the
moral approach. the environmental movement has led a great many people to focus on questions of
environmental eth- ics, exploring the moral dimensions of human impacts on the natural
environment.

the biggest problem with basing our approach to pollution control strictly on the moral argument is
the basic assumption that people pollute because they are somehow morally underdeveloped.

The Importance of Incentives


People pollute because it is the cheapest way they have of solving a certain, very practical problem.
People make these decisions on pro- duction, consumption, and disposal within a certain set of
economic and social institutions2; these institutions structure the incentives that lead people to
make decisions in one direction rather than another

One simplistic incentive-type is that pol- lution is a result of the profit motive. the profits that
entrepreneurs try to maximize are strictly monetary profits. entrepreneurs give no thought to the
environmental impacts of their actions because it “does not pay.”

But the most persuasive argument against the view that the search for profits causes pollution
comes from looking at the history of Eastern Europe and the former USSR. With the collapse of
these ex-Communist regimes, we became aware of the enormous environmental destruction that
occurred in some of these regions—heavily pol- luted air and water resources in many areas, which
have a major impact on human health and ecological systems.
Incentives: A Household Example
An incentive is something that attracts or repels people and leads them to mod- ify their behavior in
some way. An economic incentive is something in the eco- nomic world that leads people to channel
their efforts at economic production and consumption in certain directions. nonmaterial incentives
that lead people to modify their economic behavior; for example, self-esteem, the desire to preserve
a beautiful visual environment, or the desire to set a good example for others.

The response in introduce a system that gives people an incentive to search for ways to reduce the
amount of solid waste they pro- duce. This was done by charging people for each bag of trash they
put on the curb- reduce the number of bags. They can do this by recycling, by switching to products
that have less waste, by putting food scraps in a compost pile, and so on. The technical name for
this approach is unit pricing.

Incentives and Global Warming


Municipal solid waste and other trash have traditionally been local problems, not all environmental
problems are local: traditional air pollution is a regional or national issue, and sometimes it is an
international problem because it crosses country borders. And some environmental problems are
truly global in that they have causes and im- pacts that involve everyone around the world

the global issue that is thrusting itself into the world’s conscious- ness is the greenhouse effect, the
buildup of heat-trapping gases in the earth’s atmosphere that is producing long-run changes in
global climate. identify the most effective policy ap- proaches to combat the emissions of substances
causing the greenhouse effect, especially carbon dioxide (CO2)

One way to approach this is with conventional “command-and-control” policies. There are two
basic types of incentive policies: emission charges or taxes, analogous to the trash-collection fees
discussed in the previous section; and market-based trading programs.

The Design of Environmental Policy


Environmental economics has a major role to play in the design of public policies for
environmental quality improvement.

The problem of designing efficient environmental policies is often not given the emphasis it
deserves.

By “get- ting it right,” he means having programs that get the maximum improvement in
environmental quality for the resources spent. Everybody has an interest in this: environmentalists,
for obvious reasons; public regulators, because they are tapping a limited supply of taxpayer
resources and consumer tolerance; and the regulated polluters themselves, because matters of
efficiency are critical to business success.

An important problem in en- vironmental policy is that of perverse incentives—that is, incentives
created by a policy that actually work against the overall objectives of that policy
Issues related to the design of environmental policy are a major part of environmental economics.

Macroeconomic Questions: Environment and Growth


When we study topics such as changes in GDP, rates of inflation, and the unemployment rate, we
are focusing on the performance of the country as a whole; that is to say, we are do- ing
macroeconomics.

From a political standpoint, perhaps the most sensitive question is whether stricter environmental
policies will tend to retard economic growth. environmental protection costs have been a significant
economic burden.

Another macroeconomic question concerns the impacts of economic growth on environmental


quality.

“Some pollution increases during the early stages of a country’s development and then begins to
diminish as countries gain adequate resources to tackle pollution problems.” This happens because
at low incomes, people tend to value development over environmental quality, but as they achieve
greater wealth, they are willing to devote greater resources to environmental quality
improvements.

Benefit–Cost Analysis
Effective decision making requires that there be adequate information about the consequences of
the decisions. This is as important in the public sector, where the issue is effective public policy, as
it is in the private sector, where the main concern is with the bottom line of the profit-and-loss
statement. The primary type of public-sector analysis in environmental policy questions is benefit–
cost analysis. Or a proposal to build a solid-waste incinerator would compare the costs of building
and operating the incinerator, including the costs of disposing of the remaining ash and the costs of
possible airborne emissions, with benefits, such as reducing the use of landfills for the solid waste

Valuing the Environment


To complete a benefit–cost analysis of an environmental program or regula- tion successfully, it’s
necessary to estimate both the benefits and the costs of the actions. One factor that complicates this
type of analysis is that the benefits suppose we have a program of air-pollution reduction that will,
among other things, lower the risk that people in a certain region will have of contracting chronic
bronchitis. Environmental econo- mists have developed a series of nonmarket valuation
techniques that are used to estimate these types of environmental outcomes.

Environment and Development


Most developing countries have environmental issues, and many have put into place laws and
regulations to deal with cases of pollution and resource degradation. Although many have
embraced command-and-control policy approaches, there has also been heavy reliance on
voluntary pollution- control plans.
International Issues
Many environmental problems are local or regional, in the sense that the causal factors and
resulting damages lie within the same country. But many others are international in scope. Some
are international simply because there is a national border between the pollution source and the
resulting impacts. Airbone emissions, water pollution of a river that traverses several countries.
There is another class of problems that are global in nature because they impact the global
environment. One of these is the destruction of the earth’s protective layer of stratospheric ozone
by chemicals devised by humans for a number of industrial purposes. Another is the problem of
global warming, the possible rise in surface temperatures of the earth stemming from the accumu-
lation of carbon dioxide (CO2) in the atmosphere.

How this plays out will depend on the negotiating skills of the parties, and on the incentives that
the countries have to take part in an effective agreement.

Globalization and the Environment


Globalization is a term used to refer to the perceived changes that are taking place in the world
economy, including the rapid growth of trade among nations, privatization of economic
institutions, massive international flows of financial capital, and growth in the numbers and sizes
of multinational firms.

Globalization has become a politically charged concept; it is sometimes hard to cut through the
rhetoric and identify the substantive issues that are involved. One part of globalization is the
substantial increase that has occurred in the volume of trade among nations.

Another aspect of globalization is the growth of multinational firms and the relocation of industrial
firms from developed to developing countries. The fear is that some developing countries could
become pollution havens, places to which firms move in order to have to spend less on pollution
control measures

Economics and Politics


Finally, we need to discuss briefly the question of how to achieve effective en- vironmental policy in
a highly political policy environment. Affects environment and people. This means that
environmental policy decisions come out of the political process, a process where, at least in
democratic systems, people and groups come together and contend for influence and control,
where interests collide, coalitions shift, and biases intrude.

we know that the real world is one of compromise and power, the best way for scientists and
economists to serve that process is to produce studies that are as clear and as objective as possible.

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