Introduction to

Environmental
Economics
Ref: Ch. 1
Hussen, Ahmed (2019). Principles of Environmental Economics and
Sustainability.
Environmental Economics vs
Resource Economics

2
Environmental Economics vs
Resource Economics

3
Environmental Economics

4
Environmental Economics

5
 The Role of Economics in
Environmental
Management

Ref. Ch. 1
Callan and Thomas (2013). Environmental economics:
applications, policy, and theory

© 2007 Thomson Learning/South-Western Callan and Thomas, Environmental Economics and Management, 4e.
 Economics and the Environment

 Economic theory explains what we observe in

reality, including environmental problems
 Recognize the link between economic activity
and the environment using models
 Circular Flow Model
 Materials Balance Model

7
Circular Flow Model

8
 Circular Flow Model

 Shows the real and monetary flows of

economic activity through the output and
factor markets:
 Basis for computing GDP by 3 approaches:
output, income, and expenditure.
 Markets and prices: for allocating efficiently
 But does not explicitly show the linkage
between economic activity and the
environment
 Do market and prices exist?
9
 Materials Balance Model
 Places the circular flow within a larger schematic to show
links between economic activity and the natural
environment

10
Materials Balance Model
The Interdependence of Economic Activity and Nature

Source: Adapted from Kneese, Ayres, and D'Arge (1970). 11

 Material Balance Model

 Residuals arise from both consumption and

production activity.
 This set of flows is the chief concern of
environmental economics.

12
 Materials Balance Model

 Flow of resources from the environment to the economy

 The focus of Natural Resource Economics

 Flow of residuals from the economy to the environment

 The focus of Environmental Economics

13
Material Balance Model

14
Source: Tietenberg, p. 18
 Links between economy and
environment
 Supplier of resource inputs

 Supplier of environmental or amenity goods

 Waste sink capacity: absorb waste

Environment as an asset: Green accounting

 Economics and the
Environment
 Flow of Residuals
 Residual from production and consumption
 Residuals – by-products released back into the

environment
 Assimilative Capacity – environmental ability to

absorb residuals
 Recovery Recycling and Reuse – methods to delay

the flow of residuals

17
 Science and the Materials Balance
Model
 The flow of resources and residuals are
balanced according to laws of science
 First Law of Thermodynamics
 Matter and energy can neither be created nor
destroyed
 Second Law of Thermodynamics
 Nature’s capacity to convert matter and energy
is not without bound

18
 First law of
thermodynamics
According to the first law of thermodynamics, matter and energy
can neither be created nor destroyed. Applying this fundamental
law to the materials balance model means that in the long run,
the flow of materials and energy drawn from nature into
consumption and production must equal the flow of residuals
that run from these activities back into the environment. Put
another way, when raw materials are used in economic activity,
they are converted into other forms of matter and energy, but
nothing is lost in the process. Over time, all these materials
become residuals that are returned to nature. Some arise in the
short run, such as waste materials created during production.
Other resources are first transformed into commodities and do
not enter the residual flow until the goods are used up. At this
point, the residuals can take various forms, such as carbon
monoxide emissions from gasoline combustion or trash disposed 19
in a municipal landfill. Even if recovery does take place, the
 Second law of
thermodynamics
There is one further point. Because matter
and energy cannot be destroyed, it may seem
as though the materials flow can go on
forever. But the second law of
thermodynamics states that nature’s capacity
to convert matter and energy is not unlimited.
During energy conversion, some of the energy
becomes unusable. It still exists, but it is no
longer available to use in another process.
Consequently, the fundamental process on
which economic activity depends is finite. 20
 First and second laws of
thermodynamics
These scientific laws that support the materials
balance model communicate important, practical
information to society. First, we must recognize that
every resource drawn into economic activity ends up
as a residual, which has the potential to damage the
environment. The process can be delayed through
recovery but not stopped. Second, nature’s ability to
convert resources to other forms of matter and
energy is limited. Taken together, these assertions
provide a comprehensive perspective of
environmental problems and the important
connections between economic activity and nature. It
is the existence of these connections that motivates 21
 Causes of Environmental Damage
 Natural Pollutants arise from non-artificial
processes in nature
 e.g., volcanic eruptions, pollen
 Anthropogenic Pollutants are human induced
and include all residuals associated with
consumption and production
 e.g.,chemical wastes, gases from combustion
 Of greater concern to environmental economists

 Which type: natural or anthropogenic

 Covid-19?
 Sea intrusion affecting Indus delta? 22
 Anthropogenic and
Anthropocentric
 Anthropogenic Pollutants are human induced and include all
residuals associated with consumption and production
 Generated by human
 Anthropocentric: Anthropocentrism, philosophical viewpoint
arguing that human beings are the central or most significant
entities in the world. Anthropocentrism regards humans as
separate from and superior to nature and holds that human
life has intrinsic value while other entities (including animals,
plants, mineral resources, and so on) are resources that may
justifiably be exploited for the benefit of humankind.
(https://www.britannica.com/topic/anthropocentrism)
23
 Sources of Pollution

 Sources grouped by mobility

 Stationary Sources: fixed-site
 Mobile Source: any nonstationary source
 Sources grouped by identifiability
 Point source: single identifiable source
 Nonpoint Source: a source that cannot be
accurately identified, degrading in a diffuse way

24
25
 Scope of Environmental Damage
 Local Pollution
 Damage not far from the source
 e.g., urban smog

 Regional Pollution
 Damage extends well beyond the source
 e.g., acidic deposition

 Global Pollution
 Involving widespread environmental effects
with global implications
 e.g., global warming, ozone depletion

26
 Environmental Objectives

 Environmental Quality – reduction in

anthropogenic contamination to socially
acceptable levels
 Sustainable Development – management of
resources to ensure long-term quality and
abundance
 Biodiversity – assuring the variety of distinct
species, genetic variability, and variety of
inhabitable ecosystems
27
 Environmental Policy Planning
 Environmental planning involves many
segments of society
 In each country, the Environmental Protection
Agency (EPA) acts as liaison to numerous
constituents within each sector
 http://environment.gov.pk/

 http://sacep.org/member-countries/pakistan

28
 Risk Analysis
Chief Tool Guiding Policy Planning

 Two decision-making procedures

 Risk Assessment – qualitative and quantitative
evaluation of risk posed by an environmental
hazard
 Risk Management – decision process of choosing
from alternative responses to environmental risk

See next slide for criteria of risk management

29
 Risk Management
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

30
 Government Policy Approach

 Command-and-Control Approach – regulates

polluters through the use of rules
 Market Approach – incentive-based policy that
encourages conservation or pollution reduction
 Can follow the “polluter-pays principle” whereby the
polluter pays for the damage caused

31
 Setting the Time Horizon

 Management Strategies – a short-term strategy

intended to manage an existing problem
 An ameliorative intent
 Pollution prevention (P2) – a long-term strategy
aimed at reducing the amount of toxicity of
residuals released to nature
 A preventive intent

32
Ecosystem Services
Ecosystem Services

https://www.millenniumassessment.org/en/Framework.html
https://www.millenniumassessment.org/documents/document.300.aspx.pdf
  Examples:

http://www.fao.org/ecosystem-services-biodiver
sity/background/provisioning-services/en/

https://www.millenniumassessment.org/docume
nts/document.300.aspx.pdf

35
  http://www.pnas.org/content/106/18/7357.full
 https://www.thenews.com.pk/print/604909-400m-gallo
ns-of-untreated-sewage-being-dumped-into-sea
 https://www.thenews.com.pk/print/912296-unmanage
d-solid-waste-affecting-quality-of-urban-life-harming-t
he-poor-study
 https://tribune.com.pk/story/816992/karachis-mangro
ves-defence-against-storms-and-tsunamis-threatene
d/

36
  https://blogs.worldbank.org/endpovertyinsouthasia/bu
ilding-resilience-against-floods-pakistans-largest-city

 http://www.undp.org/content/undp/en/home/sustainab
le-development-goals.html

 https://data.worldbank.org/indicator

 http://sacep.org/regional-overview

37
  Economics—misguided market forces—is at
the core of most environmental problems.

 Economics—guiding market forces in the

right direction—is also fundamental to the
solution.

38