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Venkatachalam 2007

Venkatachalam 2007

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Published by nachodrumon
This paper focuses in the analysis of differences and similarities among Ecological Economics and Environmental Economics.
This paper focuses in the analysis of differences and similarities among Ecological Economics and Environmental Economics.

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Published by: nachodrumon on Sep 02, 2009
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Environmental economics and ecological economics: Wherethey can converge?
L. Venkatachalam
Centre for Economic Studies and Policy (CESP), Institute for Social and Economic Change, Nagarbhavi, Bangalore-560 072, India
 Article history:
Received 7 March 2005Received in revised form5 May 2006Accepted 26 May 2006Available online 7 July 2006Environmental economics and ecological economics share the common objective of understanding the human
environment interaction in order to redirect theeconomies towards sustainability. In pursuing this objective, these two perspectives utilisedifferent types of analytical framework and are opposed to each other on many of thefundamental theoretical and methodological issues. While the environmental economicshasprogressedwithinanarrowly,butsharply,focusedneoclassicalanalyticalapproach,theecologicaleconomicshasexpandedbyadopting a
diversified approach
,whichledtowidenthegapbetweenthetwo.Thisarticlemakesanattempttohighlightthedivergence betweenthese two perspectives on different issues and identifies certain research avenues thatwould potentially bring convergence between these two perspectives.© 2006 Elsevier B.V. All rights reserved.
Environmental economicsEcological economicsSustainabilityEconomic valuationBehavioral issues
1. Introduction
The environmental economics has gradually become a full-fledgedsub-disciplineofeconomicsafter Pigou(1920)whodealtextensivelywiththeanalysisof 
withintheneoclassical framework to correct the
market failure
(Verhoef,1999). This Pigouvian neoclassical tradition still continues todominate the analytical foundation of all stretches of environ-mental economics (Cropper and Oates, 1992) such as, Coasiansolution (Coase, 1960);
second-best solution
in the area of pollution control (Baumol and Oates, 1988); non-market valua-tion within micro cost-benefit analysis (Smith, 1993); sustain-abledevelopment(PearceandTurner,1990)andenvironmentalaccounting (Ahmed et al., 1989) within macroeconomics of environment (Munasinghe, 2002), making this subject as an
economically holistic
as well as a powerful branch of modernnormative welfare economics. Though the Pigouvian neoclas-sical tradition embracing methodological individualism, un-boundedrationalityassumptionandefficiencyasacriterionfor resourceallocation had strengthenedthe analytical foundationof modern environmental economics, this sub-discipline hasits own weakness as well. While its strength lies in itsanalytical rigour and its ability to provide concrete, first-hand solutions to some of the major environmental prob-lems, its weakness is that it adopts a narrow approach whichhas prevented us from thinking about the
larger features
(Lazear, 2000) of the environmental and ecological issues. Onthe other hand, the ecological economics (seeCostanza et al.,1997a) emerged in the late 1980s to
this weaknessby making effort to incorporate those
larger features
in theanalysis of human
environment interaction. The
analytical approaches used in the ecologicaleconomics (seevan den Bergh, 2001; Turner et al., 1997; SahuandNayak,1994)inthepasthaveenrichedourunderstanding of the importance of ecological dynamisms in the economicprocesses. But at the same time, the progress in ecological
E C O L O G I C A L E C O N O M I C S 6 1 ( 2 0 0 7 ) 5 5 0
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Tel.: +91 80 23215468, 23215519; fax: +91 80 2321 7008.
E-mail address:
venkat@isec.ac.in.0921-8009/$ - see front matter © 2006 Elsevier B.V. All rights reserved.doi:10.1016/j.ecolecon.2006.05.012
available at www.sciencedirect.comwww.elsevier.com/locate/ecolecon
economics during the past one and half decades leads us toask the following questions: Have the ecological economistssucceeded in their objective of 
the weakness of environmental economists, despite heavy opportunity costincurred by them? Have the environmental economistsresponded adequately to the challenges provided by theecological economists? Has the gap between these twoperspectives converged? What common lessons that theenvironmental and ecological economists can learn fromthe recent developments in mainstream economics, espe-cially from the behavioral economics so as to narrow downthe gap? This present article makes an attempt to investigatethese questions rigorously.
1.1. On the theoretical and methodological approach
Attheoutset,theenvironmentaleconomicsandtheecologicaleconomics differ on the basic theoretical framework that theyutilise to analyse the underlying objective of understanding the human
environment dynamism. While theformer extends the basic premises of neoclassical economicsnamely, methodological individualism, rationality, margin-alism, efficiency criterion and general equilibrium models toanalyse the environmental issues, the latter adopts
approaches such as energy/entropy analysis and ecolog-ical modeling (seeProops and Safonov, 2004). More precisely,environmentaleconomicsassumesthatenvironmentalissuesform part of overall economic issues and therefore, theseissues could be well analyzed by extending the existing neoclassical economic tools and principles without altering the fundamental structure of them. At the micro level, for example,theenvironmentaleconomistsextendthe
models of neoclassical economics such as random utilitymodel (Domencich and McFadden, 1975) or household pro-duction function approach (Becker, 1965) to understand howboth marketed and environmental goods are being combinedby the individuals and the households to produce
welfare. Various standard non-market valuation techniquesare based on the
weak complementarity
principle suggestinthat the marginal utility derived from environmental goodsbecomes positive
only if 
marketed goods are combined withthe non-market environmental goods. The major task of anenvironmental economist here is to employ the standardutility models to analyse how the individuals combine themarket and non-market commodities to produce economicwelfare, and how this welfare changesin relation to change inthe combination of the goods. This implies that the existing neoclassical micro models are capable of dealing with anynumber of 
, including the environment sub-set. Atmacro level also, the macroeconomists take a similar kind of position. For example,Solow (1974)showed how environ-mentalscarcitycouldbeincorporatedwithintheneoclassicalgrowth models without disturbing the
of themodels. Similarly, the micro-based macro models developedbyHotelling (1931)andHartwick (1977)demonstrated how the
individual rationality
based models can be used tounderstand the long term relationship between the resourceusebehavior of the economicagents guidedbymarketforcesanditsimpacton thesustainability ofresource use.In recentyears, specific efforts were made to incorporate the environ-ment into the neoclassical IS-LM models at the theoreticallevel (e.g.Heyes, 2000) without altering the fundamentalstructure. All these suggest that the existing neoclassicaleconomics, in one way or other, could respond adequately tothe emerging concerns about the environmental issues asalong as the neoclassical tools and principles are understoodand used appropriately (seeSolow, 1997).Ecologicaleconomics,ontheotherhand,challengestheentire
postulation of neoclassical models in dealing withnatural resource and environmental scarcity, even though someof the ecological economists themselves are moving closer tousing the neoclassical models in their analyses (seeGowdy andErickson, 2004). The ecological economists treat the entireeconomic system as a dissipative structure or a sub-system of global ecosystem (seeGowdy and O'Hara, 1997; Sollner, 1997)which is more complex than understood by the environmentaleconomists.Itisarguedthatwithameagerlevelofunderstanding oftheenvironmentalsystem,theexistingneoclassicalmodelsarecapable of addressing only a very few environmental issues butare inadequate to incorporate variety of other issues. This isbecause, the neoclassical models: (a) ignore the natural limits togrowth; (b) neglect the important interdependency betweeneconomy and environment; and (c) downplay the role of time(Sollner,1997).Therefore,theecologicaleconomistsprescribenota single approach but a variety of them in order to
theneoclassicalmodelstoaccommodatethelargerecologicalissues.They rely mainly on the
methodological pluralism
(Norgaard,1985) in which important conceptual frameworks such asmacroeconomic scale, ecological footprint, long-term sustain-ability and ecological complexity are constantly used to analysethe environment
economy interaction. Some ecological econo-mists adopt alternative approaches such as institutional ap-proach to analyse this interaction (e.g.Soderbaum, 2000). Theinsistence on the multiplicity of approaches calls for shifting thefocus from the
abstract model building 
of the neoclassicaleconomics towards constructing plural models that wouldaccommodatethe
issues.Someoftheecologicaleconomistseven go to that extent to argue that the present
environmental economics approach needs to be replaced with a
that takes the integration of dis-ciplines a stage further, where not only does one transcend theboundaries of the discipline in seeking understanding, butactually generates new concepts and mental structures whichsubsumeandextendtheapproachesofevenaninterdisciplinaryapproach
(Proops, 1999:1232). The above discussion suggests that the theoretical andmethodological approaches used between the two perspec-tives have not yet converged adequately. There are obviousreasons for this. It should be noted that environmentaleconomists strongly believe in Adamsmith's
division of labour 
which helps them to gain
comparative advantage
in using the neoclassical economictools to environmental problems in a more rigorous way. Thespecialisation sometimes is expected to set the agenda for expertsin otherdisciplinesaswell. Forexample,environmen-tal economists argue that the environmental standard-setting by scientists and policy makers should be based purely on the
economic criterion
namely, the optimal level of pollutiondetermined by the marginal costs and marginal benefits of controlling pollution. This kind of strong view is supported by
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the ideological position that
as a powerful subjecthasnotonlyenricheditsownanalyticalrigourbutalsocreatedan
by way of explaining the subject matter of other social sciences through its own tools and principles (seeLazear, 2000). Though this
reflected in theenvironmental economics helped us to solve some of themajor environmental problems, the
of the
models used prevented us from understandinsome of the important environmental and ecological issuessuch as global warming, loss of biodiversity, etc. One needs toacceptthe fact that
in environmental econom-ics has gone
too far 
. In contrast, the ecological economicsadopts
too many approaches
such that in recent years someof the ecological economists themselves argue for 
the scope is to focus the attention on understand-ingthe
involvedinenvironmentaldecision-making of individuals. In recent years, behavioral and exper-imental economists demonstrate, using experiments, thathow the unbounded rationality assumption of neoclassicaleconomics would lead to non-Pareto optimal outcomesbecause of existence of boundedly rational behavior of theindividuals in real world (seeCamerer et al., 2004). Thebounded rationality framework has the potential to providenew insights into understanding the human
envi-ronment interaction. For example, the bounded rationalityschool argues that many of the individuals in reality tend toadopt a
or a
(Simon, 1986) objective,rather than the
objective as predicted by theneoclassical models. This implies that the interaction of theboundedlyrationalindividualswiththeenvironmentwouldbeentirely different from that of the one predicted by theneoclassical economics and therefore, just by understanding the real world behavior of the individuals itself the ecologicaleconomists could construct concrete alternative models for analyzing the human
environment relationship. While theenvironmental economists have already started adopting behavioral issues in their environmental analysis (e.g.Knetsch, 1997), the ecological economists may also adopt asimilar kind of approach so that a possible convergence in thetheoretical frameworks used could be realized.
1.2. On treatment of resources
Though the major objective is to understand the human
environment interaction, the two perspectives ap-proachthis interaction in twodifferentways. According to theenvironmental economics, an environmental resourcedeserves economic treatment only if it is
relatively scarce
andis capable of generating utilityto the individuals whereas,the ecological economics treats almost all the ecologicalresources as equally important in their analysis, irrespectiveof whether a resource is
scarce or not. Theutility-basedapproachintheenvironmentaleconomicsisthattheresourcesshouldbeprotectedforimprovingthewelfareof the individuals. This implies that the resource allocation toprotect those resources that generate
economic welfareshould be treated as a
wasteful allocation. On theotherhand,theecologicaleconomicsarguesthatindependentof the individual welfare, the environmental/ecologicalresources should be protected for their 
own sake
becausetheecologyisalsopartofthewholeecosystemanditdeservesequal right for its own survival (Daly and Townsend, 1993).With regard to human
environment interaction, this meansthatitismainlythehumaninterventionthatleadstoaltertheecosystem and therefore, reducing human intervention is thebest strategy for expanding the resource base. But this kind of argument provides
on howto protecttheseresourcessince protection of the resources warrants for a particular form of human intervention. It should be noted that humanbeings are protecting numerous environmental resourcesmainly because these resources generate
benefits tothem. Evidences show positive relationship between declinein human consumption and the extinction of the resourcebase and this suggests that resource management issue isintimately tied up with people's participation (seeLele, 1991).Moreover, protecting the resources through reduced humanintervention and expanding the resources through other means are two different issues that require different types of institutional arrangements and policy instruments. If ecolog-ical economics suggests that the government has to protectthe ecological resources, then it has to focus on the
govern-ment failure
arising from issues highlighted by the utility-basedpublicchoiceliterature (Olson, 1965)
such as, the rentseeking behavior of the policymakers, lobbying groups andtheir impact on the government policies, property rightsunderlying the common property resource management andfree-riding behavior of individuals involved in resourcemanagement, etc. The government failure may also arisefrom asymmetric information about the
opportunistic behav-ior 
oftheagentsinvolvedintheresourcemanagement,whichwill result in unexpectedly higher level of 
transactioncost (Williamson, 2000). Behavioral and experimental eco-nomics underscore that individuals use boundedly rationalmodels in certain circumstances and unboundedly rationalmodels in certain other circumstances (seeConlisk, 1996) andtherefore, unpredictable human behavior has some strong implications on the resource management and policy. Sup-pose the government's resource management policy is basedon the unbounded rationality assumption while the indivi-duals concerned utilise bounded rationality model and
, then the government's policy would become ineffectivein both the cases. For example, empirical work using behavioral game theory suggests that individuals adopt
reciprocal behavior in an interdependent strategicinteraction in which they receive kindness with morekindness and meanness with more meanness (Sobel, 2005).Suppose the
free riding 
behavior is a dominant strategy of few individuals in resource management, then the intrinsicreciprocal behavior implies that the other individuals will bewillingtosacrificetheirmaterialpay-offstopunishfree-ridersand this will result in bringing collective action among groupmembersleadingtoanoptimallevelofresourcemanagement.Since the government policy aims at changing the behavior of the individuals in relation to their resource use, any sugges-tion for government intervention in resource conservationrequires deeper understanding of the individuals' actualbehavior. Studying the behavioral issues related to environ-mental management is a rich, potential area for bothenvironmental and ecological economics to converge.
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