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Environment: is the totality of physical conditions in which human society lives, including the climate, soils, and plant and animal life. Environmental Management: refers to actions to protect and enhance the natural environment, including protecting the quality of air, water and soil, preserving natural environments and biodiversity, ensuring the sustainable use of renewable and non-renewable resources. Market Failure: occurs when the price mechanism takes account of private benefits and costs of production to the consumers and producers, but fails to take into account indirect costs such as damage to the environment. Tragedy of the Commons: refers to a situation where the failure of the market to assign costs to individuals leads to an overuse of resources such as the natural environment, which have no single owner. Free Rider: refers to groups or individuals who benefit from a good or service without contributing to the cost of supplying the good or service. As a consequence, the good or service is likely to be under-supplied in relation to the total demand. Public Sector Goods: are goods and services provided by the government such as train services and hospitals. The Kyoto Protocol: an agreement by 186 nations since 1997 designed to lower emissions of carbon dioxide and other greenhouse gases in order to combat global warming. Negative Externality: an unintended negative outcome of an economic activity whose value is not reflected in the operation of the price mechanism. Positive Externality: an unintended positive outcome of an economic activity whose value is not reflected in the operation of the price mechanism.
Ecologically sustainable development
Environmental economics p emphasises the need to achieve sustainable level of growth and to take into account of the effect that economic activity has on the environment Environmental economists: o If hidden costs of economic growth are ignores. Then fast growth p rapid depletion of resources, polluted atmosphere p decrease quality of life o Economic growth should be considered by taking longer term perspectives p all consequences of economic activity on standard of living of a nation. Governments should also focus on achieving level of growth that is consistent with preserving the environment in the long term Eco growth occurs when more goods and services are available for consumption and investment, measured by increase in GDP. Overuse/exploitation of resources in the present can deplete resources or permanently damage the environment, thus potentially reducing productivity and output in the future. This is seen from the diagram of the Production Possibility Curve.
water. soil etc used by humans for production and consumption. Key Principles of ESD: o Integrating economic and environmental gals in polices and activities o Ensuring that environmental assets are appropriately valued o Ensuring fairness in the shifting of costs and assets within and between generation o Managing environmental risks with caution o Taking into account the global effects of environmental issues Ecologically sustainable development has been a formal part of policy since 1989. The Price Mechanism y In a market economy. 2 . He benefits of satisfying material wants is undermined by damage to the natural environment or depletion of resources. There are three main flows between an economic system and the natural environment: o Natural Environment is a source of raw materials or inputs such as air. Some of this waste may cause pollution and degradation of the natural environment such as oil spills or dumping of toxic wastes. depleted natural environment p environment is unpleasant to living and health effects on humans. E. o To protect biological diversity and maintain essential ecological systems. Australia s National Strategy on Ecologically Sustainable Development was developed in 1992 (NSESD). producers will make them available as long as they receive a price at least covering its cost.e. Market Failure: Private Benefits and Social Costs y y y Businesses want economic growth because it increases sales/profits. Gov seeks growth because it provides higher SOL and reduces unemployment and increases government revenue. as well as recreational facility. When consumers demand goods. The concept of ESD gained prominence following the publication of the WCED in 1987. This involves the interplay of market forces.: current development and growth should not inhibit the ability of future generations to enjoy resources and the environment in the future. It implied that current rates of economic growth should not threaten the world s natural and cultural environments. decisions about the price and quantity of goods are determined by theprice mechanism.Environmental Economics Basil Razi y y y y y y y y Economic growth and environmental protection p give people the best quality of life.g. The findings of the commission defined ESD as development that meets the needs of the present without compromising the ability of future generations to meet their own needs . The view of the environment in an anthropocentric way has led to overexploitation of many resources. o The environment is a receptacle for (Non-) biodegradable waste from households and firms. Core objectives: o To enhance individual and community well being by following a path that ensures the welfare of future generations. o To provide equity between generations. Consumers want growth to increase incomes and improve their SOL by increasing number of wants satisfied. o The environment provides amenities. Ecologically Sustainable Development (ESD): involves conserving and enhancing the community s resources so that ecological processes and quality of life is maintained. I.
the cost of resources increases. as demonstrated in the normal demand and supply interaction (diagram 1) o When property rights can be clearly defined the market determines an e uilibrium price and quantity. Eg. when environmental resources become scarce. Externalities become a problem when they are unpriced. The mobility of a market to bring about optimal resource allocation is termed MARKET FAILURE. the reaction in water quality for recreational users of the river. the level of ¢ § ¤ ¥ ¨ ¦ ¨ 3 . the private cost of using a river to dispose waste would be the cost of the pipeline for the firm. but it may not be enough. goods and services markets are based upon users being prepared to pay a price and producers willing to supply at this price. In the case of most factors. Environmental resources are often difficult to allocate according to the usual behaviour of markets. since private property rights are difficult to establish. of resources consumed.g. Overfishing or foreign fishing vessels inside territorial waters. Loss if income from for fishermen using the river. This can be demonstrates in diagram 2. The problem with common property resources is that when their use is unregulated they tend to over e ploit relative to the efficient average rate TRAGEDY OF THE COMMONS o BUT. This demonstrates that when the social costs are taken into account.g.E y ir t E ¡¡ i s B il £ ¢ i y y y y y y y y The mechanism does not take into account the longe -te m e ect of economic activity This is because the producers enjoy a private benefit from the activity that may deplete resources but they do not directly face the social costs that their activity creates The market price does not reflect the social cost. eventually it will become more e pensive to supply them. This then results in a divergence between private and social costs o E. reducing the no. Environmental resources are often open access resources in that they can be used by anyone and nobody can be stopped from using them The common property nature of environmental resources makes it very difficult to control individual use of the resource or prevent outsiders from using a common property resource. This will induce development of alternative inputs to production. This is referred to as an e ternality. Markets are seen as the frame ork in which scarce resources are allocated among competing uses. The e ploitation of an environmental resource by one user directly was adversely affects the production on consumption possibilities of other users that resources. For market s to form. private property rights to a resource must be clearly defines. This will lead to higher prices. o E. The divergence of private and social costs leads an unregulated market system to over exploit the common property resource. if large amount of trees are cut down to be sold. The social costs include the private cost but also included the costs borne by all other users of the resources eg. Hence the PM may protect the environment.
World Development Indicators 2009 p Australia has 623 animals and plants as threatened with extinction. restricts availability of resources. thus reducing the level of exploitation of the resources. agricultural procurers reject reductions in water allocation o Industries will face higher costs p if firms have to comply with rigorous environmental standards. athirst of the global total. In the last 200 years 27 mammals have become extinct. such as mining in national parks o Controls over emissions of water products o Requiring new plantation in areas where logging has occurs o Actively protecting the natural environment from threats such as non-native plants and animals.g. y Australia protects about 10% of its total land area.Environmental Economics Basil Razi resource use will be lower than when only private costs are considered. Environmental standards p may make us less competitive as a place p o Australia may miss out on opportunity that would life economic growth and exports. Public and Private Goods y Publics goods are NON-EXCLUDABLE p once public goods are provided. national defence. the consumption of a public good by one person does not reduce the ability of others to also enjoy this public good. E. Australia has POOR record of preserving biodiversity despite being one of the six most biodiverse nations in the world. the good or service is likely to be under-supplied in relation to the total demanded. the producer cannot exclude consumers from enjoying the benefit of that good even if they are not prepared to pay. y Public goods are NON-RIVAL p consumption of the good by one individual consumer does not reduce the quantity of the good available for other consumers. o The diagram shows that without regulation the user will continue to the point where marginal private cost = marginal social benefit. E. It is far more appropriate that use be restricted to where marginal social cost = marginal social benefit. As a consequence. mining and construction p lobby governments 4 . Such changes are often unpopular. Most effected industries such as farming. E.g. y Preservation of the environmental may include measures such as: o Restrictions on development in environmentally sensitive area. Major Environmental Issues Preserving Natural Environments y Environmental damage affects human health p higher levels of air and water pollution.g. For this reason public goods tend to be provided by the government. y Public sector foods are goods and services provided by the government such as train services and hospitals. y FREE RIDERS: refers to the groups or individuals who benefit from good or service without contributing to the cost of supplying the good or service. y Governments face problems in preserving the natural environment: o Intervention by the government preduction in economic growth in the short term p cause higher prices or reduced supply. street lighting or a clean environment p even non-paying consumers cannot be excluded from the enjoying the benefits.
E. y NEGATIVE EXTERNALITIES: refer to the adverse spill-over effects on the environment from economic activity. Similarly emission of greenhouse gases p affects weather patterns globally. also harming the Australian tourist industry.Environmental Economics Basil Razi o Cost of repairing damage is borne by taxpayer s p rathe than those that have caused the damage. Externalities represent the costs and benefits that affect society as a whole. the effects could be pollution. greater demands are being placed on limited natural resources to satisfy the world s energy and food needs. costs which are borne by society. Externalities y The social and environmental costs associated with economic activity that are not reflected in the actual costs of production are referred to as externalities. y Depletion of ozone layer p relates to emission of CFCs p MONTREAL PROTOCOL signed in 1987 p phasing out the production of ozone depleting products by 2000. y Garnaut Climate Change Review. The environmental spillover effects of externalities are generally negative.8% by 2100. potholes in the road. y Within individual countries. repair fragile coastal ecosystems and fight the spread of Cane Toads. y Goods and services that have negative externalities are referred to as demerit goods 5 . consumption by 5. 2008/09 Budget p $2. Australian Government aims to reduce greenhouse gas emissions by 60% of their level in 2000 by 2050. o Increased incidence of heat related health conditions such as malaria. Eg: if a company decides to use road instead of rail.g. Climate Change y Several economists have linked rising emissions with increasing per capita incomes and growth in the world population over time. A key challenge is to balance the interests of high income (large greenhouse gas emissions per capita) and low income countries (lower but rapidly rising emissions per capita). They are passed onto society.4% and real wages by 7. outlined the consequences of climate change: o Reducing Australia s GDP by 2. etc. World Meteorological Organisation shows the hole in the ozone layer over Antarctica has shrunk by 15%. Controlling Pollution y Impact of pollution is often felt far away from the original source. It expires in 2012 and it is expected to be replaced by a new agreement in 2013.6 billion Caring for our Country p protect Great Barrier Reef.8% o Causing permanent damage to environmentally sensitive regions in Australia such as through the bleaching of coral in the Great Barrier Reef due to rising ocean temperatures and loss of up to 80% of Kakadu wetlands by the end of this century. Australia ratified the protocol in 2007. As standards of living improve. governments implement polices to control pollution (SEE NEXT SECTION). not dealt by people responsible for them. E. sulfur emissions from industrial regions in Europe and USA cause acid rain p damage rivers and lakes throughout Europe and North America. heat stroke and skin cancer o Increased frequency of drought in southern parts of Australia leading to a reduction in agricultural production y Kyoto Protocol in 2997 when 160 nations agreed that industrialised countries to reduce their average national emissions by approximately 5% below 1990 levels over the period of 2008-2012.g. but aren t accounted for by the price mechanism. it is estimated that by 2068 ozone levels will return to 1980 levels.
But it will also impose severe costs on firms and individuals p employment decreases (as those that are involved with the production of the good/service. (diagram 3) o The Diagram Shows that the value of the tax would be set to ensure that marginal social cost equals benefit 6 . Exploitation of these resources makes them non renewable. These play a crucial role in the development of Australia s economy. y Australia has the world s largest reserves of zinc. and coal. the imposition of a tax on the use of resources will increase the marginal private cost of using the resource. y Non-renewable resources: Non-renewable resources are natural ones that are in limited supply. lead. The tax would need to be set a t a value to match the marginal social cost and therefore bring about optimal resource allocation. This option presents problems. nickel and uranium and major deposits of gold. y For non-renewable. the optimal rate of use means that a threshold is reached where the resources are allowed to regenerate. This may include curbing. y For renewable resources. Eg: the same trucks provide jobs for small businesses and roadside diners. as they cannot be replaced in the short term. the OPTIMAL rate is a rate of decline acceptable to the present and future generation. The aim of sustainable resource management is that the present generation does not consume the stocks of renewable. Eg: Oil. coal. bauxite. over fishing must be prevented. The community might reject the notion that private ownership of and environmental resource is appropriate. Eg: over fishing a species. for they are often lost forever. OR p that new technologies are developed. y The impact of depletion is greatest on future generations. Metal exports surged from less than third to almost half of Australia s total export revenue. resources. gas. and doesn t deplete non-renewable. e.g. eventually. they will not regenerate. Goods and services with positive externalities are referred as merit goods The Depletion of Natural Resources y Renewable resources: These can naturally regenerate or replace themselves in a relatively short period of time. ASSIGNING PRIVATE PROPERTY RIGHTS: a solution to the over issue of environmental resources is to establish and enforce private property rights and let the forces of demand and supply bring about different levels of use. since 2002 it has been illegal to sell leaded petrol. not necessarily environmental. Governments only consider this option when the particular product is causing environmental or social damage or when a close substitute is available. the rate of consumption of these resources.g. 2007 p incandescent light bulbs replaces by fluorescent light bulbs. That means that once the existing supply is exhausted. Banning p eliminate all externalities associated with use. Private ownership might be unappropriated because more paying users of the good cannot be excluded. copper. gas and oil. Eg. iron ore. Government Polices and Environmental Management A number of techniques might be adopted t correct market failure techniques y y y BAN ON PRODUCTION: of a particular good or service e. PIGOUVIAN CORRECTION TAX: because externalities are unpriced.Environmental Economics Basil Razi y POSITIVE EXTERNALITIES: These are the beneficial spill-over effects from eco activity.
Government s can also encourage firms and individuals to use more ENVIRONMENTALLY FRIENDLY GOODS AND SERVICES. individuals and the government. E. management of the resource e. TRADEABLE PERMITS: this system provides a permit which may be bought or sold e. 2009/10 Federal Budget p Home insulation project to 2. Firms must hold enough permits to cover the amount of emissions they release. it can trade off its permit to other firms which wants to go beyond its permitted level. This is designed to encourage firms to reduce pollution.g.5 billion Clean Energy Initiative. A similar scheme is used in Australia in relation to the amount of water that can be draw for irrigation. GOVERNMENT OWNERSHIP AND MANAGEMENT: where an environmental resources provides public goods or is an open access on common property resources.2% without the scheme) o But the ETS will also affect businesses.g.5%. governments will compensate pensioners and low and middle income earners o Problem of ETS: reduce competitiveness of Australia s economy and lead to carbon leakage.Environmental Economics Basil Razi The Commonwealth government imposes a 38¢/litre p INTERNALISE THE EXTERNALITIES i.2 million homes (failed because of deaths/fires) o y y y y 7 .1% per annual (rather than 1.g.e. governments might step in to either provide the good or to take over the. o Other policies to encourage development of new technologies p 2009/10 budget p $4. And the government has set a target of producing 20% of electricity from renewable energy sources by 2020. Individuals p rise in costs of living p CPI of 1-1. Carbon Leakage is the shift in production of emissions-intensive products to countries with no carbon emissions targets but not reduce emissions into the atmosphere. ENVIRONMENTAL REGULATION: a government would establish regulatory limits and firms found to be in breach of these limits would be penalised. Government funding is also used to accelerate the introduction of new technologies e.g. requires the firm or individual that causes the externality to pay for some or all of its costs. This polluter pay approach is designed to ensure that those who contribute to the environmental damage bear the costs of reducing much damage. This puts a price on the emissions and provides incentives for firms to develop new technologies and processes to reduce emissions of greenhouse gases. o The government has introduced a cap and trade emission trading scheme by mid 2011. state government s p subsidies public transport to provide an alternative to motor vehicles. Australia s real GDP/capita will grow at 1. A firm must buy a permit which allows it to pollute to a certain level. Between 2010 to 2050. o The emissions trading scheme (ETS) will have significant consequences on the economy. Department of National Parks and wildlife. the government might set a limit on the amount of pollution that can be emitted.
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