Environmental Economics

Module-1
environmental economics, subdiscipline of economics that applies the values
and tools of
mainstream macroeconomics and microeconomics to allocate environmental
resources more efficiently.
Source :environmental economics | Britannica
Relationship Between Environmental Economics and Economics
The words Ecology and Economic have the same root i.e. Greek ‘Oikos’ means
‘House’ Despite common origin, the two sciences are inter-disciplinary
subjects. In simple words, Ecology is the study of the relationship or
interdependence between living organism and their environment. Thus,
Ecology, is the body of knowledge concerning the economy of nature—the
investigation of the total relations of the animal both to its in organic and
organic environment. In other words, ecology deals with the ‘household’ of
nature while economics deals with the ‘household of man’.
An ecosystem is governed by the laws of growth and decay. These laws operate
simultaneously, tending to move the system towards a state of balance or
equilibrium. The problem is that man, in his aspiration for better living, has
upset the ecological balance. In a more appropriate sense, there is a conflict
between ‘economy’ and ‘ecology’. Ecology studies harmony between nature
and men.
Economy, in general means disharmony with nature. Use is made of nature both
directly and indirectly to transform raw-materials into final goods. During this
production-process nature is polluted by emission and wastes. Hence the
conflict arises due to sustainability of ecological system and business
profitability of economic growth and expansion of world market.
To reconcile the interests of human beings and nature—an ecological
reorientation of the economic policy is required. Unless we derive unifying

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principles from these disciplines—ecology and economics which views society
as a great interacting network of co-existing population, many of our social and
economic policies are doomed to failure.
Source Economics, Environment and Ecology (With Diagram)
(yourarticlelibrary.com)
Rachel Carson- Silent Spring
Source The Story of Silent Spring | NRDC
Spaceship Earth-Prof. Boulding’s view:
In 1966, Kenneth Boulding, in his classic paper, “The economics of the
Spaceship Earth” argued for a change in our perception of the nature of
economy—environment interactions and of measuring the economic success.
He asserted for a change in orientation that is required if mankind is to achieve
a perpetually stable economy. He recommends that the time has come to move
from a throughput economy to the notion of spaceship earth.
Conventional economists believe that the economy is an open system, where
there is always some new space to move to. Boulding refers to this economy as
the “cowboy economy”. In a cowboy economy, no limit exists on the capacity
of the outside to supply resources or receive wastes. He formed that GNP or
GDP that reflect the magnitudes of the material flows are the measures of
economic success in a cowboy economy. An increase in GNP/GDP is most
desirable. Boulding has underlined the necessity for a revision in this perception
of a cowboy economy to a spaceman economy.
In a spaceman economy, the earth is viewed as a single spaceship, without
unlimited reserves of any resource and without unlimited capacity to assimilate
wastes. Within this spaceship, if civilizations survives, every effort should be
made to recycle wastes, reduce wastes, conserve exhaustible energy and
resource sources, and tap new sources of renewable resources and energy. In
such a spaceman economy, GNP or GDP is not the measure of economic
performance.

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Boulding argued that, quality and quantity of capital stock will be the suitable
measure of economic growth. Boulding’s spaceship earth analysis was
formalized in the material balance models of Ayres and Kneese.
The materials balance model
The material balance models are based on the First and Second laws of
Thermodynamics. The material balance approach of Allen Kneese and R.V.
Ayres studies the total economic process as a physically balanced flow between
inputs and outputs. The material balance approach given in figure 2.
It depicts production of output from organic and inorganic inputs, through
various energy conversion and production process resulting in the discharge of
solid, liquid and gaseous waste. Moreover, wastes result from consumption
activities too. Thus material and energy are drawn from the environment, used
for production and consumption activities and returned back to environment as
wastes.

The impact of this transformation of material inputs and energy on the

biosphere is highlighted better by the application of laws of thermodynamics.
This law is also referred to as the law of conservation of matter and energy. It
tells us that energy, like matter, can

3
Source Economics, Environment and Ecology (With Diagram)
(yourarticlelibrary.com)

Market Failure
By 
THE INVESTOPEDIA TEAM
Reviewed by 
MICHAEL J BOYLE
 on April 06, 2020
What Is a Market Failure?
Market failure, in economics, is a situation defined by an inefficient distribution
of goods and services in the free market. In market failure, the individual
incentives for rational behavior do not lead to rational outcomes for the group.
In other words, each individual makes the correct decision for him or herself,
but those prove to be the wrong decisions for the group. In traditional
microeconomics, this can sometimes be shown as a steady-state disequilibrium
in which the quantity supplied does not equal the quantity demanded.
Source Market Failure Definition (investopedia.com)
The main types of market failure include asymmetric information, concentrated
market power, public goods and externalities
Public goods
Public goods have two distinct aspects—"nonexcludability" and "nonrivalrous
consumption." Nonexcludability means that nonpayers cannot be excluded from
the benefits of the good or service. If an entrepreneur stages a fireworks show,
for example, people can watch the show from their windows or backyards.
Because the entrepreneur cannot charge a fee for consumption, the fireworks
show may go unproduced, even if demand for the show is strong.

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The fireworks example illustrates the "free-rider" problem. Even if the
fireworks show is worth ten dollars to each person, no one will pay ten dollars
to the entrepreneur. Each person will seek to "free-ride" by allowing others to
pay for the show, and then watch for free from his or her backyard. If the free-
rider problem cannot be solved, valuable goods and services, ones that people
want and otherwise would be willing to pay for, will remain unproduced.

The second aspect of public goods is what economists call nonrivalrous

consumption. Assume the entrepreneur manages to exclude noncontributors
from watching the show (perhaps one can see the show only from a private
field). A price will be charged for entrance to the field, and people who are
unwilling to pay this price will be excluded. If the field is large enough,
however, exclusion is inefficient because even nonpayers could watch the show
without increasing the show's cost or diminishing anyone else's enjoyment. That
is nonrivalrous competition to watch the show.

Externalities occur when one person's actions affect another person's well-being
and the relevant costs and benefits are not reflected in market prices. A positive
externality arises when my neighbors benefit from my cleaning up my yard. If I
cannot charge them for these benefits, I will not clean the yard as often as they
would like. (Note that the free-rider problem and positive externalities are two
sides of the same coin.) A negative externality arises when one person's actions
harm another. When polluting, factory owners may not consider the costs that
pollution imposes on others. Policy debates usually focus on free-rider and
externalities problems, which are considered more serious problems than
nonrivalrous consumption.
Source Public Goods and Externalities, by Tyler Cowen: The Concise
Encyclopedia of Economics | Library of Economics and Liberty (econlib.org)
Understanding Market Failure – Please go through the Following Slides

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Source Microsoft PowerPoint - 9-marketfailure.ppt (ethz.ch)
Tools to take care of market failure
Indirect Tools
Source https://www.khanacademy.org/economics-finance-
domain/microeconomics/market-failure-and-the-role-of-
government/environmental
Direct Tools
Command and ControL
Source What are market-oriented environmental tools? (article) | Khan
Academy
Coase Theorem
The Coase theorem
British American economist Ronald Coase developed the Coase theorem in
1960, and, although not a regulatory framework, it paved the way for incentive-
driven, or market-based, regulatory systems. According to the Coase theorem,
in the face of market inefficiencies resulting from externalities, private citizens
(or firms) are able to negotiate a mutually beneficial, socially desirable solution
as long as there are no costs associated with the negotiation process. The result
is expected to hold regardless of whether the polluter has the right to pollute or
the average affected bystander has a right to a clean environment.
Source environmental economics - The Coase theorem | Britannica
Deposit refund system
Source How Can a Deposit Refund Scheme Help the Environment? Envirotech
Online (envirotech-online.com)

Module 2

Population and the environment

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Source 4.-Notes-Pessimistic-vs-optimistic-views-1un79k2.pdf (cpb-us-
e1.wpmucdn.com)

Population matters

Source Resources & consumption | Population Matters

Poverty Environment Nexus

The relationships between poverty and the environment are highly contested,
debated and researched. Environmental degradation and poverty, however, may
have mutual causality. This paper, therefore, tried to examine whether there is
an association between poverty and environmental degradation in developing
countries. An extensive literature review was made to evaluate the effect of
environmental degradation on the poor. The paper posited that poverty worsens
environmental degradation by leaving poor with no alternatives rather than
degrading their environment to meet their present needs at the expense of future
benefits. Conversely, environmental degradation exacerbated poverty through
deteriorating poor’s livelihood, income and health. Therefore, an effort has to be
made to curb the effect of poverty on the environment.

Source https://www.researchgate.net/publication/324821925_The_Poverty_-
_Environment_Nexus_in_Developing_Countries_Evidence_from_Ethiopia_A_
Systematic_Review

Gender and the Environment

Fuels have been estimated to be responsible for 4.3 million deaths in 2012,
7.7 per cent of global mortality (PEI, 2015). This affects in particular women
and children
Gender aspects are an important dimension of equitable access. For instance,
the impact of lack of access to clean water and sanitation may be
disproportionate on women. Women and girls have differentiated needs that

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must be considered when devising and implementing water, sanitation and
health measures. Women also face challenges to effective participation in
decision-making processes: an important challenge since the involvement.

The environment-poverty nexus is based on the fact that poor people tend to
depend more directly on environmental resources for their livelihoods. They
often work in agriculture, which depends on the quality of soils and availability
of water; they collect firewood for their energy needs; and they fetch water not
from a tap in their houses but frequently from natural water sources and wells.
Coastal fisheries that provide sustenance both in terms of fish protein and
employment to some 60 million people, half of them women, are highly
stressed. Degradation of any of these natural resources thus has an immediate
impact on the well-
being, nutrition and health of the local population. Indoor air pollution caused
by cooking with solid fuels has been estimated to be responsible for 4.3 million
deaths in 2012,
7.7 per cent of global mortality (PEI, 2015). This affects in particular women
and children.
The environment-poverty nexus is based on the fact that poor people tend to
depend more directly on environmental resources for their livelihoods. They
often work in agriculture, which depends on the quality of soils and availability
of water; they collect firewood for their energy needs; and
they fetch water not from a tap in their houses but frequently from natural water
sources and wells. Coastal fisheries that provide sustenance both in terms of fish
protein and employment to some 60 million people, half of them women, are
highly stressed. Degradation of any of these natural resources thus has an
immediate impact on the wellbeing, nutrition and health of the local population.
Indoor air pollution caused by cooking with solid fuels has been estimated to be

8
responsible for 4.3 million deaths in 2012, 7.7 per cent of global mortality (PEI,
2015). This affects in
particular women and children. The environment-poverty nexus is based on the
fact that
poor people tend to depend more directly on environmental resources for their
livelihoods. They often work in agriculture, which depends on the quality of
soils and availability of water; they collect firewood for their energy needs; and
they fetch water not from a tap in their houses but frequently from natural water
sources and wells. Coastal fisheries that provide sustenance both in terms of fish
protein and employment to some 60 million people, half of them women, are
highly stressed. Degradation of any of these natural resources thus has an
immediate impact on the well-
being, nutrition and health of the local population. Indoor air pollution caused
by cooking with solid fuels has been estimated to be responsible for 4.3 million
deaths in 2012, 7.7 per cent of global mortality (PEI, 2015). This affects in
particular women and children. The environment-poverty nexus is based on the
fact that poor people tend to depend more directly on environmental resources
for their livelihoods. They often work in agriculture, which depends on the
quality of soils and availability
of water; they collect firewood for their energy needs; and they fetch water not
from a tap in their houses but frequently from natural water sources and wells.
Coastal fisheries that provide sustenance both in terms of fish protein and
employment to some 60 million people, half of them
women, are highly stressed. Degradation of any of these natural resources thus
has an immediate impact on the wellbeing, nutrition and health of the local
population. Indoor air pollution caused by cooking with solid nt of women –
with their special knowledge of resource management and the environment –
can bring many benefits to water, sanitation and health measures.
Source:About Environment and Gender | UNECE

9
Natural Resources
Natural Resources | WWF (panda.org)
1.1 Classifying natural resources (soas.ac.uk)
Problem of common property rights
Common property resources (cprs) are those to which no individual has
exclusive property rights. They include a wide range of natural environments
(and the items that can be collected from them), and include village pastures,
bushland, uncultivable fields, community forests, waste lands, village ponds, the
inter-tidal zone, marine waters, rivers, river-beds, lakes, to name just a few.
They also include resources that are gathered from privately owned land (or
water) with access rights negotiated rather than being legally defined (Beck and
Nesmith 2001), although little research appears to have been completed on this
latter form of resource.
The literature on common-property resource theory first emerged with the work
of Gordon (1954), who formulated the theory for fisheries to explain the dual
problems of low income among Canadian fishermen and overfishing. The idea
was taken up and developed by Hardin (1968) in his often referred to article
"The tragedy of the commons", relating to grazing rights for a hypothetical
village commons[3]. The paradigm is based on the important
notions/assumptions that a) individual self-interest will prevail over the best
interests of the community as whole, b) that the environment must be limited,
and that c) the resource must be collectively owned and freely open to any user
(Stillman 1975). In the context of fisheries, it is often argued that these three
factors, combine to ensure that if fishing is making more than normal profits
then more and more fishermen will enter the fishery until all resource rents have
been dissipated. Each new boat that a fishermen adds brings him a gain of
almost +1, whereas the effects of overfishing will be shared by all, and his loss
will therefore be only a fraction of -1.

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Berkes (1985) suggests that Hardin's paradigm is a tautology. Where the
"tragedy of the commons" does exist, resource rents are by definition dissipated
(and this can be of no benefit to either the rich or the poor). Where the
"tragedy" does not exist, it is because one or more of the assumptions
underlying the paradigm do not exist. Most commonly the fishery is in reality
not open-access (because of either Government or local/community control),
and individual interests are often subservient to the collective interests of a
community.
Source 5 COMMON PROPERTY: CAUSE OR REMEDY OF POVERTY
FOR SMALL-SCALE FISHERS (fao.org)

Land degradation

Source Land-degradation-FactSheet.pdf (australiancollaboration.com.au)

Deforestation

Source Deforestation - Causes, Effects and Solutions To Clearing of Forests -

Conserve Energy Future (conserve-energy-future.com)

Water Pollution causes and effects

Source Water pollution | Definition, Causes, Effects, Solutions, Examples, &

Facts | Britannica

Energy Crisis

Source Solutions to the energy crisis: how to achieve sustainable energy?

(solarimpulse.com)

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