NUEVA ECIJA UNIVERSITY OF SCIENCE AND TECHNOLOGY

SUMACAB MAIN CAMPUS, SUMACAB ESTE CABANATUAN CITY

COLLEGE OF MANAGEMENT AND BUSINESS TECHNOLOGY

UNIT III

ENVIRONMENTAL ECONOMICS

Manuscript

MIDTERMS

Submitted by:

Formasidoro, Nico Jay

Tagaza, Katherine

Tumibay, Paula Mae

Grade and Section: BSBA-2J

Submitted to:

Dr. Lady Anne Murillo

UNIT III

ENVIRONMENTAL ECONOMICS

Environmental Economics Components

The most widely accepted definition of sustainability is the ability to meet present needs without
endangering the ability of future generations to meet their own. Three main pillars—economic,
environmental, and social—support it. The terms "people, planet, and profits" refer to these three
pillars informally.

What is Environmental Economics?

Environmental economics is the study of how environmental policies affect the economy.
Theoretical or empirical economic implications of environmental policies are studied by
environmental economists. This area of economics aids in the development of sensible
environmental policies as well as the evaluation of the benefits and drawbacks of current or
suggested policies.

Understanding Environmental Economics

The central claim of environmental economics is that there are environmental costs associated
with economic growth that are not taken into consideration by the existing market model, and
that environmental amenities, also known as environmental goods, have economic worth.
Environmental commodities include things like the general climate, wildlife survival, clean air,
and clean water. Environmental products are infamously vulnerable to the common's tragedy and
difficult to fully commercialize. Because it imposes negative externalities, the destruction or
abuse of environmental products, such as pollution and other forms of environmental
degradation, can be seen as a particular kind of market failure. Therefore, environmental
economists assess the advantages and disadvantages of particular economic policies aimed at
resolving such problems. This may involve either theoretical investigations or examinations of
the possible economic fallout.

Origins of Environmental Economics

The 1960s saw a growth in industrialization, especially in the West, and a rise in industrial
pollution, which is when environmental economics first emerged. The alleged adverse effects of
environmental deterioration gave rise to an increase in environmental activism. Global awareness
of the swift economic growth and its effects on the environment.

According to environmental economists, the environment serves as a form of natural capital that
gives people on Earth amenities and means of subsistence. The field of environmental economics
was established with a neoclassical perspective on problems including public goods
management, market failure, negative externalities, and wasteful use of natural resources.

As the movement gained traction, more complex information regarding the connection between
the environment and the economy emerged. Strong environmental arguments and assertions
emerged from the investigation, giving rise to the current environmental

worldwide policies and regulations. New environmental organizations were created as a result of
it; the United Nations Environment Programme (UNEP) was the most well-known of them in
1972.

Scope of Environmental Economics

The role of environmental economics in the design of environmental policies and its

implementation is the major concern of the discipline. Three important questions are in

environmental economics:

• What causes environmental challenges in terms of economic and institutional affairs?

The inquiry delves into the notion of market failure, predicated on the absence or incompleteness
of markets for environmental commodities such as fresh air, a clean environment, beautiful
scenery, and so forth; hence, there is unlikely to allocate environmental resources in an efficient
manner.

• What is the monetary value of environmental degradation caused by pollution and other
agents, as well as the value of advancements in environmental harm prevention and eradication?
The techniques for measuring and estimating the variables constitute a crucial facet of
environmental economics.

• How can economic incentives and environmental policies be designed to

effectively improve environmental quality and deter environmental damage?

To ascertain whether economic incentives, environmental policies, and laws are

accomplishing their intended aims, a critical evaluation of each is necessary.

Environmental economics encompasses the following concepts:

1. Sustainable Development

The notion of sustainable development looks at how economic development supports

sustainable development and is defined by UNEP as "development that meets the needs of the
present without compromising future generations' ability to meet their own needs."

The four main pillars of sustainable development are social equity, institutional
capability, environmental protection, and economic growth.
 Market Failure

When a perfect market's ability to function is undermined, it becomes unable to allocate

scarce resources effectively at a particular price because the requirements of the law of supply
and demand are not satisfied. This is known as market failure.
One example of an environmental good is a clean ocean. It is challenging to place a value
on clean seas and oceans, and there are no exchangeable markets for the cleanliness of water
bodies—a typical example of a failed market.

2. Externalities

Externalities are the unexpected repercussions of economic activity that have an impact on
individuals who are not directly involved in it. An further kind of market failure is externalities.
They could be favorable or unfavorable.

Unplanned consequences that directly affect the public or the environment are known as negative
externalities. Industrial production pollution, which leads to contaminated air and water and
other health hazards, is one example. The contaminating Even though their actions hurt the
environment and the community they are in, entities might not have to pay to clean up the
pollution.

Benefits to others who are not directly involved in its development are known as positive
externalities. People from outside the community who come to visit relatives and friends in the
region and who would not have contributed to the park's construction can benefit from a
community nature park. "Free riders" are those who profit from an economic resource without
helping to create it.

3. Valuation

Values can be attributed to environmental resources based on techniques of use and non-
use. Seeing what customers are ready to pay makes it simpler to give value to a product that is
currently in use. A key component of environmental economics is valuation, which aids in the
assessment of various approaches to problem-solving including the utilization of natural
resources and the environment. Ecological resource assessment is a complicated procedure since
it is challenging to put a monetary value on intangible benefits like pure air and a clean
environment.

It can be challenging to place a value on resources that have several uses. For instance,
mountains can regulate river flow patterns, prevent flooding, and produce good soils for farming.
The "use" strategy allows for the use of opportunity cost pricing, replacement cost pricing, and
hedonic pricing strategies. For the "non-use" method, the contingent valuation technique is
employed to determine the price at which customers are prepared to pay for a product that they
do not find enjoyable or useful.

4. Cost-Benefit Analysis

Cost-benefit analysis (CBA) involves weighing the benefit arising from a policy against
the perceived benefits. Hence, the best policy is one in which there is the greatest surplus of
benefit over costs.
CBA starts with a base policy where no changes are made to the status quo. A time
horizon is selected where the perceived costs and benefits are expected to be realized. Benefits
are instance where human well-being is improved, and costs decrease human well-being.
Costs and benefits to realized in the future are discounted using a discount factor to
cater for the time value of money. Benefits include extra income, improved quality of
life.
Clean water and beaches, and costs include opportunity costs, internal and external
costs, and externalities.

Environmental Economic Strategies

The focus of environmental economists is on pinpointing particular issues that require attention;
yet, there exist various methods for tackling a same environmental problem. A state has a few
choices, for instance, if it want to enforce a clean energy transition. The government can employ
more incentive-based strategies, including imposing a quantity-based tax on carbon emissions or
offering tax advantages to companies that adopt renewable energy sources, in addition to
enforcing a mandatory cap on carbon emissions.

Since all of these tactics, in different ways, depend on government engagement in the market, the
degree to which this is acceptable plays a crucial political role in establishing environmental
economic policy. This issue is also known as prescriptive vs market-based, wherein the
government would set goals and provide incentives but otherwise permit companies to reach
those goals in any way they desired. In the former scenario, the government would manually
limit carbon emissions whatever their preferences were.)

Environmental Economics Challenges

Environmental economics usually necessitates a global approach because of the nature and
economic worth of environmental goods, which often transcend national boundaries. An
environmental economist might, for instance, point out that aquatic depopulation is a negative
externality that requires attention. The United States may implement regulations on its own
fishing sector, but the problem would not be solved unless several other nations that also engage
in overfishing took similar action. Non-governmental organizations (NGOs) like the
International Panel on Climate Change (IPCC), which hosts yearly gatherings for heads of state
to discuss international environmental legislation, have emerged as a result of the global scope of
such environmental challenges.

The degree to which the results of environmental economics have an impact on other businesses
presents another challenge. As said before, environmental economics is a wide field with a lot of
moving components. The conclusions of environmental economists are often the subject of
debate. The solutions offered by environmental economists are similarly challenging to put into
practice due to their complexity. One instance of the disorganized international application of
concepts from environmental economics is the development of numerous carbon credit
marketplaces. Another example of the balancing act mandated by policy recommendations
relating to environmental economics is the fuel economy criteria set by the Environmental
Protection Agency (EPA).

Proposals for environmental economics policies frequently lead to contentious political debates
in the US. It is challenging to create comprehensive environmental policy because leaders
seldom agree on the degree of externalization of environmental costs. Environmental economists
work for the EPA doing policy analysis. Legislative bodies then examine and assess these
recommendations. It is in charge of the National Center for Environmental Economics, which
advocates for cap and trade programs and other market-based solutions to reduce carbon
emissions. Encouraging the use of biofuels, estimating the costs of climate change, and solving
waste and pollution issues are among their top policy priorities.

Example of Environmental Economics

Using environmental economics in a modern setting is exemplified by the cap-and-trade

system. Businesses buy carbon offsets from poor nations or environmental organizations to
make up for their carbon emissions.
The application of a carbon price to penalize businesses that emit carbon dioxide is another
example. Corporate Average Fuel Economy (CAFE) standards are another instance of
environmental economics in action. These rules, which are prescriptive in nature, outline how
many gallons of gas cars should use every mile. They were put into place in the 1970s during a
period of gas shortages to encourage fuel economy.