Composition of Environmental

economics
Environmental Economics is a branch of economics
which is concerned with two aspects;

 The valuation of environmental amenities (assets)

and

 The regulation of pollution activities.

Valuation of the environment
Valuation of environmental resources implies
measurement of the impacts of the costs and benefits of
the environmental resources

The valuation of environmental assets is a very important

aspect because it helps to correct economic decisions
which sometimes treat the natural environment as if it is a
free asset.
 The environment is viewed as a composite asset, which
provides a variety of resources.

The environment is a very special asset because it
provides the life support system, i.e. sustains
existence of living things.

Therefore it is very important to prevent unnecessary

deterioration of the value of the asset so that it
continues to provide life-sustaining services.
Reasons for valuation of envt
resources
To analyze the benefits and costs associated with
environmental resources since every resource has
benefit to the society but at the same time, it
generates a cost to the society.

To include those goods and services that can be

ignored in the environment resource management
analysis ie those ignored usually have long term
benefits.
Reasons cont…
To improve on the utilization of resources since
valuation determines the quantity and hence
determines the rate of utilization.

To overcome the shortages in the existing

environment resource markets because valuation
determines the demand and supply of such resources
THE ECONOMIC SYSTEM AND THE
ENVIRONMENT
The environment provides the economy with;

 Raw materials;
A set of natural goods, and,
 Waste assimilation capacity provided by the wetlands

Life support systems

Amenity services
CONT…
The raw materials are used by the firms to produce
goods and services which are supplied to the households.

 After the consumption of the goods and services,

households produce waste which is disposed off in the
environment.
 The environment utilises its absorptive capacity to
diffuse the waste.
Therefore there is a direct link between the environment
and the economic system as illustrated in the diagram
below
The big picture…
Amenity services
Services that add to the quality of
life e.g. fresh sweet smelling air
Natural beauty and space for out
door activities.
Pleasure of going to a park
Pleasure to run in a forest
Simply knowing that nature exists
The watching of flowing water
Life Support Services
Services that make human life
possible or to exist eg air, water
systems, land resource and
diversity of plant and animal life.
Role of life systems
Purification of air and water
Stabilization and moderation of
climate
Nutrient cycling
Pollination of plantsetc
Waste absorption
Waste: the “Unwanted” byproducts of
economic activity and are absorbed by the
environment though sink functions

Accumulation of waste in the environment is

detrimental to the environment
Waste absorption cont.
Damage relationships of waste in the environment

NB.
Some wastes are difficult to be disposed off in the
environment eg long lived radioactive materials and hence
special arrangement has to be made for such wastes
Supply of natural resources
Provide raw materials and energy for economic
production and household activity hence use of non
renewable resources reduces the finite stock.

Note ; some parts of the environment may provide

more functions eg oceans-determine life support

Modify climate assimilate wastes provide opportunity

for marine animals etc
Other
Interactions
Various services
interact e.g.
Inflow of fossil
fuels creates an
outflow of
carbon
Increasing
temperatures,
affecting other
services
The Earth as a System….
Systems: Two or more entities that interact

Open system: Exchanges energy and materials with

its surroundings

Closed system: Exchanges only energy with its

surroundings.
system?
The origin of Resource and Environment
Economics....
• Classical economists: 1700-1800 century
– Development of natural resource economics
– Adam Smith, Thomas Malthus, David Ricardo, John
Stuart Mill
• Economic growth: importance of natural resources
(land)
• Living standards in the long run subject to constraints
(land)
• Diminishing returns , inevitability of a stationary state

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The Economic system
The origin.....
Adam Smith: markets and allocation of resources,
invisible hand

Malthus: population growth geometric and food

output growth arithmetic

Ricardo: subsistence wage level in steady state, land

in varying quality

John Stuart Mill: diminishing returns, but also growth

of knowledge and technical progress. Amenity values,
first environmental economist?

20
The origin...
Neoclassical economics: marginal theory and value in
exchange
1870+, Jevons, Menger, Marshall (consumer surplus),
Walras (general equilibrium)
Production- and utility functions
Keynes: short-run use of resources
Neoclassical growth theory: absence of natural
resources, introduced from 1970+

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The concerns; welfare economics....
Rankings of allocation must be based on ethical
criterions; i.e. is it right, is it fair?

Utilitarian moral philosophy, Hume, Bentham, Mill.

Weighted average of the total utility levels enjoyed by
all individuals in the society

Pareto optimality (1897) :Efficient allocation when no

one can be made better of at the cost of others

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The Basis of the Holistic View…
Thermodynamics
Matter = energy and materials
Energy = ability to do work
.
Laws of Thermodynamics
The first law:
Matter (energy or materials) can neither be created
nor destroyed
Implications:
Whatever comes in will come out (implies waste)
Economic processes simply rearrange things
Laws of Thermodynamics
Second law:The entropy law
All processes require energy - and as they do they
reduce the quality of the energy used - increasing
entropy in the universe

The arrow of time: over time we always will see an

increase in entropy

Energy cannot be recycled - continually goes from a

high quality state to a low quality state
Laws of thermodynamics
Implications for the earth
as a whole
A closed system, and
thus quantity of
materials is constant
Constant flux of energy
into the system
Energy cannot be
recycled but materials
can
No process is 100%
efficient
Implications for
economic systems?
The Issues; Threats to
Sustainability
Resource depletion

Waste accumulation
Loss of resiliency of ecosystem –
possible collapse!
(Resilience is the ability of a
system to bounce back/spring
back after a disturbance)

What to do?
Why those threats?
Can’t we be responsible?
The Issues....
Can the global economic system continue to grow
without undermining the natural systems, which are its
ultimate foundation?
Can poverty be alleviated in such ways that do not
affect the natural environment in such a way that future
economic prospects suffer
Interrelationship between poverty, economic
development and the state of the natural environment;
cause-effect relationship!
What does the World Commission on Environment and
Development (1987) say about Our Common Future?
Importance of Environmental
economics….
Environmental economics helps us to
identify the optimal levels of resource use
so that we do not;
overwhelm the regenerative capacity of the
environment
overwhelm the waste-assimilative capacity
of the environment
To ensure growth and sustainability and
equity
Issues in resource economics
Types of resources
Non-renewables
 Minerals, oil, gas, coal
Renewables
 Fish, forests, water
Optimal resource use
Optimal depletion of non-renewables
Optimal harvesting of renewables
 Sustainability of resources
What level of environmental protection
is desired or ideal in each situation;
Economists focus on decisions at the margin:
equating marginal costs and marginal benefits.
This however is difficult with regard to
environmental resources e.g. the choice is not
between clean air and dirty air, but rather
between levels of pollution.
This requires placing a value on environmental
protection or protection of environmental
resources.
However, this valuation is complicated by the
lack of market prices for environmental goods.
Issues of Efficiency versus equity
Efficient solutions may not always be
desirable, and may not always ensure
equity.
 Policymakers need to consider how
various groups will be impacted. This can
be complex in environmental economics
for example, how should the welfare of
future generations be weighed when
making global warming policy?
Discussion; So what issues should
we be concerned with in R&E
today?
The issues…