Environmental Economics and Management: Theory, Policy, and Applications 3e by Scott Callan and Janet Thomas © 2004 Thomson Learning/South-Western

The Role of Economics in Environmental Management Chapter 1 © 2004 Thomson Learning/South-Western

3 Economics and the Environment Economic theory explains what we observe in reality Microeconomic analysis can also be used to analyze environmental problems

4 Economics and the Environment Circular Flow Model – the basis for modeling the relationship between economic activity and the environment  Real Flow  Factor Market  Output Market  Money Flow Does not explicitly show the linkage between economic activity and the environment

5 Economics and the Environment Figure 1.1 Circular Flow Model of Economic Activity

6 Economics and the Environment Figure 1.2 Materials Balance Model: The Interdependence of Economic Activity and Nature

7 Economics and the Environment Materials Balance Model – illustrates the relationship between economic activity and the environment  Flow of Resources Natural Resource Economics – concerned with flows of resources from nature to economic activity  Flow of Residuals Residuals – by-products released back into the environment Assimilative Capacity – environmental ability to absorb residuals Recovery Recycling and Reuse – methods to delay the flow of residuals

8 Economics and the Environment Materials Balance Model  Science and Materials Balance First Law of Thermodynamics – matter and energy can neither be created nor destroyed Second Law of Thermodynamics – nature’s capacity to convert matter and energy is not without bound

9 Fundamental Concepts in Environmental Economics Causes of Environmental Damage: Types of Pollutants  Natural Pollutants – nonartificial  Anthropogenic Pollutants – human induced and include all residuals associated with consumption and production Of greater concern to environmental economists

10 Fundamental Concepts in Environmental Economics Sources of Pollution: Classifying Polluting Sources  Source Grouped by Mobility Stationary Sources – fixed site Mobile Source – any non-stationary source  Sources Grouped by Identifiability Point source – single identifiable source Nonpoint Source – a source that cannot be accurately identified

11 Fundamental Concepts in Environmental Economics Identifying the Scope of Environmental Damage: Local, Regional, and Global Pollution  Global Pollution – widespread environmental effects with global implications Examples: Global warming Ozone depletion

12 Identifying Environmental Objectives Environmental Quality – reduction in anthropogenic contamination to socially acceptable levels Sustainable Development – management of resources to ensure long-term quality and abundance Biodiversity – the variety of distinct species, genetic variability, and variety of inhabitable ecosystems

13 Environmental Policy Planning: An Overview Figure 1.4 Parties Involved in Environmental Policy Planning

14 Environmental Policy Planning: An Overview National Environmental Policy Act Risk Analysis  Risk Assessment – qualitative and quantitative evaluation of risk posed by an environmental hazard  Risk Management – decision process of choosing from alternative responses to environmental risk

15 Environmental Policy Planning: An Overview Policy Evaluation Criteria  Allocative Efficiency – requires resources be appropriated such that benefits are equal to costs  Cost-effectiveness – requires the least amount of resources be used to achieve an objective  Environmental Quality – concerned with the fairness of the environmental risk burden across segments of society or geographic region

16 Environmental Policy Planning: An Overview Government’s Overall Policy Approach  Command-and-control Approach – regulates polluters through the use of rules  Market Approach – incentive policy that encourages conservation or pollution reduction “Polluter-pays Principle” – polluter pays for the damage caused Setting the Time Horizon  Management Strategies – a short-term strategy intended to manage an existing problem  Pollution prevention – long-term strategy aimed at reducing the amount of toxicity of residuals released to nature