Chapter 23 Economics, Environment, and Sustainability

Case Study: Making Microloans to the Poor (1) Micro-lending or microfinance 1983: Muhammad Yunus Grameen (Village) Bank in Bangladesh Provides microloans; mostly to women “Solidarity” groups How does it work? Half of borrowers eventually live above the poverty line

Case Study: Making Microloans to the Poor (2) 2006: Muhammad Yunus Nobel Peace Prize 2006: Citibank and TIAA-Cref Microloans

Muhammed Yunus with Nobel Prize Figure 23.1: In 1983, economist Muhammad Yunus established the Grameen Bank, which makes small loans to poor people in Bangladesh at very low interest rates. These loans have helped 7.6 million of the country’s people to improve their lives by working their way out of poverty. This has also helped to slow the country’s population growth and to empower women. Fig. 23-1, p. 613

23-1 How Are Economic Systems Related to the Biosphere? Concept 23-1 Ecological economists and most sustainability experts regard human economic systems as subsystems of the biosphere

Economic Systems Are Supported by Three Types of Resources Natural capital Human capital, human resources Manufactured capital, manufactured resources

Three Types of Resources Are Used to Produce Goods and Services Figure 23.2: In an economic system, we use three types of resources to produce goods and services. Fig. 23-2, p. 615

Market Economic Systems Depend on Interactions between Buyers and Sellers (1) Supply, demand, market price equilibrium point True free market system No company or group controls prices of a good or service Market prices include all direct and indirect costs (full-cost pricing) Consumers have full information about beneficial and harmful environmental effects of goods and services

Market Economic Systems Depend on Interactions between Buyers and Sellers (2) Real world Tax breaks Subsidies Trade barriers Withholding of negative information

Supply, Demand, and Market Equilibrium for a Good in a Market Economic System Figure 23.3: This graph shows supply and demand curves and market equilibrium for a good such as oil in a market economic system. If all factors except supply, demand, and price are held fixed, market equilibrium occurs at the point where the supply and demand curves intersect. This represents the price at which sellers are willing to sell and buyers are willing to pay for the good or service provided. Question: How would a decrease in the available supply of oil shift the market equilibrium point on this diagram? Fig. 23-3, p. 615

Economic Growth and Economic Development Increased capacity to supply goods and services Requires increased production and consumption Requires more consumers Economic development Improvement of living standards Environmentally sustainable economic development

Gross World Product, 1970-2008 Figure 1, Supplement 9

Governments Intervene to Help Correct Market Failures Private goods Public services Environmental protection National security Police and fire protection Safe food and water Provided by government because private companies can’t or won’t

Economists Disagree over Natural Capital, Sustainable Economic Growth (1) High-throughput economies Resources flow through and end up in planetary sinks where pollutant can be at harmful levels Models of ecological economists Economic systems as subsystems of biosphere Conventional economic growth unsustainable Wealth from depletion of natural capital

Economists Disagree over Natural Capital, Sustainable Economic Growth (2) Ecological models’ three assumptions Resources are limited and shouldn’t be wasted Encourage environmentally beneficial and sustainable forms of economic development Full-cost pricing needed to take into account harmful environmental and health effects of some goods and services Environmental economists take middle ground between classical and ecological economists

High-Throughput Economies Rely on Ever-Increasing Energy, Matter Flow Figure 23.4: The high-throughput economies of most of the world’s more-developed countries rely on continually increasing the flow of energy and matter resources to increase economic growth. This practice produces valuable goods and services, but it also converts high-quality matter and energy resources into waste, pollution, and low-quality heat, and in the process, can deplete or degrade various forms of natural capital that support all life and economies. See an animation based on this figure at CengageNOW. Question: What are three things you regularly do that add to this throughput of matter and energy? Fig. 23-4, p. 617

Ecological Economists: Economies Are Human Subsystems of the Biosphere Figure 23.5: Ecological economists see all human economies as subsystems of the biosphere that depend on natural resources and services provided by the sun and earth. See an animation based on this figure at CengageNOW. Question: Do you agree or disagree with this model? Explain. Fig. 23-5, p. 617

What Is the Purpose of a Business? Make a profit for its owners and investors Sustainability is about staying in business Another definition – “Making a quality product and earn a profit without harming the environment.”

23-2 How Can We Put Values on Natural Capital and Control Pollution and Resource Use? Concept 23-2A Economists have developed several ways to estimate the present and future values of a resource or ecological service, and optimum levels of pollution control and resource use. Concept 23-2B Comparing the likely costs and benefits of an environmental action is useful, but it involves many uncertainties.

Protecting Natural Capital Estimating the values of the earth’s natural capital Estimate nonuse values Existence value Aesthetic value Bequest value, option value

Estimating the Future Value of a Resource Is Controversial Discount rates Estimate of a resource’s future economic value compared to its present value Proponents of a high discount rate Critics of a high discount

We Can Estimate Optimum Levels of Pollution Control and Resource Use Marginal cost of resource production Optimum level of resource use Optimum level for pollution cleanup

Optimum Resource Use Figure 23.6: Optimum resource use: The cost of extracting coal (blue line) from a particular mine rises with each additional unit removed. Mining a certain amount of coal is profitable, but at some point the marginal cost of further removal exceeds the monetary benefits (red line) unless some factor such as scarcity raises the value of the coal remaining in the mine. Where the two curves meet at current prices is theoretically the optimum level of resource use. Question: How would the location of the optimum level of resource use shift if the price of coal doubled? Fig. 23-6, p. 620

Cost-Benefit Analysis Is a Useful but Crude Tool Cost-benefit analysis follows guidelines State all assumptions used Include estimates of the ecological services Estimate short-and long-term benefits and costs Compare the costs and benefits of alternative courses of action Always uncertainties

23-3 How Can We Use Economic Tools to Deal with Environmental Problems? Concept 23-3 We can use resources more sustainably by including their harmful environmental and health costs in the market prices of goods and services (full-cost pricing); by subsidizing environmentally beneficial goods and services; and by taxing pollution and waste instead of wages and profits.

Most Things Cost a Lot More Than We Might Think Market price, direct price Indirect, external, or hidden costs Direct and indirect costs of a car Should indirect costs be part of the price of goods? Economists differ in their opinions

Environmental Economic Indicators Could Help Us Reduce Our Environmental Impact Measurement and comparison of the economic output of nations Gross domestic product (GDP) Per capita GDP Newer methods of comparison Genuine progress indicator (GPI) Gross National Happiness (GNH)

Monitoring Environmental Progress: Comparing U. S Monitoring Environmental Progress: Comparing U.S. Per Capita GDP and GPI Figure 23.7: Monitoring environmental progress: This graph compares the per capita gross domestic product (GDP) and the per capita genuine progress indicator (GPI) in the United States between 1950 and 2004. Questions: Would you favor making widespread use of this or similar green economic indicators? Why hasn’t this been done? (Data from Redefining Progress, 2006) Fig. 23-7, p. 622

We Can Include Harmful Environmental Costs in the Prices of Goods, Services Environmentally honest market system Why isn’t full-cost pricing more widely used? Many businesses would have to raise prices and would go out of business Difficult to estimate environmental and health costs Businesses have strong influence on government – preferential regulations, tax breaks, subsidies

Label Environmentally Beneficial Goods and Services Product eco-labeling Certification programs Greenwashing

Reward Environmentally Sustainable Businesses Phase out environmentally harmful subsidies and tax breaks Phase in environmentally beneficial subsidies and tax breaks for pollution prevention Political difficulties

Tax Pollution and Wastes Instead of Wages and Profits Green taxes, ecotaxes So that harmful products and services are at true cost Steps for successful implementation of green taxes Success stories in Europe

Trade-Offs: Environmental Taxes and Fees Figure 23.8: Using green taxes to help reduce pollution and resource waste has advantages and disadvantages. Questions: Which single advantage and which single disadvantage do you think are the most important? Why? Fig. 23-8, p. 624

Environmental Laws and Regulations Can Discourage or Encourage Innovation Environmental regulation Command and control approach Incentive-based environmental regulations Innovation-friendly regulations

We Can Use the Marketplace to Reduce Pollution and Resource Waste Incentive-based regulation example Tradable pollution or resource-use permits Cap-and-trade approach used to reduce SO2 Advantages Disadvantages

Trade-Offs: Tradable Environmental Permits Figure 23.9: Using tradable pollution and resource-use permits to reduce pollution and resource waste has advantages and disadvantages. Questions: Which two advantages and which two disadvantages do you think are the most important? Why? Fig. 23-9, p. 625

Reduce Pollution and Resource Waste by Selling Services Instead of Things 1980s: Braungart and Stahl New economic model Service-flow economy, eco-lease (rent) services Xerox Carrier Ray Anderson: lease carpets in the future

Individuals Matter: Ray Anderson CEO of Interface, largest commercial manufacturer of carpet tiles Goals Zero waste Greatly reduce energy use Reduce fossil fuel use Rely on solar energy Copying nature How’s it working?

Ray Anderson Figure 23.A: Ray Anderson is one of the world’s most respected and effective leaders in making businesses more sustainable. Fig. 23-A, p. 626

23-4 How Can Reducing Poverty Help Us to Deal with Environmental Problems? Concept 23-4 Reducing poverty can help us to reduce population growth, resource use, and environmental degradation.

The Gap between the Rich and the Poor Is Getting Wider Poverty 1.4 billion people live on less than $1.25 per day Trickle-down effect Flooding up Wealth gap

Poor Family Members Struggling to Live in Mumbai, India Figure 23.10: This mother and her child live in poverty on the edges of Mumbai (formerly Bombay), India, a thriving urban center. Fig. 23-10, p. 627

We Can Reduce Poverty (1) South Korea and Singapore reduced poverty by Education Hard work Discipline Attracted investment capital

We Can Reduce Poverty (2) Important measures Combat malnutrition and infectious diseases Universal primary school education Stabilize population growth Reduce total and per-capita ecological footprints Large investments in small-scale infrastructure

Revisiting Microlending Microloans give hope to the poor Microloans help more than direct aid Spreading around the world Kiva.org

Solar Panel Purchased with Microloan in India Figure 23.11: A microloan helped these women in a rural village in India to buy a small solar-cell panel (installed on the roof behind them) that provides electricity to help them make a living, thus applying the solar energy sustainability principle. Fig. 23-11, p. 629

Achieve the World’s Millennium Development Goals Sharply reduce hunger and poverty Improve health care Empower women Environmental sustainability by 2015 Developed countries: spend 0.7% of national budget toward these goals How is it working?

What Should Our Priorities Be? Figure 23.12: What should our priorities be? Question: Which item on the right side of the figure would you do without or reduce to pay for solving some of the problems listed on the left side of the figure? (Data from United Nations, World Health Organization, U.S. Department of Commerce, U.S. Office of Management and Budget, World Bank, Earth Policy Institute, and Stockholm International Peace Research Institute) Fig. 23-12, p. 629

23-5 Making the Transition to More Environmentally Sustainable Economics Concept 23-5 We can use the three principles of sustainability as well as various economic and environmental strategies to develop more environmentally sustainable economies.

We Are Living Unsustainably Depleting natural capital Environmental alarm bells going off Matter recycling and reuse economies Mimic nature

Use Lessons from Nature to Shift to More Sustainable Economies Donella Meadows: contrasts the views of neoclassical economists and ecological economists Best long-term solution is a shift to Low-throughput low-waste, economy

Solutions: Lessons from Nature: A Low Throughput Economy Figure 23.13: Solutions. Learning and applying lessons from nature can help us design and manage more sustainable economies. A low-throughput economy, based on energy flow and matter recycling, works with nature to reduce excessive throughput and the unnecessary waste of matter and energy resources (green boxes). This is done by (1) reusing and recycling most nonrenewable matter resources; (2) using renewable resources no faster than they are replenished; (3) reducing resource waste by using matter and energy resources more efficiently; (4) reducing unnecessary and environmentally harmful forms of consumption; (5) emphasizing pollution prevention and waste reduction; and (6) controlling population growth to stabilize the number of matter and energy consumers. See an animation based on this figure at CengageNOW. Question: What are three ways in which your school could decrease its unsustainable economic and environmental practices, and three ways that it could promote more sustainable economic and environmental practices? Fig. 23-13, p. 631

Make Money and Create Jobs by Shifting to an Eco-Economy Hawken, Brown, and other environmental business leaders Transition to environmentally sustainable economies Some companies will disappear New jobs will be created Economic succession Green jobs

Solutions: Principles for Shifting to a More Environmentally Sustainable Economy Figure 23.14: Solutions. We can use certain principles for shifting to more environmentally sustainable economies, or eco-economies, during this century. Question: Which five of these solutions do you think are the most important? Fig. 23-14, p. 631

Solutions: Environmentally Sustainable Development Figure 23.15: Solutions. These are some of the components of more environmentally sustainable economic development favored by ecological and environmental economists. The goal is to get economic systems to put more emphasis on conserving and sustaining the air, water, soil, biodiversity, and other natural resources that in turn sustain all life and all economies. Such a shift toward more efficient resource use, cleaner energy, cleaner production, ecocities, and natural capital preservation can stimulate economies, create jobs, and be profitable. Question: What are three new types of jobs that could be generated by such an economy? Fig. 23-15, p. 632

Green Careers Figure 23.16: Green careers. Some key environmental businesses and careers are expected to flourish during this century, while environmentally harmful, or sunset, businesses are expected to decline. See the website for this book for more information on various environmental careers. Question: How could some of these careers help you to apply the three principles of sustainability? Fig. 23-16, p. 633

Green Career: Installing Solar Cells Figure 23.17: Selling and installing solar-cell systems is a rapidly growing business and a source of many new green jobs in the United States and in many other countries. Fig. 23-17, p. 633

Three Big Ideas Making a transition to more sustainable economies will require finding ways to estimate and include the harmful environmental and health costs of producing goods and services in their market prices. Making this economic transition will also mean phasing out environmentally harmful subsidies and tax breaks, and replacing them with environmentally beneficial subsidies and tax breaks.

Three Big Ideas Other tools to use in this transition are to tax pollution and wastes instead of wages and profits, and to use most of the revenues from these taxes to promote environmental sustainability and to reduce poverty.