Chapter 23 Economics, Environment, and Sustainability

New Economic and Environmental Vision Ecological Economists - Redesign economic and political systems Environmental Economists - Reform of current economic systems rather than redesign Sustainability revolution=economic revolution

ECONOMIC SYSTEMS An economic system produces and distributes goods and services by using natural, human, and manufactured resources.

Economic Systems Are Supported by Three Types of Resources Natural Resources-goods and services produced by the earth’s natural processes Human Resources-people’s physical and mental talents that provide labor, innovation, culture, and organization Manufactured Resources-machinery, equipment, and factories, which are made from natural resources with the help of human resources

Three Types of Resources Are Used to Produce Goods and Services

Market Economic Systems Pure Free-market economic system –Theoretical model in which buyers and sellers interact in markets without any gov’t interference. –Pure free markets do not exist in today’s capitalist market system Companies lobby for gov’t subsidies, tax breaks, or regulations to get advantages $ 1 trillion in gov’t subsidies given out each year.

Supply and Demand Supply-the amount of a good that is available Demand-The amount of a good that people want Price-market cost of a good or service Profit or loss-the difference between the cost of producing something and the price buyers are willing to pay

Supply and Demand Price, Demand and Supply Price of Widget s Number of Widgets People Want to Buy Number of Widgets Sellers Want to Sell $ $ $ $

Supply, Demand, and Market Equilibrium for a Good in a Market Economic System

Active Figure: Two views of economics

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

Marginal Cost/Benefit Marginal Cost-the additional cost of producing one more unit of a good or service. -The difference between a seller’s starting price and the new price Marginal Benefit-The increase in benefit that it provides to the buyer when one more unit of a good or service is produced.

Government Intervention in Market Economic Systems Governments intervene in market systems to help provide economic stability, national security, and public services such as education, crime protection, and environmental protection.

Problems with Capitalist market system Do not make widespread use of indicators that monitor environmental health and quality Do not include the harmful environmental costs of goods in their market prices. Do not consider long-term harmful environmental consequences because the focus is on short term profits

Environmentally Sustainable Economic Development: Copying Nature Models of ecological economists are based on these assumptions: –Resources are limited. –Encourage environmentally beneficial and sustainable forms of development. –The harmful environmental and health effects of producing goods and services should be included in market prices.

–Mitigation cost: how much it takes to offset any environmental damage. –Willingness to pay: determine how much people are willing to pay to keep the environment in tact (e.g. protect an endangered species).

Estimating Future Value of a Resource Economists use discount rates (estimate resource’s future value compared to current) to estimate the future value of a resource. The market price you pay for something does not include most of the environmental, health, and other harmful costs associated with its production and use. (Full Cost Pricing)

Estimating the Optimum Levels of Pollution Control and Resource Use

Optimum Pollution Control

Cost-benefit Analysis Making economic decisions about how to control pollution and manage resources Estimate optimum level of pollution cleanup or resource use Estimating costs for –Pollution control regulation –Building a dam on a river –Preserving an area of forest

Cost Benefit Analysis Direct costs: land, materials etc. Indirect costs: clean air and water Estimations depend on individual assumptions and value judgments Guidelines –Use uniform standards –Clearly state all assumptions used –Rate the reliability of data used –Estimate short- and long-term benefits and costs for all affected population groups –Compare the costs and benefits of alternative courses of action –Summarize the range of estimated costs and benefits

Economic Indicators GDP and per capita GDP –Provide a standardized and useful method for measuring and comparing the economic outputs of nations –Doesn’t determine between the goods and services that are environmentally or socially beneficial or harmful –New ideas Add to the GDP items improve environmental or social quality Subtract from GDP cost that lead to lower quality of life/ degrade natural resources

GPI GPI- Genuine Progress Indicator –Estimated values of beneficial transactions that meet basic needs, but in which no money changes hands, are added to the GDP. Unpaid volunteer work, health care, childcare, housework GPI = GDP + benefits not included in transactions - harmful environmental and social costs

Monitoring Environmental Progress: Comparing Per Capita GDP and GPI

Internal Costs After a car is purchased, the buyer must pay for gasoline, maintenance, and repair. All of these direct and indirect costs, which are paid for by the seller and the buyer of an economic good which then is a internal cost.

External Costs An external cost, also known as an externality, arises when the social or economic activities of one group of persons have an impact on another group and when that impact is not fully accounted, or compensated for, by the first group

Full-Cost Pricing Marketed price of a good or service includes the cost to make the good or produce the service, plus the harmful external cost, including health and environmental effects

Full Cost Pricing Environmentally honest market system –Way to deal with the harmful costs of goods and services –Harmful indirect or external costs of goods or services in their market prices to reflect as close as possible to Full costs Full Cost = internal costs + external costs

Holding back Full-Cost pricing What is holding back the shift to full cost pricing is that; 1.Many producers of harmful and wasteful goods would have to charge so much they could not stay in business 2.Huge governmental subsidies distort the market place and hide many of the harmful environmental and social costs of producing and using some goods and services

Full Cost Pricing More resource efficient Less polluting methods of production Cut production costs More green products Why not used more? Harmful and wasteful goods would have to charge more, go out of business Hard to price environmental and health costs

Product Eco-labeling Encouragement to develop green product Certification by Marine Stewardship Council, Forest Stewardship Council, and Rainforest Alliance (coffee) US Green Seal –Easy for consumers to buy these products

Subsidies Phase out environmentally harmful subsidies and tax breaks that create huge economic incentive for unsustainable resource depletion –Extracting minerals –Cutting timber on public lands –Supplying fertilizers –Low cost water for farmers

Subsidies Typical American taxpayer pays at least $2500 a year to provide environmentally harmful subsidies and then pays $1000 due to environmental degradation, pollution cleanup, and higher health and insurance costs

Subsidy Shifting Phase in environmentally beneficial subsidies and tax breaks –High subsidies for Energy conservations Renewable energy Sustainable forestry Sustainable agriculture Soil and water conservation Etc.

Subsidy Shifting in Other Countries Japan, France, and Belgium have phased out all coal subsidies Germany plans to do so by 2018 China has cut coal subsidies by nearly 73% New Zealand has phased out virtually all agricultural subsidies

Objection Organizations currently receiving subsidies lobby to resist change

Taxes presently Encourage what we want less of –Pollution, resources waste Discourage what we want more of –jobs, income Green taxes (Ecotaxes) help pay for environmental and health costs resulting from certain market transactions

3 requirements for Green Taxes to 20 years to phase in 2. Mechanism to ensure that the revenues from such taxes improve environmental quality/reduce taxes on labor, income and wealth 3. Poor and lower class need an economic safety net (reduction of regressive taxes: higher % of income for tax on clothing)

Marketplace Tradable pollution and resource use permits –Similar to cap and trade –Permit’s disadvantages Caps can be too low Determining caps is difficult Self monitoring can promote cheating –Permit’s advantages Flexible cap Easy to administer (not easy to enforce) Can promote achievement of caps

Trade-Offs: Tradable Environmental Permits, Advantages & Disadvantages

Selling Services Material flow economy -> service flow economy –Customers can ecolease or rent services –Document services: leasing a photocopier –Chemical services: leasing organic solvents –Mobility services: lease a vehicle –Ray Anderson: lease commercial carpets

Worldwide Poverty Poverty: the inability to meet one’s basic economic needs 1.1 billion people struggle to survive on less than $1 a day About half the world’s population live on a daily income of $1-2

Solutions: Reducing Poverty Cancel debts of poorest countries Mount global effort to combat malnutrition and infectious diseases Provide universal primary school education and eradicate illiteracy Stabilize population growth in developing countries Microloans

Grameen Bank in Bangladesh Lending $50-$500 at a time instead of large amounts Solidarity groups of 5 Less than 3% of payments are late About half of those borrowing money have escaped poverty within 5 years

Microloans Muhammad Yunus won Nobel Peace Prize in 2006 Citibank and TIAA-Cref have each committed $100 million to microloans