Chapter 1 The Role of Economics in Environmental Management

Economics and the Environment Economic theory explains what we observe in reality, including environmental problems, and tries to predict what will happen Use two basic models: Circular Flow Model Materials Balance Model

Circular Flow Model Shows the real and monetary flows of economic activity through the output and factor markets Model the relationship between economic activity and the environment Does not show the linkage between economic activity and the environment

Circular Flow Model

Materials Balance Model Expand on circular flow model Shows links between economic activity and the natural environment via flow of residuals from the economy to the environment This is Environmental Economics Residuals are pollution remaining in the environment after some process has occurred Residuals can be delayed, but not prevented, through recovery, recycling, and reuse Law of Thermodynamics for economists: planet’s resources won’t last forever

Materials Balance Model Source: Adapted from Kneese, Ayres, and D'Arge (1970).

What Causes Environmental Damage? Natural Pollutants arise from non-artificial processes in nature e.g., ocean salt spray, pollen Anthropogenic Pollutants are human-induced and include all residuals associated with consumption and production e.g., chemical wastes, gases from combustion Of greater concern to environmental economists Focus on anthropogenic pollutants

Sources of Pollution Sources grouped by mobility Stationary Sources: fixed-site Mobile Source: any nonstationary source Sources grouped by identifiability Point source: single identifiable source Nonpoint Source: a source that cannot be accurately identified, degrading in a diffuse way

Scope of Environmental Damage Local Pollution Damage not far from the source e.g., urban smog Regional Pollution Damage extends well beyond the source e.g., acidic deposition Global Pollution Involving widespread environmental effects with global implications e.g., global warming, ozone depletion

Examples of pollution

April 20, 2010: Deepwater Horizon Explosion

What do we want the environment to look like? Environmental Quality – reduction in anthropogenic contamination to socially acceptable levels Sustainable Development – management of resources to ensure long-term quality and abundance (economists’ version?) Biodiversity – assuring the variety of distinct species, genetic variability, and variety of inhabitable ecosystems

Environmental Policy Planning Environmental planning involves many segments of society In the U.S., the Environmental Protection Agency (EPA) acts as liaison to numerous constituents within each sector

Environmental Policy Planning

Environmental Laws * Atomic Energy Act (AEA) * Energy Independence and Security Act (EISA) * Nuclear Waste Policy Act (NWPA) * Chemical Safety Information, Site Security and Fuels Regulatory Relief Act * Energy Policy Act * Occupational Safety and Health (OSHA) * Federal Food, Drug, and Cosmetic Act (FFDCA) * Clean Air Act (CAA) * Oil Pollution Act (OPA) * Clean Water Act (CWA) * Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) * Pesticide Registration Improvement Act (PRIA) * Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, or Superfund) * Food Quality Protection Act (FQPA) * Pollution Prevention Act (PPA) * Resource Conservation and Recovery Act (RCRA) * Marine Protection, Research, and Sanctuaries Act (MPRSA, also known as the Ocean Dumping Act) * Superfund Amendments and Reauthorization Act (SARA) * Safe Drinking Water Act (SDWA) * Shore Protection Act (SPA) * Emergency Planning and Community Right-to-Know Act (EPCRA) * National Environmental Policy Act (NEPA) from 1969 * Toxic Substances Control Act (TSCA) * National Technology Transfer and Advancement Act (NTTAA) * Endangered Species Act (ESA) * Noise Control Act

Government Policy Approach Command-and-Control approach – tell people what to do Market approach – create incentives (=prices) for people to do the ‘right’ thing

Review of key ideas How economy is linked to environment How to think about pollution The policy of managing the environment

Risk Analysis Two decision-making procedures Risk Assessment: qualitative and quantitative evaluation of risk posed by an environmental hazard Risk Management: decision-making process of choosing from alternative responses to environmental risk

Risk Management Economic Criteria Equity Criterion Allocative efficiency – requires resources to be appropriated such that benefits equal costs Cost-effectiveness – requires the least amount of resources be used to achieve an objective Equity Criterion Environmental justice – concerned with the fairness of the environmental risk burden across segments of society or geographic region

Efficiency and fairness may conflict