1. ECONOMICS- APPROACHES AND ENVIRONMENTAL IMPLICATIONS Chapter 5

2. Economics  People say protection threatens economic growth  But environmental protection is good for the economy Economics studies how people use resources to provide goods and services in the face of demand Environmental problems are also economic problems Ecology and economics come from oikos (household)  Economy: a social system that converts resources into:  Goods: manufactured materials that are bought, and  Services: work done for others as a form of business

3. Types of modern economies  Subsistence economy: people get their daily needs directly from nature or their own production – They do not purchase or trade products  Capitalist market economy: buyers and sellers interact to determine prices and production of goods and services  Centrally planned economy: the government determines how to allocate resources  Mixed economy: governments intervene in the market

4. Governments intervene in a market economy  In mixed market economies, governments intervene to: – Eliminate unfair advantages held by single buyers or sellers – Provide social services (national defense, medical care, education) – Provide safety nets for elderly, disaster victims, etc. – Manage the commons – Reduce pollution and other threats to health and quality of life

5. The economy relies on the environment  Economies receive inputs (resources)  Process them  Discharge outputs (waste)  Traditional economics ignores the environment  But still drives most policy decisions

6. Environmental view of economics Human economies are subsets of the environment and depend crucially on it for goods and services

7. Environmental systems support economies  Economic activity uses natural resources (sun’s energy, water, trees, rocks, fossil fuels) as “goods”  Ecosystem services: essential services support the life that makes economic activities possible * Soil formation * Pollination * Water purification * Nutrient cycling * Climate regulation * Waste recycling

8. Economic activities affect the environment  Resource depletion and generating pollution reduces the functioning of ecological systems  Degradation of ecosystem services disrupts economies  Pollution depresses economic opportunities  Ecological degradation hurts poor people the most  Restoring ecosystem services is a prime way to alleviate poverty 15 of 24 global ecosystem services are being degraded or used unsustainably

9. Adam Smith’s “invisible hand” Adam Smith believed that self-interested behavior could benefit society If laws were followed and markets were competitive Classical economics: when people pursue economic self- interest in a competitive marketplace … The market is guided by an “invisible hand” and … Society benefits  This idea is a pillar of free-market thought today

10. Neoclassical economics includes psychology  Neoclassical economics examines the psychological factors that underlie consumer choices  Market prices reflect consumer preference – Supply vs. demand  Conflict between buyers and sellers leads to …. – Production of the “right” quantities of a product

11. Assumption: resources are infinite  Economic models treat resources and workers as infinite, substitutable, and interchangeable  Once used up, a replacement resource will be found  Some resources can be replaced but some cannot  Nonrenewable resources (fossil fuels) can be depleted  Renewable resources (forests) can also be used up

12.  A future event has less value than a present one  Future events are discounted:  Short-term costs and benefits are more important than long- term costs and benefits  Present conditions are more important than future ones  We ignore the long-term consequences of policy decisions  Environmental problems unfold gradually  Discounting causes us to downplay environmental impacts of pollution and resource degradation Assumption: discount long-term effects

13.  Only the buyer and seller experience costs and benefits associated with exchanging goods or services  Pricing ignores social, environmental, or economic costs of pollution and degradation  Taxpayers bear the burden of paying these costs  External costs: affect people other than buyers or sellers  Health problems, resource depletion, property damage  Ignoring external costs creates a false impression of the consequences of choices  Laws and regulations address external costs Assumption: costs and benefits are internal

14. People suffer from external costs People who do not participate in a transaction suffer from external costs (health problems, property and aesthetic damage, stress, lower real estate values)

15. Assumption: all growth is good  Economic growth is needed to keep jobs and social order  It creates opportunities for poor to become wealthier  Progress is measured by economic growth  But economic growth does not ensure well-being  Affluenza: material goods do not always bring contentment to those who can afford them  Runaway growth can destroy our economic system  Resources are ultimately limited

16. We live in a growth-oriented economy  Modern global economic growth is unprecedented  Americans are in a frenzy of consumption  Economic growth comes from:  Increased inputs (labor, natural resources)  Economic development: improved efficiency of production (technology, ideas, equipment)  Uncontrolled economic growth is unsustainable  Technology can push back limits, but not forever  Resources are finite or have limited rates of extraction

17. The dramatic rise in per-person consumption has severe environmental consequences Is the growth paradigm good for us?

18. Ecological economics  Ecological economics: civilizations cannot overcome environmental limitations  Uses principles of ecology and systems science  Natural systems are models for sustainability  Calls for revolution  Ecological economists advocate steady-state economies:  Economies that mirror natural ecological systems  They don’t grow nor shrink but stay stable  Quality of life increases through technological and behavioral changes

19. Environmental economics  Environmental economics: unsustainable economies have high population growth and inefficient resource use  We can attain sustainability within current economic systems  Calls for reform  Economies grow by modifying neoclassical economics to increase efficiency through technology  Environmental economists assign monetary values to ecosystem goods and services  Integrating them into traditional cost-benefit analysis

20. Valuing ecosystem goods and services  The market ignores/undervalues ecosystem services  Nonmarket values: values (e.g., ecological, cultural, spiritual) not included in the price of a good or service  Hard to quantify, since there is no traditional measure of economic worth Natural cycles are vital to our existence but markets impose no penalties when we disturb them

21. How do we quantify an ecosystem’s value?  Surveys determine how much people are willing to pay to protect or restore a resource  Measure the money, time, or effort expended to travel to parks for recreation  Compare housing prices in different areas to infer the dollar value of landscapes, views, and peace and quiet  Measure the cost to restore natural systems, replace systems with technology, or reduce harm from pollution

22. The global value of ecosystem services  The global economic value of 17 ecosystem services equals $46 trillion  More than the GDP of all nations combined Protecting land gives 100 times more value than converting it to agriculture, logging, or fish farming

23. Businesses are responding to concerns  Industries, businesses, and corporations make money by “greening” their operations  Recycling, cutting energy use, etc., reduces costs, and increases profits  Greenwashing: consumers are misled into thinking companies are acting more sustainably than they are  Example: “Pure” bottled water may not be safer or better People must support sustainable economics

25. Markets can fail  Market failure occurs when markets ignore:  The environment’s positive impacts on economies (ecosystem services)  The negative effects of activities on the environment or people (external costs)  Government intervention counters market failure through:  Laws and regulations  Taxing harmful activities  Designing economic incentives to promote fairness, conservation, and sustainability