1. Economics- Approaches and Environmental Implications
Chapter 5

2. What is Economics and how is it related to the Environment?
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. What are the different 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. When does the government intervene?
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. What does the economy rely on the environment for?
Economies receive inputs (resources)
Process them
Discharge outputs (waste)
Traditional economics ignores the environment
But still drives most policy decisions

6. What is the Economic view of the Environment?
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: (for example)
* Soil formation * Pollination
* Water purification * Nutrient cycling
* Climate regulation * Waste recycling

8. How do 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. Father of Classic Economics
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. What is Neoclassic Economics?
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. Neoclassic Economic Assumptions:
1. Resources are finite
2. Events in the future are not as important as today
3. Only the buyer and seller experience costs and benefits associated with exchanging goods or services
4. Economic Growth is good to keep employment high and maintain social order

12. What is our economy like today?
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

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

14. What is Ecologic Economics?
Ecological economics: civilizations cannot overcome environmental limitations
Uses principles of ecology and systems science
Natural systems are models for sustainability
Calls for revolution in thinking
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 14

15. Why is it important to value ecosystem 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

16. 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

17. What is 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
GDP=Gross Domestic
Product
Protecting land gives 100 times more value than converting it to agriculture, logging, or fish farming

18. What are businesses doing to respond to environmental 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 18

20. When can markets 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