Chapter 5 Economics, Policy, and Sustainable Development Environmental Science

Economic theory moved from "invisible hand" to supply and demand

AdamSmith•Believed that self-interested economic behavior could benefit society if laws were followed and markets were competitive •Classicaleconomics 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

Assumption 1

Assumption 1 : resources are replaceable•Economic models treat natural resources and human resources as substitutable and interchangeable•Once used up, a replacement resource will be found•Some resources can be replaced, but some cannot•Nonrenewable resources (e.g., fossil fuels) can be depleted•Renewable resources (e.g., forests) can also be used up

Assumption 2

Assumption 2: costs and benefits are internal•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•Externalcosts•Affect people other than buyers or sellers•Include health problems, resource depletion, property damage•Ignoring external costs shifts the burden to the taxpayers•Environmental policy addresses external costs

Assumption 4

Assumption 4: all growth is good•Economicgrowthis needed to keep jobs and social order•It creates opportunities for poor to become wealthier•Progress is measured by economic growth•Endless growth cannot be sustained, because resources to support growth are ultimately limited

Assumption 3(cont.)

Assumption: discount long-term effects•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

Neoclassical economics has environmental consequences

Capitalist market systems operate according to neoclassical economics •Enormous material wealth has been created• Assumptions of neoclassical economics contribute to environmental degradation :1.Resources are replaceable 2.All costs and benefits are internal3.We should discount the future4.All growth is good

Cost-benefit analysis: evaluating decisions•

Costs of a proposed action are compared to benefits that result from the action•If benefits costs: pursue the action•But not all costs and benefits can be easily identified, defined, or quantified•It is easy to quantify the cost of pollution-reducing equipment or jobs created by an activity•But hard to assess the effects of pollution on health•Monetary benefits are overrepresented•Analysis is biased in favor of economic development•Biased against environmental protection

Economies rely on goods and services from the environment•

Economies receive inputs from the environment, process them, and discharge outputs into the environment

economics and the environment

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 Economics Studies how people use resources to provide goods and services in the face of demand Ecology and economics come from oikos(household)

Environmental policy

Environmental policy • Once a society agrees that a problem exists, it may persuade its leaders to solve it through policy • Policy • A formal set of general plans and principles to address problems and guide decision making • Public policy • Policy made by governments at local, state, federal, or international level • Environmental policy • Pertains to human interactions with the environment • Regulates resource use or reduces pollution to promote human welfare and protect resources

Environmental policy addresses issues of fairness and resource use

Environmental policy addresses issues of fairness and resource use • Capitalist markets are driven by short-term profit • Not long-term social or environmental stability • Little incentive to minimize impacts • Market failure justifies government intervention • Reasons for governments to intervene in market • Provide social services • National defense, health care, education • Provide "safety nets" • For elderly, the poor, victims of natural disasters • Eliminate unfair advantages held by single buyers/sellers • Manage publicly held resources • Minimize pollution and threats to health and quality of life

How sustainable is economic growth? (cont'd)

How sustainable is economic growth? (cont'd) • Environmental economics • Economies grow by increasing efficiency to attain sustainability within our current economic system • Environmental economists developed methods to tackle the problem of external costs and discounting • Ecological economics • Societies cannot surpass environmental limitations • Ecological economists advocate steady-state economies • Economies that mirror natural ecological systems • They neither grow nor shrink but stay stable • Quality of life increases through technological advances

How sustainable is economic growth?

How sustainable is economic growth? • Modern global economic growth is unprecedented • Americans are in a frenzy of consumption • Economic growth comes from: • Increased inputs (labor, natural resources) • Improvements in efficiency of production (technology, ideas, equipment) • Uncontrolled economic growth is unsustainable • Resources are finite or have limited rates of extraction • Technological innovation can push back limits, but not forever

Markets can fail

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

Policy addresses environmental problems

Policy addresses environmental problems • Science, ethics, and economics help formulate policy • Science provides information and analysis • Ethics and economics clarify how society can address problems • Government interacts with citizens, organizations, and the private sector

The value of the world's ecosystem services

The value of the world's ecosystem services • Earth's economic value of 17 ecosystem services each year equals $148 trillion in 2017 dollars • More than the GDP of all nations combined

We can assign monetary value to ecosystem goods and services (cont'd)

We can assign monetary value to ecosystem goods and services (cont'd) • 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 • Calculate the cost to restore natural systems, replace systems with technology, or clean up pollution

We can assign monetary value to ecosystem goods and services

We can assign monetary value to ecosystem goods and services • The market often assigns natural resources no quantitative monetary value • Nonmarket values • Values 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

We can measure progress with full cost accounting (cont'd)

We can measure progress with full cost accounting (cont'd) • Full cost accounting (true cost accounting) • Accounts for all costs and benefits • Example: Change in U.S. GDP vs. GPI across 50 years

We can measure progress with full cost accounting (cont'd) •

We can measure progress with full cost accounting (cont'd) • Genuine Progress Indicator (GPI) • Indicators that distinguish between desirable and undesirable economic activity • Conventional economic activity plus positive nonmonetary contributions such as volunteering and parenting • Negative impacts such as crime and pollution are subtracted • GPI can differ greatly from GDP

We can measure progress with full cost accounting

We can measure progress with full cost accounting • Gross Domestic Product (GDP) • The monetary value of final goods and services produced each year • Has been used for decades to assess each nation's economy • Fails to account for nonmarket values • Includes desirable and undesirable activity • GDP can rise as a result of crime, war, pollution, and natural disasters

Assumption 3

ssumption 3: costs and benefits are internal (cont'd) •People suffer from external costsPeople who do not participate in a transaction suffer from external costs (health problems, property and aesthetic damage, stress, lower real estate values)© 2015 Pearson Education, Inc.Assumption: discount long-term effects•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

Economic theory moved from "invisible hand" to supply and demand (cont'd)

•Neoclassicaleconomics•Examines the psychological factors that underlie consumer choices•Market prices reflect consumer preference•Supplyvs. demand•Conflict between buyers and sellers leads to ....•Production of the "right" quantities of a product