Chapter 2

The Economy and the

Environment

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 Economy and Environment

• Economy: a collection of technological, legal, and social

arrangements through which individuals in society seek to increase
their material and spiritual well-being. The two elementary economic
functions pursued by society are production and distribution, leading
to consumption.

• Any economic system exists within, and is encompassed by, the

natural world. Its processes and changes are of course governed by
the laws of nature. In addition, economies make use directly of
natural assets of all types.

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 Economy and Environment

• The natural world is the

• (a) provider of raw materials and energy inputs needed for
production and consumption – natural resource economics
• (b) receptor of residuals from production and consumption –
environmental economics

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 Natural Resource Economics vs. Environmental Economics

• Natural resource economics: application of economic principles to the

study of extraction and utilization of natural resources
• Mineral economics
• Forest economics
• Marine economics
• Land economics
• Energy economics
• Water economics
• Agricultural economics
• Environmental economics examines the waste products or residuals
from production and consumption and how to reduce or mitigate the
flow of residuals, so they have less damage on the natural environment
and depletion of natural capital.
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 Basic Terminology

• Ambient quality: quantity of pollutants in the environment

• Environmental quality: state of the natural environment; ambient and
other quality (visual, aesthetic)
• Residuals: materials left over after production/consumption
• Emissions: discharge of residuals to the environment, treated or not
• Recycling: returning residuals to be used again in production or
consumption
• Pollutant: a substance, energy form, or action that, when introduced
into the natural environment, results in damages from a lowering of
the ambient quality level

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 Basic Terminology

• Effluent: emissions
• Pollution: ambient quality of the environment is degraded enough to
cause some damage, when a residual is introduced into the
environment
• Damages: negative impacts produced by environmental pollution on
people in forms of health effects, visual degradation, and on elements
of the ecosystem through disruptions of ecological linkages, habitat
destruction, species extinction.
• Environmental medium: broad dimensions of the natural world that
collectively constitute the environment, usually classified as land,
water, and air
• Source: the location at which emissions occur

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 The Fundamental Balance

• In the long run, materials and energy (M) extracted from the natural
environment must be equal to the residuals from production and
consumption, which are discharged back into the environment.

• When we consider what producers use for production and what they
produce, we have

• If our goal is to reduce the mass of residuals disposed of in the natural

environment, we can reduce M in 3 fundamental ways:
1) reduce G: conservation
2) reduce : reduce residual’s intensity of production; sectoral shift
3) increase : increase recycling

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 FIGURE 2.1 The Environment and the Economy

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 1) Reducing Production of Goods

• The idea is not popular with many people because it means they will
have to live with less material goods to consume, or the total
population will have to shrink.

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 2) Reducing Residuals from Production

• By making the production process less polluting by improving

technology and practices, residuals per unit of output produced can be
reduced.

• Also, by shifting the composition of output (from manufacturing to

services, for example), we can reduce residuals from production. It
can also mean a shift to consumption of less polluting goods. For
example, detergents/soaps that do not contain phosphates or organic
produce.

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 3) Increasing Recycling

• If we reuse goods that were once considered waste, we need fewer

raw natural resources in production, reducing overall residuals.
• Recycling an aluminum can means we use less bauxite from
nature and less energy in production

• However, recycling has its limits – not all goods can be recycled,
goods are degraded in recycling and recycling still requires the input
of energy and other natural resources

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 Ultimate Goal

• Our ultimate goal is to reduce the damages caused by the discharge

of production and consumption residuals.
• This can be achieved by:
• Reduce the total quantity of these residuals (3 ways)
• Working directly on the stream of residuals to reduce the damages
caused by the (given quantity of) residuals.

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 The Environment as an Economic and Social Asset

• We can think of environment as an asset that produces important

services for humans and nonhuman organisms. Yet the ability of the
environment to produce these services can be degraded.
• Production possibility curve (PPC) shows a trade-off between
conventional economic output and environmental quality, with a fixed
endowment of resources and technology
• Our preferences (values) determine our choice: how much goods our
society produces and what level of environmental quality we enjoy.
• Today’s social choice will influence the position of the PPF in the
future – an intemporal (intergenerational) trade-off

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 FIGURE 2.2 Production Possibility Curves for Current and
Future Generations

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 Environmental Sustainability

• Today’s social choice will influence the position of the PPF in the
future – Short-run decisions made by the present generation may
have long-run consequences for future generations
• High use of natural resources today might lower the PPF over time,
leading to an unsustainable economy with lower consumption in the
future
• Environmental policy needs to be made with long-run considerations
• Sustainability means that future PPCs are not adversely affected by
what is done today. It does not mean that we must maximize
environmental quality today, because that implies zero output of
goods and services. It means simply that environmental impacts need
to be reduced enough today to avoid shifting future PPCs back in
comparison to today’s production possibilities – intergenerational
fairness

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 Emissions, Ambient Quality, and Damages

Emissions produce changes in levels of ambient quality, which in turn

cause damages to humans and nonhumans.
1. Multiple sources of emission: Who is responsible? Who should
reduce how much of emissions? Pollution-control programs face a
real problem of design and enforcement.
2. How the residual emissions translate into particular ambient quality
levels - natural and physical sciences
3. A given set of ambient conditions translates into particular exposure
patterns for living and nonliving systems. These exposures are a
function not only of the physical processes involved, and the
human choices that are made about where and how to live, and of
the susceptibilities of living and non-living systems to varying
environmental conditions. Last, damages are related to human
values.

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 Types of Pollutants: Cumulative vs. Noncumulative

• Cumulative pollutant builds up in the environment over time because it does

not degrade or only does so very slowly. Examples: radioactive wastes,
plastics, heavy metals, many chemicals

• Noncumulative pollutant dissipate soon after being emitted (can be

assimilated or buffered by the natural environment) and hence does not build
up over time. Example: noise.

• Many residuals or pollutants lie between these two ends of the spectrum. For
example, organic matters emitted into water bodies. If the emission rate
exceeds assimilation rate, then they become accumulative. There is a concern
that carbon dioxide is turning into accumulative type because of increasing
levels of emissions over time.

• We need to figure out the environmental damages and relate these back to the
costs of reducing emissions. This is more complex for cumulative pollutants

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 Types of Pollutants: Local vs. Regional vs. Global

• Local pollutants are those pollutants whose emissions have an

impact only in restricted localized regions. Noise pollution and the
degradation of the visual environment are local in their impacts. Only
the group of people near the emission source are affected.

• Regional and global pollutants are those pollutants whose impacts

are widespread, affecting people and environment over a large region
or globally. Sulphur dioxide, which causes acid rain problem, is a
regional pollutant. The ozone-depleting effects of chlorofluorocarbon
emissions from various countries work through chemical changes in
the earth’s stratosphere, which means that the impacts are truly
global.

• Other things equal, local environmental problems ought to be easier to

deal with than regional or national problems, which in turn ought to be
easier to manage than global problems.
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 Types of Pollutants: Point-Source vs. Nonpoint-Source

• Pollutants with an easily identifiable point of discharge or emission are

called point-source pollutants. The points at which sulphur dioxide
emissions leave a large power plant are easy to identify; they come
out the tops of smokestacks associated with each plant. Municipal
waste treatment plants normally have a single outfall from which all
the wastewater is discharged.

• Nonpoint-source pollutants are those for which there are no well-

defined points of discharge or emissions. Agricultural chemicals, for
example, usually run off the land in a dispersed or diffused pattern,
and even though they may pollute specific streams or underground
aquifers, there is no single pipe or stack from which these chemicals
are emitted.

• Generally, point source pollutants are easier to monitor and control

than nonpoint source pollutants.
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 Types of Pollutants: Continuous vs. Episodic

• Emissions discharged in a predictable /regular manner is described as

continuous emissions. Emissions from coal-fired electric power
plants or municipal waste treatment plants are more or less
continuous or steady.

• Emissions that are unpredictable in frequencies and levels are called

episodic emissions – uncertainty and fluctuations. Accidental oil or
chemical spills are examples of episodic emissions.

• For continuous emissions, the main environmental concern is to

reduce the quantity discharged per unit time. The main concern for
episodic emissions is to design and manage a system to reduce the
probability of accidental discharges – risk management

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 Environmental Damages Not Related to Emissions

• There are many important instances of deteriorating environmental

quality that are not traceable to residuals discharges. The conversion
of land to housing and commercial areas destroys the environmental
value of that land, whether it be its ecosystem value, such as habitat
or wetland, or its scenic value. Other land uses, such as logging or
strip mining, or converting farmland for food crops to solar farms, can
also have important impacts.
• In these cases, the policy problem is still to understand the incentives
of people whose decisions create these impacts and to change these
incentives when appropriate. Although there are no physical
emissions to monitor and control, there are nevertheless outcomes
that can be described, evaluated, and managed with appropriate
policies.

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