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THE ROLE OF ECONOMICS IN ENVIRONMENTAL MANAGEMENT

Economics and the Environment

Economic theory explains what we observe in reality, including environmental problems.

Recognize the link between economic activity and the environment using these models

Circular Flow Model

Vs.

Materials Balance Model

Circular Flow Model

Shows the real and monetary flows of economic activity through the output and factor markets

Forms the basis for modeling the relationship between economic activity and the environment

But does not explicitly show the linkage between economic activity and the environment

Materials Balance Model

Places the circular flow within a larger schematic to show links between economic activity and the natural environment via two sets of flows

Flow of resources from the environment to the economy  Natural Resource Economics

Flow of residuals from the economy to the environment  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.

Circular Flow Model

Materials Balance Model

The Interdependence of Economic Activity and Nature

Source: Based on Kneese, Ayres, and D'Arge (1970).

Science and the Materials Balance Model

The flow of resources and residuals are balanced according to laws of science

First Law of Thermodynamics

Matter and energy can neither be created nor destroyed. Total energy of an isolated system is constant; energy can be transformed from one form to another, but can be neither created nor destroyed.

Second Law of Thermodynamics

Nature’s capacity to convert matter and energy is not without bound. This law is concerned with the direction of natural processes. It asserts that a natural process runs only in one sense, and is not reversible. For example, heat always flows spontaneously from hotter to colder bodies, and never the reverse, unless external work is performed on the system. 

What is the essence of these laws?

Fundamental Concepts in Environmental Economics

Terms and Definitions

1. Causes of Environmental Damage

Natural Pollutants arise from nonartificial processes in nature. e.g., ocean salt spray, pollen, etc.

Anthropogenic Pollutants are human induced and include all residuals associated with consumption and production. e.g., chemical wastes, gases from combustion. These are of greater concern to environmental economists.

2. 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

3. 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

4. Environmental Objectives

Environmental Quality – reduction in anthropogenic contamination to socially acceptable levels

Sustainable Development – management of resources to ensure long-term quality and abundance

Biodiversity – assuring the variety of distinct species, genetic variability, and variety of inhabitable ecosystems

Environmental Policy Planning

EPA headquarters are in Washington, D.C., and there are 10 regional offices across the nation.

Source: Based on Vaupel (1978), Figure 5-3, p. 75.

National Environmental Policy Act (NEPA) of 1969

Directs the integration of effort across agencies, executive departments, and branches of government in the U.S.

Guides U.S. federal environmental policy

Requires that environmental impact of public policy proposals be addressed

Calls for an Environmental Impact Statement (EIS) on proposals or major federal actions

Risk Analysis Chief Tool Guiding Policy Planning

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. More…

Risk Management Policy Evaluation Criteria

Economic Criteria

Allocative Efficiency – requires resources to be appropriated such that additional benefits equal additional costs

Cost-effectiveness – requires that 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

Government Policy Approach

Command-and-Control Approach – regulates polluters through the use of rules

Market Approach – incentive-based policy that encourages conservation or pollution reduction

Can follow the “polluter-pays principle” whereby the polluter pays for the damage caused

Setting the Time Horizon

Management Strategies – short-term strategies intended to manage an existing problem

An ameliorative intent

Pollution Prevention (P2) – a long-term strategy aimed at reducing the amount of toxicity of residuals released to nature

A preventive intent