Environmental economics - AbsoluteAstronomy.com

Environmental economics is a subfield of economics

Economics

Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

concerned with environmental issues. Quoting from the National Bureau of Economic Research

National Bureau of Economic Research

The National Bureau of Economic Research is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community." The NBER is well known for providing start and end...

Environmental Economics program:
For an overview of international policy relating to environmental economics, see Runnals (2011).

Topics and concepts

Central to environmental economics is the concept of market failure

Market failure

Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off...

. Market failure means that markets fail to allocate resources efficiently. As stated by Hanley, Shogren, and White (2007) in their textbook Environmental Economics: "A market failure occurs when the market does not allocate scarce resources to generate the greatest social welfare. A wedge exists between what a private person does given market prices and what society might want him or her to do to protect the environment. Such a wedge implies wastefulness or economic inefficiency; resources can be reallocated to make at least one person better off without making anyone else worse off." Common forms of market failure include externalities, non-excludability and non-rivalry.

Externality

Externality

In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...

: the basic idea is that an externality exists when a person makes a choice that affects other people that are not accounted for in the market price. For instance, a firm emitting pollution

Pollution

Pollution is the introduction of contaminants into a natural environment that causes instability, disorder, harm or discomfort to the ecosystem i.e. physical systems or living organisms. Pollution can take the form of chemical substances or energy, such as noise, heat or light...

will typically not take into account the costs that its pollution imposes on others. As a result, pollution in excess of the 'socially efficient' level may occur. A classic definition influenced by Kenneth Arrow

Kenneth Arrow

Kenneth Joseph Arrow is an American economist and joint winner of the Nobel Memorial Prize in Economics with John Hicks in 1972. To date, he is the youngest person to have received this award, at 51....

and James Meade

James Meade

James Edward Meade CB, FBA was a British economist and winner of the 1977 Nobel Memorial Prize in Economic Sciences jointly with the Swedish economist Bertil Ohlin for their "Pathbreaking contribution to the theory of international trade and international capital movements."Meade was born in...

is provided by Heller and Starrett (1976), who define an externality as “a situation in which the private economy lacks sufficient incentives to create a potential market in some good and the nonexistence of this market results in losses of Pareto efficiency.” In economic terminology, externalities are examples of market failure

Market failure

s, in which the unfettered market does not lead to an efficient

Pareto efficiency

Pareto efficiency, or Pareto optimality, is a concept in economics with applications in engineering and social sciences. The term is named after Vilfredo Pareto, an Italian economist who used the concept in his studies of economic efficiency and income distribution.Given an initial allocation of...

outcome.

Common property

Common-pool resource

In economics, a common-pool resource , also called a common property resource, is a type of good consisting of a natural or human-made resource system , whose size or characteristics makes it costly, but not impossible, to exclude potential beneficiaries from obtaining benefits from its use...

and non-exclusion: When it is too costly to exclude people from access to an environmental resource for which there is rivalry, market allocation is likely to be inefficient. The challenges related with common property and non-exclusion have long been recognized. Hardin's (1968) concept of the tragedy of the commons

Tragedy of the commons

The tragedy of the commons is a dilemma arising from the situation in which multiple individuals, acting independently and rationally consulting their own self-interest, will ultimately deplete a shared limited resource, even when it is clear that it is not in anyone's long-term interest for this...

popularized the challenges involved in non-exclusion and common property. "commons" refers to the environmental asset itself, "common property resource" or "common pool resource" refers to a property right regime that allows for some collective body to devise schemes to exclude others, thereby allowing the capture of future benefit streams; and "open-access" implies no ownership in the sense that property everyone owns nobody owns.

The basic problem is that if people ignore the scarcity value of the commons, they can end up expending too much effort, over harvesting a resource (e.g., a fishery). Hardin theorizes that in the absence of restrictions, users of an open-access resource will use it more than if they had to pay for it and had exclusive rights, leading to environmental degradation

Environmental degradation

Environmental degradation is the deterioration of the environment through depletion of resources such as air, water and soil; the destruction of ecosystems and the extinction of wildlife...

. See, however, Ostrom

Elinor Ostrom

Elinor Ostrom is an American political economist. She was awarded the 2009 Nobel Memorial Prize in Economic Sciences, which she shared with Oliver E. Williamson, for "her analysis of economic governance, especially the commons." She was the first, and to date, the only woman to win the prize in...

's (1990) work on how people using real common property resources have worked to establish self-governing rules to reduce the risk of the tragedy of the commons.

Public goods and non-rivalry: Public goods are another type of market failure, in which the market price does not capture the social benefits of its provision. For example, protection from the risks of climate change is a public good since its provision is both non-rival and non-excludable. Non-rival means climate protection provided to one country does not reduce the level of protection to another country; non-excludable means it is too costly to exclude any one from receiving climate protection. A country's incentive to invest in carbon abatement is reduced because it can "free ride

Free rider problem

In economics, collective bargaining, psychology, and political science, a free rider is someone who consumes a resource without paying for it, or pays less than the full cost. The free rider problem is the question of how to limit free riding...

" off the efforts of other countries. Over a century ago, Swedish economist Knut Wicksell (1896) first discussed how public goods can be under-provided by the market because people might conceal their preferences for the good, but still enjoy the benefits without paying for them.

Valuation

Assessing the economic value of the environment is a major topic within the field. Use and indirect use are tangible benefits accruing from natural resource

Natural resource

Natural resources occur naturally within environments that exist relatively undisturbed by mankind, in a natural form. A natural resource is often characterized by amounts of biodiversity and geodiversity existent in various ecosystems....

s or ecosystem services

Ecosystem services

Humankind benefits from a multitude of resources and processes that are supplied by natural ecosystems. Collectively, these benefits are known as ecosystem services and include products like clean drinking water and processes such as the decomposition of wastes...

(see the nature section of ecological economics). Non-use values include existence, option, and bequest values. For example, some people may value the existence of a diverse set of species, regardless of the effect of the loss of a species on ecosystem services. The existence of these species may have an option value, as there may be possibility of using it for some human purpose (certain plants may be researched for drugs). Individuals may value the ability to leave a pristine environment to their children.

Use and indirect use values can often be inferred from revealed behavior, such as the cost of taking recreational trips

Travel cost analysis

The travel cost method of economic valuation, travel cost analysis, or Clawson Method is a Revealed preference method of economic valuation used in cost benefit analysis to calculate the value of something that cannot be obtained through market prices...

or using hedonic methods in which values are estimated based on observed prices. Non-use values are usually estimated using stated preference methods such as contingent valuation

Contingent valuation

Contingent valuation is a survey-based economic technique for the valuation of non-market resources, such as environmental preservation or the impact of contamination...

or choice modelling

Choice Modelling

Choice modelling attempts to model the decision process of an individual or segment in a particular context. Choice modelling may also be used to estimate non-market environmental benefits and costs....

. Contingent valuation typically takes the form of surveys in which people are asked how much they would pay to observe and recreate in the environment (willingness to pay

Willingness to pay

In economics, the willingness to pay is the maximum amount a person would be willing to pay, sacrifice or exchange in order to receive a good or to avoid something undesired, such as pollution...

) or their willingness to accept (WTA) compensation for the destruction of the environmental good. Hedonic pricing examines the effect the environment has on economic decisions through housing prices, traveling expenses, and payments to visit parks.

Solutions

Solutions advocated to correct such externalities include:

Environmental regulations. Under this plan, the economic impact has to be estimated by the regulator. Usually this is done using cost-benefit analysis
Cost-benefit analysis
Cost–benefit analysis , sometimes called benefit–cost analysis , is a systematic process for calculating and comparing benefits and costs of a project for two purposes: to determine if it is a sound investment , to see how it compares with alternate projects...

. There is a growing realization that regulations (also known as "command and control" instruments) are not so distinct from economic instruments as is commonly asserted by proponents of environmental economics. E.g.1 regulations are enforced by fines, which operate as a form of tax if pollution rises above the threshold prescribed. E.g.2 pollution must be monitored and laws enforced, whether under a pollution tax regime or a regulatory regime. The main difference an environmental economist would argue exists between the two methods, however, is the total cost of the regulation. "Command and control" regulation often applies uniform emissions limits on polluters, even though each firm has different costs for emissions reductions. Some firms, in this system, can abate inexpensively, while others can only abate at high cost. Because of this, the total abatement has some expensive and some inexpensive efforts to abate. Environmental economic regulations find the cheapest emission abatement efforts first, then the more expensive methods second. E.g. as said earlier, trading, in the quota system, means a firm only abates if doing so would cost less than paying someone else to make the same reduction. This leads to a lower cost for the total abatement effort as a whole.

Quotas on pollution. Often it is advocated that pollution reductions should be achieved by way of tradeable emissions permits, which if freely traded may ensure that reductions in pollution are achieved at least cost. In theory, if such tradeable quotas are allowed, then a firm would reduce its own pollution load only if doing so would cost less than paying someone else to make the same reduction. In practice, tradeable permits approaches have had some success, such as the U.S.'s sulphur dioxide trading program or the EU Emissions Trading Scheme, and interest in its application is spreading to other environmental problems.

Taxes and tariffs on pollution
Tax, tariff and trade
The tax, tariff and trade laws of a political region, state or trade bloc determine which form of consumption and production tend to be encouraged or discouraged...

/Removal of "dirty subsidies
Dirty subsidy
A dirty subsidy is a payment or incentive by a government to a private corporation that encourages waste of raw materials, natural resources, energy, or results in pollution or other human health hazards....

." Increasing the costs of polluting will discourage polluting, and will provide a "dynamic incentive," that is, the disincentive continues to operate even as pollution levels fall. A pollution tax that reduces pollution to the socially "optimal" level would be set at such a level that pollution occurs only if the benefits to society (for example, in form of greater production) exceeds the costs. Some advocate a major shift from taxation from income and sales taxes to tax on pollution - the so-called "green tax shift."

Better defined property rights. The Coase Theorem
Coase theorem
In law and economics, the Coase theorem , attributed to Ronald Coase, describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are no transaction costs, bargaining will lead to...

states that assigning property rights will lead to an optimal solution, regardless of who receives them, if transaction costs are trivial and the number of parties negotiating is limited. For example, if people living near a factory had a right to clean air and water, or the factory had the right to pollute, then either the factory could pay those affected by the pollution or the people could pay the factory not to pollute. Or, citizens could take action themselves as they would if other property rights were violated. The US River Keepers Law of the 1880s was an early example, giving citizens downstream the right to end pollution upstream themselves if government itself did not act (an early example of bioregional democracy). Many markets for "pollution rights" have been created in the late twentieth century—see emissions trading
Emissions trading
Emissions trading is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants....

. The assertion that defining property rights is a solution is controversial within the field of environmental economics and environmental law and policy more broadly; in Anglo-American and many other legal systems, one has the right to carry out any action unless the law expressly proscribes it. Thus, property rights are already assigned (the factory that is polluting has a right to pollute).

Relationship to other fields

Environmental economics is related to ecological economics

Ecological economics

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but there are differences. Most environmental economists have been trained as economists. They apply the tools of economics to address environmental problems, many of which are related to so-called market failures—circumstances wherein the "invisible hand

Invisible hand

In economics, invisible hand or invisible hand of the market is the term economists use to describe the self-regulating nature of the marketplace. This is a metaphor first coined by the economist Adam Smith...

" of economics is unreliable. Most ecological economists have been trained as ecologists, but have expanded the scope of their work to consider the impacts of humans and their economic activity on ecological systems and services, and vice-versa. This field takes as its premise that economics is a strict subfield of ecology

Ecology

Ecology is the scientific study of the relations that living organisms have with respect to each other and their natural environment. Variables of interest to ecologists include the composition, distribution, amount , number, and changing states of organisms within and among ecosystems...

. Ecological economics is sometimes described as taking a more pluralistic approach to environmental

Natural environment

The natural environment encompasses all living and non-living things occurring naturally on Earth or some region thereof. It is an environment that encompasses the interaction of all living species....

problems and focuses more explicitly on long-term environmental sustainability and issues of scale.

Environmental economics is viewed as more pragmatic in a price system

Price system

In economics, a price system is any economic system that affects its distribution of goods and services with prices and employing any form of money. Except for possible remote and primitive communities, all modern societies use price systems to allocate resources...

; ecological economics as more idealistic in its attempts not use money

Money

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

as a primary arbiter of decisions. These two groups of specialists sometimes have conflicting views which may be traced to the different philosophical underpinnings.

Another context in which externalities

Externality

In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...

apply is when globalization

Globalization

Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...

permits one player in a market who is unconcerned with biodiversity

Biodiversity

Biodiversity is the degree of variation of life forms within a given ecosystem, biome, or an entire planet. Biodiversity is a measure of the health of ecosystems. Biodiversity is in part a function of climate. In terrestrial habitats, tropical regions are typically rich whereas polar regions...

to undercut prices of another who is - creating a "race to the bottom" in regulations and conservation. This in turn may cause loss of natural capital

Natural capital

Natural capital is the extension of the economic notion of capital to goods and services relating to the natural environment. Natural capital is thus the stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into the future...

with consequent erosion, water purity problems, diseases, desertification, and other outcomes which are not efficient

Pareto efficiency

in an economic sense. This concern is related to the subfield of sustainable development

Sustainable development

Sustainable development is a pattern of resource use, that aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but also for generations to come...

and its political relation, the anti-globalization movement

Anti-globalization movement

The anti-globalization movement, or counter-globalisation movement, is critical of the globalization of corporate capitalism. The movement is also commonly referred to as the global justice movement, alter-globalization movement, anti-globalist movement, anti-corporate globalization movement, or...

.

Image:Sustainable development.svg|right|The three pillars of sustainability. Clickable.|300px|thumb
poly 138 194 148 219 164 240 182 257 219 277 263 291 261 311 264 331 272 351 283 366 300 383 316 394 287 408 261 417 224 424 182 426 154 423 119 415 87 403 58 385 40 368 24 347 17 328 13 309 16 286 26 263 43 240 64 224 84 212 107 202 Environment

Environment (biophysical)

The biophysical environment is the combined modeling of the physical environment and the biological life forms within the environment, and includes all variables, parameters as well as conditions and modes inside the Earth's biosphere. The biophysical environment can be divided into two categories:...

poly 324 219 334 226 343 234 351 242 359 251 366 263 371 276 375 287 400 279 417 272 438 263 453 252 466 241 477 229 488 214 497 193 482 189 463 188 423 188 398 191 376 196 352 204 Equitable

Equity (economics)

Equity is the concept or idea of fairness in economics, particularly as to taxation or welfare economics. More specifically it may refer to equal life chances regardless of identity, to provide all citizens with a basic minimum of income/goods/services or to increase funds and commitment for...

poly 319 221 330 229 337 235 347 244 357 258 365 270 371 287 358 289 344 291 321 292 303 292 284 290 268 288 272 275 278 261 287 249 297 239 Sustainable

Sustainable development

poly 142 192 167 188 185 187 211 187 235 190 263 196 286 203 304 212 316 219 305 227 295 236 285 246 276 259 269 272 264 287 249 284 229 277 208 268 190 256 172 242 158 226 149 212 Bearable (Social ecology)

Social ecology

Social ecology is a philosophy developed by Murray Bookchin in the 1960s.It holds that present ecological problems are rooted in deep-seated social problems, particularly in dominatory hierarchical political and social systems. These have resulted in an uncritical acceptance of an overly...

poly 267 291 265 304 267 320 275 345 284 360 293 371 304 381 319 392 332 384 343 374 354 362 364 347 371 332 373 317 374 305 372 292 362 293 344 295 323 296 301 296 286 294 Viable (Environmental economics)

Environmental economics

Environmental economics is a subfield of economics concerned with environmental issues. Quoting from the National Bureau of Economic Research Environmental Economics program:...

poly 501 193 519 197 541 205 561 215 582 228 604 248 616 267 623 286 626 305 623 326 617 343 607 359 596 373 580 386 563 397 538 409 517 417 494 422 468 425 432 426 413 424 396 421 375 416 353 409 335 401 323 394 335 386 349 372 360 359 374 331 377 313 377 299 376 290 388 288 410 280 458 256 481 233 Economic

Economics

poly 141 188 139 173 143 147 152 126 169 107 191 88 216 75 242 65 280 55 310 53 352 54 379 60 415 71 447 88 461 99 475 112 488 128 496 147 500 162 500 176 500 189 471 185 452 183 410 185 369 194 337 206 319 216 305 208 279 197 257 191 230 185 199 183 199 182 199 183 Social

Society

A society, or a human society, is a group of people related to each other through persistent relations, or a large social grouping sharing the same geographical or virtual territory, subject to the same political authority and dominant cultural expectations...

Environmental economics was once distinct from resource economics. Natural resource economics as a subfield began when the main concern of researchers was the optimal commercial exploitation of natural resource stocks. But resource managers and policy-makers eventually began to pay attention to the broader importance of natural resources (e.g. values of fish and trees beyond just their commercial exploitation;, externalities associated with mining). It is now difficult to distinguish "environmental" and "natural resource" economics as separate fields as the two became associated with sustainability

Sustainability

Sustainability is the capacity to endure. For humans, sustainability is the long-term maintenance of well being, which has environmental, economic, and social dimensions, and encompasses the concept of union, an interdependent relationship and mutual responsible position with all living and non...

. Many of the more radical green economists split off to work on an alternate political economy

Political economy

Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...

.

Environmental economics was a major influence for the theories of natural capitalism

Natural capitalism

Natural Capitalism: Creating the Next Industrial Revolution is a 1999 book co-authored by Paul Hawken, Amory Lovins and Hunter Lovins. It has been translated into a dozen languages and was the subject of a Harvard Business Review summary....

and environmental finance

Environmental finance

Environmental Finance is the use of various financial instruments to protect the environment. The field is part of both environmental economics and the conservation movement....

, which could be said to be two sub-branches of environmental economics concerned with resource conservation in production, and the value of biodiversity to humans, respectively. The theory of natural capitalism

Natural capitalism

(Hawken, Lovins, Lovins) goes further than traditional environmental economics by envisioning a world where natural services are considered on par with physical capital

Capital (economics)

In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...

.

The more radical Green economists reject neoclassical economics in favour of a new political economy

Political economy

beyond capitalism

Capitalism

Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...

or communism

Communism

Communism is a social, political and economic ideology that aims at the establishment of a classless, moneyless, revolutionary and stateless socialist society structured upon common ownership of the means of production...

that gives a greater emphasis to the interaction of the human economy and the natural environment, acknowledging that "economy is three-fifths of ecology" - Mike Nickerson.

These more radical approaches would imply changes to money supply

Money supply

In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

and likely also a bioregional democracy so that political, economic, and ecological "environmental limits" were all aligned, and not subject to the arbitrage

Arbitrage

In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...

normally possible under capitalism

Capitalism

Professional bodies

The main academic and professional organizations for the discipline of Environmental Economics are the Association of Environmental and Resource Economists (AERE) and the European Association for Environmental and Resource Economics (EAERE). The main academic and professional organization for the discipline of Ecological Economics is the International Society for Ecological Economics

International Society for Ecological Economics

The International Society for Ecological Economics was founded in 1989 to promote Ecological Economics and assist ecological economists and related societes...

(ISEE) and The Green Economics Institute for Green Economics [greeneconomics.org.uk] is its international Professional body.

External links

The new green economy by Hillary Rosner 10.September.2010 Wired UK
Wired UK
Wired UK is a full-colour monthly magazine that reports primarily on the effects of science and technology. It covers a broad range of topics including design, architecture, culture, the economy, politics and philosophy...
- Environmental Economics course at the Harris School of Public Policy Studies
M. King Hubbert on the Nature of Growth. 1974
A green New Deal-environmental economics preposition (2008)
The Bioeconomy to 2030: Designing a Policy Agenda by the OECD
Environmental economics (World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

).
The Economic Benefits/Costs of Biophysical Systems to Business and Society NOAA Economics
Grant Thornton International Business Report Energy & Environment focus
Earth Index (PDF).
Sustainable Prosperity: building a greener and more prosperous economy for Canadians
The Environmental Economics Blog.
Environmental Economics: Basic Concepts and Debates
Introduction to environmental economics
University of Nebraska Natural Resource and Environmental Economics
UNEP/GEF Regional Task Force on Economic Valuation
IDEAS/RePEc
Řepeč
Řepeč is a village and municipality in Tábor District in the South Bohemian Region of the Czech Republic.The municipality covers an area of , and has a population of 267 ....

list of environmental economists, and ranking of same

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