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Environmental economics is a sub-field ofeconomics concerned withenvironmental issues.[1] It has become a widely studied subject due to growing environmental concerns in the twenty-first century. Environmental economics "undertakes theoretical or empirical studies of the economic effects of national or localenvironmental policies around the world. Particular issues include the costs and benefits of alternative environmental policies to deal withair pollution,water quality,toxic substances,solid waste, andglobal warming."[2]
Environmental economics is distinguished fromecological economics in that ecological economics emphasizes the economy as a subsystem of the ecosystem with its focus upon preservingnatural capital.[3] While environmental economics focuses on human preferences, by trying to balance protectingnatural resources with people's needs for products and services.[4] Due to these differences it can be seen that ecological economics takes a more holistic approach to traditional economic theories, while environmental economics fits within traditional economic theories.[4]
One survey of German economists found that ecological and environmental economics are differentschools of economic thought, withecological economists emphasizing "strong"sustainability and rejecting the proposition that human-made ("physical") capital can substitute for natural capital.[5] And environmental economics focusing on the efficient allocation of natural resources in order to fulfill human wants.[4]
Although the term "environmental economics" became popular beginning in the 1960s, the entwinement of the two fields of environmentalism and economics started much earlier. Starting with economistMarquis de Condorcet in the 18th century, who had an interest in the link between economic activity and environmental issues.[6] This was seen in his usage ofexternalities while analyzing environmental issues.[6]
During theclassical period of economics,Adam Smith realized while the market is able to allocate private goods efficiently for most goods, it fails to do so in some environmental circumstances.[6] It is within these scenarios where the market fails, that the government needs to take action.[6] This is seen in his quote "Erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals to erect and maintain; because the profit would never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society."[7]Thomas Robert Malthus also was another classical economist whose work led to the beginnings of environmental economists.[6] Malthus' theory of population argued that agricultural productivity faces diminishing returns, which ultimately limits the exponential growth of human populations.[6] This thought process later led economists to think about the relationship between resource scarcity and economic development.[6]David Ricardo's writings connected the natural environment and the standard of living which further helped to develop environmental economics later on.[6] He stressed that the value of land varies based on how fertile it is.[6] The last classical economist to add to environmental economics wasJohn Stuart Mill.[6] In hisPrinciples of Political Economy, he wrote that the management of the environment cannot be done by the market and individuals, and is instead a governmental obligation, "[I]s there not the earth itself, its forests and waters, and all other natural riches, above and below the surface? These are the inheritance of the human race, and there must be regulations for the common enjoyment of it. What rights, and under what conditions, a person shall be allowed to exercise over any portion of this common inheritance cannot be left undecided. No function of government is less optional than the regulation of these things, or more completely involved in the idea of civilized society."[8]
Environmental economics became increasingly more popular in the 19th century.[9] This is when theResources for the Future (RFF) was established in Washington, D.C. This independent research organization applied economics to environmental issues.[9] During this timeH. Scott Gordon released his paper "Economic Theory of a Common Property Resource: The Fishery" which claimed that open access fisheries can be exploited leading to economic rents to be dissipated.[9] Another important paper adding to environmental economics at this time was "Spaceship Earth" byKenneth E. Boulding.[9] This paper describes the physical limits of earths resources and how technology cannot truly help humans push those limits.[9] Finally,Ronald Coase created an economic solution to environmental issues, which solidified environmental economics as a sub field of economics.[9] He believed that there were two solutions 1) to tax the creator of the polluter and to create regulation that put the burden of action on the polluter or 2) the sufferer must pay the polluter to not pollute.[9]
Central to environmental economics is the concept of market failure.Market failure means that markets fail to allocate resources efficiently. As stated by Hanley, Shogren, and White (2007):[10] "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." This results in an inefficient market that needs to be corrected through avenues such as government intervention. Common forms of market failure include externalities, non-excludability andnon-rivalry.[4]
Anexternality exists when a person makes a choice that affects other people in a way that is not accounted for in the market price. An externality can be positive or negative but is usually associated with negative externalities in environmental economics. For instance, water seepage in residential buildings occurring in upper floors affect the lower floors.[11] Another example concerns how the sale of Amazon timber disregards the amount of carbon dioxide released in the cutting.[12][better source needed] Or a firm emittingpollution will typically not take into account the costs that its pollution imposes on others. As a result, pollution may occur in excess of the 'socially efficient' level, which is the level that would exist if the market was required to account for the pollution. A classic definition influenced byKenneth Arrow andJames Meade 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 ofPareto efficiency".[13] In economic terminology, externalities are examples ofmarket failures, in which the unfettered market does not lead to an efficient outcome.
When it is too costly to exclude some people from access to an environmental resource, the resource is either called acommon property resource (when there is rivalry for the resource, such that one person's use of the resource reduces others' opportunity to use the resource) or apublic good (when use of the resource isnon-rivalrous). In either case of non-exclusion, market allocation is likely to be inefficient.
These challenges have long been recognized.Hardin's (1968) concept of thetragedy of the commons 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.[14]
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 toenvironmental degradation. See, however,Ostrom'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.[14]
Themitigation of climate change effects is an example of a public good, where the social benefits are not reflected completely in the market price. Because the personal marginal benefits are less than the social benefits the market under-provides climate change mitigation. This is a public good since therisks of climate change are both non-rival and non-excludable. Such efforts are non-rival since climate mitigation provided to one does not reduce the level of mitigation that anyone else enjoys. They are non-excludable actions as they will have global consequences from which no one can be excluded. A country's incentive to invest in carbon abatement is reduced because it can "free ride" off the efforts of other countries. Over a century ago, Swedish economistKnut 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.
Assessing the economic value of the environment is a major topic within the field. The values ofnatural resources often are not reflected in prices that markets set and, in fact, many of them are available at no monetary charge. This mismatch frequently causes distortions in pricing of natural assets: both overuse of them and underinvestment in them.[15] Economic value or tangible benefits ofecosystem services and, more generally, of natural resources, include both use and indirect (see thenature 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 the possibility of using it for some human purpose. For example, certain plants may be researched for drugs. Individuals may value the ability to leave a pristine environment for their children.
Use and indirect use values can often be inferred from revealed behavior, such as the cost of takingrecreational trips or usinghedonic methods in which values are estimated based on observed prices. These use values can also be predicted through defensive behavior against pollution or environmental hazards, which can reveal how much people are willing to spend on healthcare and other preventative measures to avoid these hazards.[16] Another health-based predictor of environmental use value is thevalue of a statistical life (VSL), which provides an estimate of how much people are willing to pay for small reductions in their risk of dying from environmental hazards.[17] Non-use values are usually estimated using stated preference methods such ascontingent valuation orchoice modelling. 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) 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.[18]
Almost all governments and states magnify environmental harm by providing various types of subsidies that have the effect of paying companies and other economic actors more to exploit natural resources than to protect them. The damage to nature of such public subsidies has been conservatively estimated at $4-$6 trillion U.S. dollars per year.[19]
Solutions advocated to correct such externalities include:
| Rank | IMPACT | SECTOR | REGION | NATURAL CAPITAL COST$, BN | REVENU$, BN | IMPACT RATIO |
|---|---|---|---|---|---|---|
| 1 | GHG | Coal Power Generation | Eastern Asia | 361.0 | 443.1 | 0.8 |
| 2 | Land Use | Cattle Ranching and Farming | South America | 312.1 | 16.6 | 18.7 |
| 3 | GHG | Iron and Steel Mills | Eastern Asia | 216.1 | 604.7 | 0.4 |
| 4 | Water | Wheat Farming | Southern Asia | 214.4 | 31.8 | 6.7 |
| 5 | GHG | Coal Power Generation | Northern America | 201.0 | 246.7 | 0.8 |
If companies are allowed to include some of these externalities in their final prices, this could undermine theJevons paradox and provide enough revenue to help companies innovate.
Environmental economics is related toecological economics 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" 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 ofecology. Ecological economics is sometimes described as taking a more pluralistic approach toenvironmental problems and focuses more explicitly on long-termenvironmental sustainability and issues of scale.
Environmental economics is viewed as more idealistic in aprice system; ecological economics as more realistic in its attempts to integrate elements outside of theprice system as primary arbiters of decisions. These two groups of specialisms sometimes have conflicting views which may be traced to the different philosophical underpinnings.
Another context in whichexternalities apply is whenglobalization permits one player in a market who is unconcerned withbiodiversity to undercut prices of another who is – creating arace to the bottom in regulations and conservation. This, in turn, may cause loss ofnatural capital with consequent erosion, water purity problems, diseases,desertification, and other outcomes that are notefficient in an economic sense. This concern is related to the subfield ofsustainable development and its political relation, theanti-globalization movement.
Environmental economics was once distinct fromresource economics.[29] 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). It is now difficult to distinguish "environmental" and "natural resource" economics as separate fields as the two became associated withsustainability. Many of the more radicalgreen economists split off to work on an alternatepolitical economy.
Environmental economics was a major influence on the theories ofnatural capitalism andenvironmental finance, which could be said to be two sub-branches of environmental economics concerned with resource conservation in production, and thevalue of biodiversity to humans, respectively. The theory ofnatural capitalism (Hawken, Lovins, Lovins) goes further than traditional environmental economics by envisioning a world where natural services are considered on par withphysical capital.
The more radical green economists reject neoclassical economics in favour of a new political economy beyondcapitalism orcommunism that gives a greater emphasis to the interaction of the human economy and the natural environment, acknowledging that "economy is three-fifths of ecology".[30] This political group is a proponent ofa transition to renewable energy.
These more radical approaches would imply changes tomoney supply and likely also abioregional democracy so that political, economic, and ecological "environmental limits" were all aligned, and not subject to thearbitrage normally possible undercapitalism.
An emerging sub-field of environmental economics studies its intersection withdevelopment economics. Dubbed "envirodevonomics" byMichael Greenstone and B. Kelsey Jack in their paper "Envirodevonomics: A Research Agenda for a Young Field", the sub-field is primarily interested in studying "why environmental quality [is] so poor in developing countries."[31] A strategy for better understanding this correlation between a country's GDP and its environmental quality involves analyzing how many of the central concepts of environmental economics, including market failures, externalities, and willingness to pay, may be complicated by the particular problems facing developing countries, such as political issues, lack of infrastructure, or inadequate financing tools, among many others.[32]
In the field oflaw and economics,environmental law is studied from an economic perspective. The economic analysis of environmental law studies instruments such as zoning, expropriation, licensing, third party liability, safety regulation, mandatory insurance, and criminal sanctions. A book by Michael Faure (2003) surveys this literature.[33]
The main academic and professional organizations for the discipline of Environmental Economics are theAssociation of Environmental and Resource Economists (AERE) and theEuropean Association for Environmental and Resource Economics (EAERE). The main academic and professional organization for the discipline of Ecological Economics is theInternational Society for Ecological Economics (ISEE). The main organization for Green Economics is theGreen Economics Institute.
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