4_Environmental_Economics_ch2

Economics and the Environment

• Definition of Economics: The science used to understand and explain the production, distribution, and consumption of goods and services.

• Related Disciplines: Includes psychology, environment, sociology, ethics, politics, and anthropology.

Microeconomics vs Macroeconomics

• Microeconomics:

  • Focused on the economic behavior of individuals, households, and businesses.

  • Examines how decisions impact supply and demand, and subsequently, prices.

  • Additionally investigates how prices influence supply and demand.

• Macroeconomics:

  • Investigates larger economic factors such as the performance and structure of national or regional economies.

  • Topics include growth, inflation, unemployment, distribution, and taxation.

Economic Systems

• Types of Economic Systems:

  • Subsistence Economy: Meets needs without accumulating wealth.

  • Market Economy: Production and consumption operate through price mechanisms; with minimal government intervention.

  • Planned Economy: The government controls prices and production through regulation, incentives, subsidies, and taxation.

Supply and Demand

• Key Concept: Price dynamics are influenced by supply levels.

  • Price Increases: Occur when supply is low, allowing producers to gain more profit.

• Neoclassical Economic Theory:

  • Coined by Adam Smith’s notion of the “Invisible Hand”, highlighting how supply and demand interactions set prices and production levels.

  • Economies of Scale: As production increases, cost per unit decreases.

• Equilibrium: Achieves balance when supply meets demand at a stable price point.

Economic Value and Opportunity Costs

• Economic Value: Represents the price consumers are willing to pay, which can vary based on the quantity available; more goods available typically decreases the willingness to pay.

• Discount Rate: The rate at which economic value declines over time.

• Opportunity Cost: Refers to the potential benefits missed by choosing one option over another.

Market Complications

• Issues in Free Markets:

  • This can lead to the depletion of resources due to externalized costs and benefits.

  • Positive Externalities: Benefits received by third parties (e.g., timber market benefiting forest health).

  • Negative Externalities: Costs imposed on third parties (e.g., pollution from timber harvest).

• Resource Limitations: Economic models often inaccurately assume resources are infinite.

Unknown Costs and Economic Valuation

• Valuing Nature: Assessing the price tag for nature is complex and considers ecotourism, real estate impacts, and contingent valuation methodologies.

  • Marginal Value: Willingness to pay compared to alternatives.

  • Travel-Cost Valuation: Costs individuals are willing to incur to visit ecosystems.

  • Hedonic Valuation: Value differences in real estate based on environmental factors.

  • Contingent Valuation: Derived from how much people would pay for specific ecosystem services.

Ecological Economics

• Definition: Considers the economy a subsystem of Earth’s ecosystem, emphasizing natural capital preservation.

• Key Focus Areas:

  • Justice, intergenerational equity, and sustainable development.

  • Relationships between economy and quality of the environment.

Ecosystem Services

• Definition: Processes that sustain and fulfill human life through natural ecosystems.

  • Benefits such as flood control, water purification, and climate regulation.

• Measuring Value: Ecosystems offer significant services like pollination and recreational opportunities but are often undervalued in traditional economics.

  Economic Data

  • Types:

    • Time Series: e.g. poverty rate over years (daily, monthly, quarterly, annually)

    • Cross-Sectional: e.g. poverty rates across counties

  • Sources: Data from global trade, national economies (GDP), sectors, and households; often collected by governments and organizations.

  Economic Analysis

  • Methods: Heavily relies on quantitative analysis and statistics (econometrics).

  Environmental Economics

  • Focus: Balancing product/service needs with natural resource protection. Key concept: "getting the price right" involving various values (option, bequest, existence, intrinsic).

  • Policy Considerations: Analyzes costs/benefits of environmental policies (air pollution, water quality, etc.).

Ecological Valuation

• Natural Capital: Essential Earth resources (forests, fisheries, etc.).

• Example: Deforestation's cost in increased flooding.

Economic Indicators

• Gross Domestic Product (GDP): A metric representing goods/services produced divided by the population.

• Genuine Progress Indicator (GPI): An alternative measure accounting for economic degradation and environmental enhancement.

• Social Progress Index: Uses multiple indicators to assess social well-being relative to environmental needs.

Conclusion: Doughnut Economics

• Principle: Balancing human needs with the planet's capacities. Importance of ensuring essential needs are met for all while maintaining ecological integrity.

• Kate Raworth's Perspective: Advocates for a sustainable approach to economics that respects planetary boundaries.