Chapter 23 Economics, Environment, and Sustainability
23-1 How Are Economic Systems Related to the Biosphere? • Concept 23-1A Ecological economists and most sustainability experts regard human economic systems as subsystems of the biosphere • Concept 23-1B Governments intervene in market economies to help correct or prevent market failures such as the failure to protect natural capital, which supports life and all economies.
Economic Systems Are Supported by Three Types of Resources • An economic systems is a social institution through which goods and services are produced, distributed, and consumed to satisfy people’s need and wants, ideally in the most efficient possible way. • Economic systems are supported by • Natural capital: includes resources and services produced by the earth’s natural processes. • Human capital or human resources: includes people’s physical and mental talents, which provides labor, innovation, culture, and organization. • Manufactured capital, manufactured resources: are items such as machinery, equipment, and factories made from natural resources with the help of human resources.
Three Types of Resources Are Used to Produce Goods and Services Fig. 23-2, p. 615
Market Economic Systems Depend on Interactions between Buyers and Sellers (1) • All economic decisions are governed by the competitive interactions of supply, demand, and price. • The market price equilibrium point is the point at which the supply and demand curves intersect (where the supplier’s price matches what buyers are willing to pay for some quantity of a good or service). • Changes in supply and demand can shift one or both curves back and forth.
Supply, Demand, and Market Equilibrium for a Good in a Market Economic System Fig. 23-3, p. 615
Market Economic Systems Depend on Interactions between Buyers and Sellers (2) • True free market system • No company or group controls prices of a good or service • Market prices include all direct and indirect costs (full-cost pricing) • Consumers have full information about beneficial and harmful environmental effects of goods and services • Real world • Tax breaks • Subsidies • Withholding of negative information about health or environmental dangers. • Such advantages create an uneven economic playing field that can undermine true free-market competition.
Governments Intervene to Help Correct Market Failures • Governments intervene in market systems to provide various public services, to protect open-access resources that cannot privately owned. • Markets can also fail when they do not value the beneficial effects provided by the earth’s natural capital and the harmful health or environmental effects of some types of economic activity. • Governments can try to prevent or correct these and other market failures through laws, regulation, taxes, subsides,… • Public services • Environmental protection • National security and education • Police and fire protection • Safe food and water • Provided by government because private companies can’t or won’t
Economists Disagree over Natural Capital, and whether Economic Growth is Sustainable (1) • Neoclassical economist view the earth’s natural capital as a subset or part of a human economic system and assume that the potential for economic growth is essentially unlimited. • High-throughput economies: Most of today’s advanced industrialized countries • Resources flow through and end up in planetarysinks (air, water, soil, and organisms) where pollutant can be at harmful levels • Models of ecological economists • Economic systems as subsystems of biosphere • Conventional economic growth unsustainable
Economists Disagree over Natural Capital, and whether Economic Growth is Sustainable (2) • Ecological models’ three assumptions • Resources are limited and shouldn’t be wasted • Encourage environmentally beneficial and sustainable forms of economic development • Full-cost pricing needed to take into account harmful environmental and health effects of some goods and services • Environmental economists take middle ground between classical and ecological economists
Economists Disagree over Natural Capital, and whether Economic Growth is Sustainable (3) • Ecological and environmental economists have suggested strategies for implementing these principles and making the transition to more sustainable eco-economies: • Use and publicize indicators that monitor economic and environmental health. • Use eco-labeling and certification to identify products produced by environmentally sound methods. • Increasing subsidies and tax breaks for environmentally beneficial good and services. • Decrease taxes on wages, income, and wealth while increasing taxes on pollution (tax shifting) • Use laws and regulations to help prevent pollution and resource depletion and degradation. • Use tradable permits or rights to pollute or to use resources, in order to limit overall pollution and resource use. • Sell services instead of things. • Reduce poverty (one of the basic causes of environmental degradation, pollution, poor health, and premature death.
High-Throughput Economies Rely on Ever-Increasing Energy, Matter Flow Fig. 23-4, p. 617
Ecological Economists: Economies Are Human Subsystems of the Biosphere Fig. 23-5, p. 617
23-2 How Can We Put Values on Natural Capital and Control Pollution and Resource Use? • Concept 23-2A Economists have developed several ways to estimate the present and future values of a resource or ecological service, and optimum levels of pollution control and resource use. • Concept 23-2B Comparing the likely costs and benefits of an environmental action is useful, but it involves many uncertainties.
Practicing Natural Capitalism: Taking Into Account the Monetary Value of Natural Capital • Estimating the values of the earth’s natural capital: For example, using this approach a team of ecologists and economists estimated that the ecological services provided by the earth’s forests are worth at least $4.7 trillion a year. • However according to neoclassical economists, a product or a service has no economic value until it is sold in the market-place, and thus because they are not sold in the marketplace, ecological services have no economic value.
Practicing Natural Capitalism: Taking Into Account the Monetary Value of Natural Capital • Estimate nonuse values • Existence value: a monetary value placed on a resource such an old-growth forest just because it exits, even though we may never see it or use it • Aesthetic value: a monetary value placed because of its beauty. • Bequest value or option value: is based on the willingness of people to pay to protect some forms of natural capital for use by future generations. • Ways to estimate these monetary values: • Estimating a mitigation cost: how much it would take to offset any environmental damage. • Estimating willingness to pay by surveying public opinion to determine how much people would pay to maintain natural resources and services.
Estimating the Future Value of a Resource Is Controversial • Discount rates • Estimate of a resource’s future economic value compared to its present value • It is based on the idea that having something today may be worth than it will be in the future. • The size of the discount rate (usually given as a percentage) is a primary factor affecting how a resource such as a forest or fishery is used or managed. • Proponents of a high discount rate because: • Inflation may reduce the value of their future earnings on a resource. • Innovation or changes in consumer preferences could make a product or resource obsolete. • Critics of a high discount rate because: • Encourage rapid exploitation of resources for immediate payoffs • These critics believe that a 0% or negative discount rate should be used to protect unique, scarce, and irreplaceable resources. • Moderate discount rates of 1-3% would make it profitable to use nonrenewable and renewable resources more sustainably. • Economic return is not always the determining factor in how resources are used or managed (ethical concerns)
We Can Estimate Optimum Levels of Pollution Control and Resource Use • Marginal cost of resource production • Optimum level of resource use • Optimum level for pollution cleanup
Optimum Resource Use Fig. 23-6, p. 620
High Marginal cost of resource production Marginal benefit of resource use Cost Optimum level of resource use Low 50 0 25 75 100 Coal removed (%) Fig. 23-6, p. 620
Cost-Benefit Analysis Is a Useful but Crude Tool • Cost-benefit analysis follows guidelines • State all assumptions used • Include estimates of the ecological services • Estimate short-and long-term benefits and costs • Compare the costs and benefits of alternative courses of action • Always uncertainties
Economic Growth and Economic Development • Economic growth • Increased capacity to supply goods and services • Requires increased production and consumption • Requires more consumers • Economic development • Improvement of living standards • Environmentally sustainable economic development
Gross World Product, 1970-2008 Figure 1, Supplement 9
Gross World Product per Person, 1970-2008 Figure 2, Supplement 9
23-3 How Can We Use Economic Tools to Deal with Environmental Problems? • Concept 23-3 We can use resources more sustainably by including their harmful environmental and health costs in the market prices of goods and services (full-cost pricing); by subsidizing environmentally beneficial goods and services; and by taxing pollution and waste instead of wages and profits.
Most Things Cost a Lot More Than We Might Think • Market price, direct price • Indirect, external, or hidden costs • Direct and indirect costs of a car • Should indirect costs be part of the price of goods? • Economists differ in their opinions
Environmental Economic Indicators Could Help Us Reduce Our Environmental Impact • Measurement and comparison of the economic output of nations • Gross domestic product (GDP) • Per capita GDP • Newer methods of comparison • Genuine progress indicator (GPI) • Gross National Happiness (GNH)
Monitoring Environmental Progress: Comparing U.S. Per Capita GDP and GPI Fig. 23-7, p. 622
35,000 30,000 25,000 20,000 Per capita gross domestic product (GDP) 1996 Dollars per person 15,000 10,000 5,000 Per capita genuine progress indicator (GPI) 0 1950 1960 1970 1980 1990 2000 Year Fig. 23-7, p. 622
We Can Include Harmful Environmental Costs in the Prices of Goods, Services • Environmentally honest market system • Why isn’t full-cost pricing more widely used? • Many businesses would have to raise prices and would go out of business • Difficult to estimate environmental and health costs • Businesses have strong influence on government – preferential regulations, tax breaks, subsidies
Label Environmentally Beneficial Goods and Services • Product eco-labeling • Certification programs • Greenwashing
Reward Environmentally Sustainable Businesses • Phase out environmentally harmful subsidies and tax breaks • Phase in environmentally beneficial subsidies and tax breaks for pollution prevention • Political difficulties
Tax Pollution and Wastes Instead of Wages and Profits • Green taxes, ecotaxes • So that harmful products and services are at true cost • Steps for successful implementation of green taxes • Success stories in Europe
Trade-Offs: Environmental Taxes and Fees Fig. 23-8, p. 624
Trade-Offs Environmental Taxes and Fees Advantages Disadvantages Low-income groups are penalized unless safety nets are provided Help bring about full-cost pricing Encourage businesses to develop environmentally beneficial technologies and goods to save money Hard to determine optimal level for taxes and fees Governments may use money as general revenue instead of improving environmental quality and reducing taxes on income, payroll, and profits Easily administered by existing tax agencies Fig. 23-8, p. 624
Environmental Laws and Regulations Can Discourage or Encourage Innovation • Environmental regulation • Command and control approach • Incentive-based environmental regulations • Innovation-friendly regulations
We Can Use the Marketplace to Reduce Pollution and Resource Waste • Incentive-based regulation example • Tradable pollution or resource-use permits • Cap-and-trade approach used to reduce SO2 • Advantages • Disadvantages
Trade-Offs: Tradable Environmental Permits Fig. 23-9, p. 625
Trade-Offs Tradable Environmental Permits Advantages Disadvantages Big polluters and resource wasters can buy their way out Flexible Easy to administer May not reduce pollution at dirtiest plants Encourage pollution prevention and waste reduction Caps can be too high and not regularly reduced to promote progress Permit prices determined by market transactions Self-monitoring of emissions can allow cheating Fig. 23-9, p. 625
Reduce Pollution and Resource Waste by Selling Services Instead of Things • 1980s: Braungart and Stahl • New economic model • Service-flow economy, eco-lease (rent) services • Xerox • Carrier • Ray Anderson: lease carpets in the future
Individuals Matter: Ray Anderson • CEO of Interface, largest commercial manufacturer of carpet tiles • Goals • Zero waste • Greatly reduce energy use • Reduce fossil fuel use • Rely on solar energy • Copying nature • How’s it working?
Ray Anderson Fig. 23-A, p. 626
23-4 How Can Reducing Poverty Help Us to Deal with Environmental Problems? • Concept 23-4 Reducing poverty can help us to reduce population growth, resource use, and environmental degradation.
The Gap between the Rich and the Poor Is Getting Wider • Poverty • 1.4 billion people live on less than $1.25 per day • Trickle-down effect • Flooding up • Wealth gap
Poor Family Members Struggling to Live in Mumbai, India Fig. 23-10, p. 627
We Can Reduce Poverty (1) • South Korea and Singapore reduced poverty by • Education • Hard work • Discipline • Attracted investment capital
We Can Reduce Poverty (2) • Important measures • Combat malnutrition and infectious diseases • Universal primary school education • Stabilize population growth • Reduce total and per-capita ecological footprints • Large investments in small-scale infrastructure
Revisiting Microlending • Microloans give hope to the poor • Microloans help more than direct aid • Spreading around the world • Kiva.org
Solar Panel Purchased with Microloan in India Fig. 23-11, p. 629
Achieve the World’s Millennium Development Goals • 2000: Millennium Development Goals • Sharply reduce hunger and poverty • Improve health care • Empower women • Environmental sustainability by 2015 • Developed countries: spend 0.7% of national budget toward these goals • How is it working?