Environmental Economics and Management Theory Policy and Applications

Environmental Economics and Management: Theory, Policy, and Applications 3 e by Scott Callan and Janet Thomas © 2004 Thomson Learning/South-Western

Chapter 1 The Role of Economics in Environmental Management © 2004 Thomson Learning/South-Western

Economics and the Environment Economic theory explains what we observe in reality l Microeconomic analysis can also be used to analyze environmental problems l 3

Economics and the Environment l Circular Flow Model – the basis for modeling the relationship between economic activity and the environment ¡ ¡ l Real Flow Factor Market Output Market Money Flow Does not explicitly show the linkage between economic activity and the environment 4

Economics and the Environment Figure 1. 1 Circular Flow Model of Economic Activity 5

Economics and the Environment Figure 1. 2 Materials Balance Model: The Interdependence of Economic Activity and Nature 6

Economics and the Environment l Materials Balance Model – illustrates the relationship between economic activity and the environment ¡ ¡ Flow of Resources l Natural Resource Economics – concerned with flows of resources from nature to economic activity Flow of Residuals l Residuals – by-products released back into the environment l Assimilative Capacity – environmental ability to absorb residuals l Recovery Recycling and Reuse – methods to delay the flow of residuals 7

Economics and the Environment l Materials Balance Model ¡ Science and Materials Balance l First Law of Thermodynamics – matter and energy can neither be created nor destroyed l Second Law of Thermodynamics – nature’s capacity to convert matter and energy is not without bound 8

Fundamental Concepts in Environmental Economics l Causes of Environmental Damage: Types of Pollutants ¡ ¡ Natural Pollutants – nonartificial Anthropogenic Pollutants – human induced and include all residuals associated with consumption and production l Of greater concern to environmental economists 9

Fundamental Concepts in Environmental Economics l Sources of Pollution: Classifying Polluting Sources ¡ ¡ Source Grouped by Mobility l Stationary Sources – fixed site l Mobile Source – any non-stationary source Sources Grouped by Identifiability l Point source – single identifiable source l Nonpoint Source – a source that cannot be accurately identified 10

Fundamental Concepts in Environmental Economics l Identifying the Scope of Environmental Damage: Local, Regional, and Global Pollution ¡ Global Pollution – widespread environmental effects with global implications l Examples: • Global warming • Ozone depletion 11

Identifying Environmental Objectives Environmental Quality – reduction in anthropogenic contamination to socially acceptable levels l Sustainable Development – management of resources to ensure long-term quality and abundance l Biodiversity – the variety of distinct species, genetic variability, and variety of inhabitable ecosystems l 12

Environmental Policy Planning: An Overview Figure 1. 4 Parties Involved in Environmental Policy Planning 13

Environmental Policy Planning: An Overview National Environmental Policy Act l Risk Analysis l ¡ ¡ Risk Assessment – qualitative and quantitative evaluation of risk posed by an environmental hazard Risk Management – decision process of choosing from alternative responses to environmental risk 14

Environmental Policy Planning: An Overview l Policy Evaluation Criteria ¡ ¡ ¡ Allocative Efficiency – requires resources be appropriated such that benefits are equal to costs Cost-effectiveness – requires the least amount of resources be used to achieve an objective Environmental Quality – concerned with the fairness of the environmental risk burden across segments of society or geographic region 15

Environmental Policy Planning: An Overview l Government’s Overall Policy Approach ¡ ¡ l Command-control Approach – regulates polluters through the use of rules Market Approach – incentive policy that encourages conservation or pollution reduction l “Polluter-pays Principle” – polluter pays for the damage caused Setting the Time Horizon ¡ ¡ Management Strategies – a short-term strategy intended to manage an existing problem Pollution prevention – long-term strategy aimed at reducing the amount of toxicity of residuals released to nature 16