Chapter 1The Role of Economics

in Environmental Management

Economics and the Environment

• Economic theory explains what we observe in reality, including environmental problems, and tries to predict what will happen

• Use two basic models:– Circular Flow Model– Materials Balance Model

4

Circular Flow Model

• Shows the real and monetary flows of economic activity through the output and factor markets – Model the relationship between economic activity

and the environment– Does not show the linkage between economic

activity and the environment

5

Circular Flow Model

6

Materials Balance Model

• Expand on circular flow model • Shows links between economic activity and the natural

environment via flow of residuals from the economy to the environment

• This is Environmental Economics• Residuals are pollution remaining in the environment after

some process has occurred – Residuals can be delayed, but not prevented, through

recovery, recycling, and reuse– Law of Thermodynamics for economists: planet’s

resources won’t last forever

7

Materials Balance Model

8

Source: Adapted from Kneese, Ayres, and D'Arge (1970).

What Causes Environmental Damage?

• Natural Pollutants arise from non-artificial processes in nature

• e.g., ocean salt spray, pollen

• Anthropogenic Pollutants are human-induced and include all residuals associated with consumption and production

• e.g., chemical wastes, gases from combustion • Of greater concern to environmental economists

• Focus on anthropogenic pollutants

9

Sources of Pollution

• Sources grouped by mobility– Stationary Sources: fixed-site – Mobile Source: any nonstationary source

• Sources grouped by identifiability– Point source: single identifiable source– Nonpoint Source: a source that cannot be

accurately identified, degrading in a diffuse way

10

Scope of Environmental Damage

• Local Pollution– Damage not far from the source

• e.g., urban smog

• Regional Pollution– Damage extends well beyond the source

• e.g., acidic deposition

• Global Pollution– Involving widespread environmental effects with

global implications• e.g., global warming, ozone depletion

11

12

Examples of pollution

13

14

15

April 20, 2010: Deepwater Horizon Explosion

17

18

What do we want the environment to look like?

• Environmental Quality – reduction in anthropogenic contamination to socially acceptable levels

• Sustainable Development – management of resources to ensure long-term quality and abundance (economists’ version?)

• Biodiversity – assuring the variety of distinct species, genetic variability, and variety of inhabitable ecosystems

19

Environmental Policy Planning

• Environmental planning involves many segments of society

• In the U.S., the Environmental Protection Agency (EPA) acts as liaison to numerous constituents within each sector

20

Environmental Policy Planning

21

Environmental Laws* Atomic Energy Act (AEA)

* Chemical Safety Information, Site Security and Fuels Regulatory Relief Act

* Clean Air Act (CAA)

* Clean Water Act (CWA)

* Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, or Superfund)

* Superfund Amendments and Reauthorization Act (SARA)

* Emergency Planning and Community Right-to-Know Act (EPCRA)

* Endangered Species Act (ESA)

* Energy Independence and Security Act (EISA)

* Energy Policy Act

* Federal Food, Drug, and Cosmetic Act (FFDCA)

* Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA)

* Food Quality Protection Act (FQPA)

* Marine Protection, Research, and Sanctuaries Act (MPRSA, also known as the Ocean Dumping Act)

* National Environmental Policy Act (NEPA) from 1969

* National Technology Transfer and

Advancement Act (NTTAA)

* Noise Control Act

* Nuclear Waste Policy Act (NWPA)

* Occupational Safety and Health (OSHA)

* Oil Pollution Act (OPA)

* Pesticide Registration Improvement Act (PRIA)

* Pollution Prevention Act (PPA)

* Resource Conservation and Recovery Act (RCRA)

* Safe Drinking Water Act (SDWA)

* Shore Protection Act (SPA)

* Toxic Substances Control Act (TSCA)

Government Policy Approach

• Command-and-Control approach – tell people what to do

• Market approach – create incentives (=prices) for people to do the ‘right’ thing

23

Review of key ideas

• How economy is linked to environment• How to think about pollution• The policy of managing the environment

Risk Analysis

• Two decision-making procedures– Risk Assessment: qualitative and quantitative

evaluation of risk posed by an environmental hazard

– Risk Management: decision-making process of choosing from alternative responses to environmental risk

25

Risk Management

• Economic Criteria– Allocative efficiency – requires resources to be

appropriated such that benefits equal costs– Cost-effectiveness – requires the least amount of

resources be used to achieve an objective• Equity Criterion

– Environmental justice – concerned with the fairness of the environmental risk burden across segments of society or geographic region

26

Efficiency and fairness may conflict