Environmental Economics
From Envirowiki
Environmental Economics is the study and application of economic principles to understand and aid in the solving of environmental issues. As a social science, economics studies how society manages its limited resources. More deeply: what is produced, how it is produced, and who gets it. Economists use theory along with models to predict or explain why certain things occur. Economics can be used for policy analysis (for example environmental policy), which helps determine the affects of policies on workers, citizens, and society as a whole. Although economics can help analyze the efficiency of policies, a main principle of economics is laissez faire, which is not always best in terms of environmental problems. In instances of market failure the market is not efficient and a prime examples are environmental problems.
Environmental Economics got its start with the political economists Robert Malthus. Malthus is known for his study and predictions of population growth. In terms of environmental economics, Malthus is important to the discussion of Earth’s limited carrying capacity and whether resources are used in a sustainable fashion. Today, environmental issues are frequently discussed in terms of market failure.
[edit] 1 How can economics be used to help solve environmental problems?
In terms of environmental problems, environmental economics primarily tries to reduce negative externalities. Negative externalities impose a cost on others that is not compensated. Within an unregulated market there is often too much of the activity that is causing the negative externalities; this is when economics looks towards policy alternatives to help reduce the negative externalities. Economic policy alternatives include pollution standards and incentive-based policies. Incentive-based policies make people pay the full cost by internalizing the externality, which at times can be the most cost-effective.
Another way environmental economics can aid in environmental issues is with a Pigouvian tax, which taxes the activity producing the negative externalities (Example: Carbon Tax). This tax is sometimes referred to as an effluent or emission charge.
Cap and Trade policies have also been used. Cap and trade internalizes the externality by issuing a certain number of permits that allow a certain amount of pollution (or bad activity), and then allow the buying and/or selling of permits to different firms. By using tradeable permits governments can reduce the amount of pollution or bad activity occurring within a region.
One of the key theories of environmental economics is the Coase Theorem Corollary, which states: If there is a well-functioning permit market, a cost-effective outcome will be achieved by a marketable permit system regardless of the initial ownership of the permits. These approaches to regulations are called incentive-based regulation (IB) because they rely on market incentives to both reduce pollution and minimize control costs.
In addition to alternative policies, economics can help is the assignment of worth to ecosystem services. Economics use nonmarket benefits of environmental protection to determine worth. The values put on protecting ecosystem services and the environment fall into three categories: use, option, and existence values. Use value is simply the value in using such service or resource. Something will have an option value if the future benefits it could have are uncertain and depletion of the resource is effectively irreversible. Existence value is assigned to things that have moral concerns dealing with environmental degradation.
[edit] 2 See Also
[edit] 3 Sources
- Lecture from Professor William Sundstrom, Santa Clara University
- Economics and the Environment by Eban S. Goodstein
