MEV 011: Unit 15 - Environmental Economics

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 UNIT 15 – ENVIRONMENTAL ECONOMICS

15.1 Introduction

Environmental economics is a vital sub-discipline of economics that examines the relationship between economic activities and the environment. It focuses on how economic tools and principles can be used to address environmental challenges like pollution, resource depletion, climate change, and biodiversity loss. This unit introduces key concepts such as the value of natural resources, the cost of environmental degradation, and economic strategies for sustainable development.

15.2 Objectives

After studying this unit, you will be able to:

·         Understand the basic concepts of economics related to scarcity and resource allocation.

·         Explain the scope and foundation of environmental economics.

·         Understand the idea of optimal pollution level and the tools used in environmental policymaking.

·         Learn various methods of environmental valuation.

·         Evaluate the relationship between economic growth and environmental sustainability.

15.3 Economics as a Discipline: Notion of Scarcity and Role of Markets

Economics is the study of how societies allocate scarce resources to meet the needs and wants of individuals. Environmental resources—such as clean air, water, forests, and biodiversity—are also limited and often treated as "free goods," leading to overuse and degradation.

Scarcity:

Scarcity implies that environmental resources are finite and must be allocated efficiently. For instance, overfishing or deforestation without limits can lead to depletion of vital natural systems.

Role of Markets:

Markets help allocate resources through the forces of supply and demand. However, environmental goods often lack well-functioning markets, leading to market failure—such as pollution not being priced, or ecosystem services being undervalued.

Environmental economics tries to correct these market failures by internalizing environmental costs and using economic instruments like taxes, subsidies, or cap-and-trade systems.

15.4 Foundations and Scope of Environmental Economics

Environmental economics draws from both classical economics and ecological principles. Its foundation lies in understanding the interaction between economic systems and the environment, especially how economic activity affects resource use and pollution.

Scope Includes:

·         Pollution control and waste management

·         Resource conservation (renewable and non-renewable)

·         Climate change economics

·         Cost-benefit analysis of environmental policies

·         Sustainable development strategies

·         Valuation of ecosystem services

Environmental economics emphasizes sustainable resource use, where present economic activities do not compromise the ability of future generations to meet their needs.

15.5 Optimal Pollution Level and Instruments for Environmental Policy

Optimal Pollution Level:

Rather than aiming for zero pollution (which is often unrealistic and economically costly), environmental economics focuses on finding the optimal level of pollution, where the marginal cost of pollution abatement equals the marginal benefit to society.

Instruments for Environmental Policy:

1.      Command and Control Instruments:

o    Regulatory limits (e.g., emissions standards)

o    Bans and permits

2.      Market-Based Instruments:

o    Pollution Taxes (Pigouvian Taxes): Charges on emissions to reflect social costs.

o    Tradable Permits (Cap-and-Trade): Markets created for pollution allowances.

o    Subsidies: Encouraging cleaner technology or conservation efforts.

3.      Voluntary and Informational Tools:

o    Eco-labeling

o    Public awareness campaigns

Each tool has advantages and limitations, and governments often use a mix of these to effectively address environmental issues.

15.6 Environmental Valuation: Values, Techniques, and Methods

Valuing the environment is essential for cost-benefit analysis and policy decisions. Since many environmental goods have no market price, economists have developed valuation techniques to estimate their economic worth.

Types of Values:

·         Use value: Direct use (e.g., timber, water)

·         Non-use value: Existence or bequest value (e.g., conserving species for future generations)

·         Option value: Value of preserving options for future use

Valuation Techniques:

1.      Market-based Approaches: Use market prices where available (e.g., price of fish catch).

2.      Revealed Preference Methods:

o    Hedonic Pricing: Based on property values affected by environment.

o    Travel Cost Method: Infers value from travel expenses to natural sites.

3.      Stated Preference Methods:

o    Contingent Valuation: Survey-based willingness to pay (WTP).

o    Choice Modelling: Preferences revealed through hypothetical choices.

Environmental valuation helps in understanding trade-offs and justifying public investments in environmental conservation.

15.7 Economic Growth and Environment: Need for Decoupling

The Dilemma:

Economic growth often leads to environmental degradation due to increased resource use and waste generation. However, sustainable development aims to “decouple” economic growth from environmental harm.

Types of Decoupling:

·         Relative Decoupling: Resource use or emissions grow slower than GDP.

·         Absolute Decoupling: Resource use or emissions decrease even as GDP increases.

Strategies for Decoupling:

·         Adoption of green technologies

·         Promoting circular economy

·         Energy efficiency improvements

·         Carbon pricing to incentivize clean growth

Decoupling is essential to achieving the Sustainable Development Goals (SDGs) and aligning environmental conservation with economic prosperity.

15.8 Let Us Sum Up

·         Environmental economics applies economic principles to address environmental problems.

·         Scarcity, externalities, and market failure are central to the discipline.

·         Economic instruments like pollution taxes, tradable permits, and subsidies help internalize environmental costs.

·         Valuation methods estimate the economic worth of ecosystem services and guide policy decisions.

·         Decoupling economic growth from environmental degradation is key to achieving long-term sustainability.

 

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