Environmental
Economics:
Unit- III
What Is Environmental Economics?
• Environmental economics is the study of the cost-effective allocation, use, and
protection of the world's natural resources.
• Economics, broadly speaking, is the study of how humans produce and
consume goods and services.
• Environmental economics focuses on how they use and manage finite resources
in a manner that serves the population while meeting concerns about
environmental impact.
• This helps governments weigh the pros and cons of alternative measures and
design appropriate environmental policies.
Contd..
• Environmental economics studies the impact of environmental policies and devises
solutions to problems resulting from them.
• Environmental economics can either be prescriptive-based or incentive-based.
• A major subject of environmental economics is externalities, the additional costs of
doing business that are not paid by the business or its consumers.
• Another major subject of environmental economics is placing a value on public goods,
such as clean air, and calculating the costs of losing those goods.
• Since some environmental goods are not limited to a single country, environmental
economics often requires a transnational approach.
Understanding Environmental
Economics
• The basic theory underpinning environmental economics is that
environmental amenities (or environmental goods) have economic value and
there are costs to economic growth that are not accounted for in more
traditional models.
• Environmental goods include things like access to clean water, clean air, the
survival of wildlife, and the general climate. Although it is hard to put a price
tag on environmental goods, there may be a high cost when they are lost.
Environmental goods are usually difficult to fully privatize and subject to
the tragedy of the commons.
Contd…
• Destruction or overuse of environmental goods, like pollution and
other kinds of environmental degradation, can represent a form
of market failure because it imposes negative externalities.
• Environmental economists analyze the costs and benefits of specific
economic policies that seek to correct such problems, and they may
run theoretical tests or studies on the possible consequences of these
policies.
Contd..
• In the United States, any federal project that is likely to affect the
environment–such as a highway, dam, or other infrastructure–must
publish an environmental impact statement describing any potential
risks to the natural environment. These documents are used to assess
any negative externalities of the project.
Strategies in Environmental
Economics
• Environmental economists are concerned with identifying specific problems, but there can be many
approaches to solving the same environmental issue.
• If a state is trying to impose a transition to clean energy, for example, they have several options.
• The government can impose a fixed limit on carbon emissions, or it can adopt more incentive-based
solutions, like placing quantity-based taxes on emissions or offering tax credits to companies that adopt
renewable power sources.
• All of these strategies rely on state intervention
• in the market, but some governments prefer to use a light touch and others may be more assertive. The
degree of acceptable state intervention is an important political factor in determining environmental
economic policy.
Environmental economics may produce
two types of policies:
• Prescriptive Regulations
• In a prescriptive approach, the government dictates specific measures to reduce
environmental harm. For example, they may prohibit highly-polluting industries, or
require certain emissions-controlling technologies.
• Market-Based Regulations
• Market-based policies use economic incentives to encourage desired behaviors. For
example, cap-and-trade regulations do not prohibit companies from pollution, but
they place a financial burden on those who do. These incentives reward companies
for reducing their emissions, without dictating the method they use to do so.
Challenges of Environmental
Economics
• Because the nature and economic value of environmental goods often transcend
national boundaries, environmental economics frequently requires a transnational
approach.
For example, an environmental economist could identify overfishing as a negative
externality to be addressed.
• Another challenge of environmental economics is the degree to which its findings
affect other industries. More often than not, findings from environmental
economists can result in controversy, and their policy prescriptions may be difficult
to implement due to the complexity of the world market.
