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1 Introduction

The document discusses the relationship between economic activity and the environment through two models: the circular flow model and the materials balance model. The circular flow model shows the flows of goods, services, and money between households and firms. The materials balance model builds on this by incorporating the flows of natural resources from the environment into the economy and residuals from the economy back into the environment as a result of production and consumption. It identifies several causes and scopes of environmental damage and discusses environmental objectives and policy approaches to address these issues.

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46 views

1 Introduction

The document discusses the relationship between economic activity and the environment through two models: the circular flow model and the materials balance model. The circular flow model shows the flows of goods, services, and money between households and firms. The materials balance model builds on this by incorporating the flows of natural resources from the environment into the economy and residuals from the economy back into the environment as a result of production and consumption. It identifies several causes and scopes of environmental damage and discusses environmental objectives and policy approaches to address these issues.

Uploaded by

ikhwanstorage
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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INTRODUCTION

Economics and the Environment


• Economic theory explains what we observe in reality,
including environmental problems
• Recognize the link between economic activity and the
environment using models
• Circular Flow Model
• Materials Balance Model
Circular Flow Model
• Shows the real and monetary flows of economic
activity through the output and factor markets

• Forms the basis for modeling the relationship


between economic activity and the environment
• But does not explicitly show the linkage between economic
activity and the environment
The circular flow of economic activity

4
Households
• the final users of goods and services
• the owners of resources

Firms
• producers of goods and services
• employers of resources

Markets
• product (goods and services) markets
• factors markets
• role of prices

Institutions
• markets need ownership rights and rules of competition
• public agencies to assign and enforce ownership rights, rules of
competition
Materials Balance Model

• Places the circular flow within a larger schematic to show


links between economic activity and the natural
environment via two sets of flows
• Flow of resources from the environment to the economy
• The focus of Natural Resource Economics
• Flow of residuals from the economy to the environment
• The focus of 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
• Shown as inner flows in the model
Materials Balance Model
The Interdependence of Economic Activity and Nature

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


7
8

Causes of Environmental Damage


• Natural Pollutants arise from nonartificial 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
9

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
10

Environmental Objectives
• Environmental Quality – reduction in anthropogenic
contamination to socially acceptable levels
• Sustainable Development – management of resources to
ensure long-term quality and abundance
• Biodiversity – assuring the variety of distinct species,
genetic variability, and variety of inhabitable ecosystems
Economics and
Environmental Policies
• Policy Evaluation Criteria
• Allocative Efficiency – requires resources be
appropriated such that marginal 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
Economics and
Environmental Policies
• Government’s Overall Policy Approach
• Command-and-control Approach – regulates polluters
through the use of rules

• Market Approach – through Market-based Instruments


(MBI)with incentive policy that encourages conservation
or pollution reduction
• “Polluter-pays Principle” – polluter pays for the damage caused
What is the problem?
The interaction between man and the environment is coming to a
critical stage. In 1992, a group of scientists issued a three-page
statement "Warning to Humanity". At least eight areas were
identified as significant threats to the global environment:

1. Atmospheric problems, including ozone depletion and acid


precipitation
2. Global warming
3. Water resources, including pollution, groundwater depletion,
coastal zone damage and fish depletion
4. Solid and hazardous wastes
5. Soil erosion
6. Rainforest destruction
7. Species loss, and
8. Human population growth
• The seriousness of the threats is made more so by the
fact that this group comprises 99 Nobel laureates and
more than a thousand other scientists. (cited in Reinhardt
p1-1.)

• Reinhardt, Forest L. and Richard H.K. Vietor (1996)


Business Management and the Natural Environment
Cases & Text. Cincinnati, Ohio: Southwestern College
Publishing.

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