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Topic: Economic aspects of environmental sustainability


The main idea: Follow the simple golden rule for an sustainable economy: “Leave the world better than you found it, take no more than you need, try not to harm life or the environment, and male amends if you do.” (Paul Hawken)


Lecture outline:

1. Economic systems and environmental problems

2. Measures of life and environmental quality

3. Concept of externalities

4. Economic strategies for pollution control

5. Solutions of reducing poverty

6. Sustainable strategies on economy


1. Economic systems and environmental problems

Economic resources:

1) Natural capital (natural resources) – earth’s resources and processes that sustain living organisms, including humans (goods and services produced by the earth’s natural processes).

These include: the planet’s air, water, and land; nutrients and minerals in the soil and deeper in the earth’s crust; wild and domesticated plants and animals (biodiversity); and nature’s dilution, waste disposal, pest control, and recycling services.

2) Manufactured capital – items made from earth capital with the help of human capital.

This includes: tools, machinery, equipment, factory buildings, and transportation and distribution facilities.

3) Human capital – people’s physical and mental talents.

Workers sell their time and talents for wages. Managers take responsibility for combining earth capital, manufactured capital, and human capital to produce economic goods.

Major types of economic systems:

1) Command economic system or centrally planned economy – all economic decisions are made by the government.

2) Market economic system – all economic decisions are made in markets, in which buyers (demanders) and sellers (suppliers) of economic goods freely interact without government or other interference. All buying and selling is based on pure competition.

3) Mixed economic system – fall somewhere between the pure market and pure command systems.

Economic growth and sustainability

Economic growth – an increase in countries’ capacity to provide goods and services for people’s final use (accomplished by means of population growth – more consumers and producers, or more consumption per person, or both).

Sustainability – meeting the needs of today without degrading the environment for future generations.

Ecologically sustainable development, or Sustainable development – the development that meets the needs of the present generations without compromising the ability of future generations to meet their own needs” (Brundtland Commission 1987).


Table: Sustainable living in economic system (compare and contrast)

Industrial age Sustainability or ecological age
Multinational corporations Community-based economics
Competition Cooperation
Limitless progress Limits to grow
Economic growth Steady state, development
No accounting of nature Economics based on ecology

2. Measures of life and environmental quality

Economic growth is usually measured by an increase in a country’s GNP.

Gross national product (GNP) – the market value in current dollars of all goods and services produced within and outside of a country by the country’s businesses for final use during a year.

Per capita GNP – the GNP divided by the total population of a country.

Gross Domestic product (GDP) – the market value in current dollars of all goods and services produced within a country for final use during a year.

! But GNP and GDP indicators are poor measures because they:

ü hide the negative effects (on humans and ecosystems) of producing many goods and services.

ü don’t include the depletion and degradation of natural resources or earthy capital on which all economies depend.

ü hide or underestimate some of the positive effects of responsible behavior on society.

ü tell us nothing about economic justice.

Environmental indicators – those that can give more realistic picture by subtracting from the GNP and GDP things that lead to a lower quality of life and depletion of earth capital.

Ø Net Economic Welfare (NEW) (W. Nordhaus and J.Tobin, 1972):

It is estimated as GNP minus a price for pollution and other “negative” goods and services, included in the GNP.

Estimations show that pollution and natural resources degradation subtract 1-5% from GNP of developed countries and 5-15% for developing countries.

Ø Net national product (NNP) (Robert Repetto et al. Have applied to Indonesia and Costa Rica):

It includes the depletion or destruction of natural resources as a factor in GNP.

Ø Index of Sustainable Economic Welfare (ISEW) (Herman E. Daly at al. have applied to US):

This comprehensive indicator measures per capita GNP adjusted for inequalities in income distribution, depletion of nonrenewable resources, loss of wetlands, loss of farmland from soil erosion and urbanization, the cost of air and water pollution, and estimates of long-term environmental damage from ozone depletion and possible global warming. After rising by 42% between 1950 and 1976, this indicator fell 14% between 1977 and 1990.

Ø Genuine progress indicator (GPI) – (applied in US):

In 1973-1994 the GDP rose from $8000 to $17000 per person while GPI fell from $6500 to $4000 per person.


3. Concept of externalities

Internal costs – all the direct costs which are paid for by the seller and the buyer of an economic good.

Externalities – social costs or benefits not included in the market price (higher costs for health care and health insurance, higher taxes for pollution control).

External cost – a harmful environmental or social cost that is borne by people not directly involved in buying or selling a product. These harmful effects are passed on to workers, the general public, and in some cases future generations.

Internalizing the external costs – a process of inclusion of the harmful external costs in the market prices of goods and services.


4 Economic strategies for pollution control

Marginal cost – the additional cost associated with one more unit of something.

Marginal cost of pollution – the added cost for all present and future members of society of an additional unit of pollution.

Marginal cost of pollution abatement - the added cost for all present and future members of society of reducing one unit of a given type of pollution.

Cost-benefit diagram – a diagram that helps policymakers make decisions about cost of a particular action and benefits that would occur if that action were implemented.

Optimum amount of pollution – the amount of pollution that is economically most desirable.

Command and control regulation – pollution control laws that work by setting limits on levels of pollution.

Incentive-based regulation - pollution control laws that work by establishing emission targets and providing industries with incentives to reduce emissions.

Table: Economic solutions to pollution and resource waste

Solution Internalizes external costs Innovation International competitiveness Administrative costs Increase government revenue
Regulation Partially Can encourage Decreased* High No
Subsidies No Can encourage Increased Low No
Withdrawing harmful subsidies Yes Can encourage Decreased* Low Yes
Tradable rights Yes Encourages Decreased* Low Yes
Green taxes Yes Encourages Decreased* Low Yes
User fees Yes Can encourage Decreased* Low Yes
Pollution prevention bonds Yes Encourages Decreased* Low No
* Unless more cost-effective and productive technologies are developed

5. Solutions of reducing poverty

Poverty – the inability to meet one’s basic economic needs.

The World Bank’s definition of poverty is the income of $1 per day (one of every five people on the planet).

Poverty causes premature deaths and preventable health problems. It also tends to increase birth rates and often pushes people to use potentially renewable resources unsustainably in order to survive.

The wealth gap

The richest fifth (20%) of the world’s population receive 80% of global income, and the poorest fifth (80%) has only 20% of income.

Poverty reducing solutions:

- to forgive at least 60% of the almost $2 trillion that developing countries owe to developed countries and international lending agencies;

- to increase the nonmilitary aid to developing countries from developed countries;

- international lending agencies should be required to use a standard environmental and social impact analysis to evaluate any proposed development project;

- to establish policies that encourage both developed and developing countries to slow population growth and stabilize their populations


Date: 2014-12-21; view: 672

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