ECONOMICS AND ENVIRONMENT

 

What supports and Drives an Economy?

 

An economy is a system of production, distribution and consumption of economic goods and any material item or service that satisfy the needs and wants of people.

 

The kinds of capital that produce material goods in an economy are called Economic Resources. They fall into 3 groups:

 

1.    Earth Capital or Natural Resources:

Goods and services produced by the earth’s natural processes. These include the air, water, land, nutrients and minerals, wild and domesticated animals, waste disposal and decomposing agents. It is these natural resources that support economic growth in all societies. There are no other sources.

 

2.    Manufactured Capital

Items made from earth capital with the help of human capital. They include tools, machinery, equipment, factory buildings, transportation and distribution facilities.

 

3.    Human Capital:

The physical and mental talents of people that entrepreneurs hire to produce goods and services. They include the managerial expertise and the time and labor of workers.

 

Is Economic Growth Sustainable forever?

 

1.  Many economists believe that the capacity for economic growth is unlimited because of the earth’s vast amounts of resources and the ability of human ingenuity to overcome resource shortages and environmental problems through science and technology.

 

2.  Other economists believe there are limits to economic growth but that we shall not reach that limits in the foreseeable future.

 

3.  To environmentalists and a small but a growing number of economists and business leaders, the notion of sustainable economic growth is false. Such people believe that even if the earth’s resources were unlimited (which it is not) pollution and other environmental problems that result from the exploitation and consumption of resources would not make continuous economic growth possible. We would reach a point where the value we add to our economy would be outweighed by the value we are removing from the earth in terms of diminished physical resources and deteriorating health, unlivable cities, undrinkable waters, polluted air, and rising crime. 

 

Some people believe we can use technology to overcome such limits. They also call for ecologically sustainable growth by which the total human population size and resources in use in a region would be limited to a level that does not exceed the carrying capacity of the existing natural capital.

 

What are Internal and External Costs to Economic Growth?

 

The production and consumption of all economic goods and services have both internal and external costs. The price a consumer pays for a car reflects the costs of the factory, raw materials, labor, marketing, shipping as well as mark up to allow a car company and its dealers to make a profit. After the car is purchased the buyer must pay for gasoline, maintenance, and repair.

 

All these direct costs that are paid by the seller and the buyer of an economic good are called Internal Costs.  Production, distribution and consumption also involve External Costs, also known as social costs or the loses that are not included in the market price.

Extracting and processing minerals and other raw materials to produce a car depletes natural resources and energy, produces solid and hazardous wastes, disturbs the land, pollutes the air and water, depletes atmospheric ozone, and contributes to global warming, and reduces biodiversity and ecological integrity. These harmful effects are External Costs (Externalities) passed on to workers, the public, society and future generations.

 

Unfortunately these harmful costs are not included in the market price of goods so people tend to forget them but every one pays these hidden costs sooner or later. While traditional economists consider these external costs to be a minor defect in an economic flow of goods and services, environmentalists believe that these are warning signs that economic systems are stressing the ecosphere.

 

The need to Shift to Full-Cost Pricing

 

One way of dealing with the problem of harmful external costs is for the government to levy taxes, pass laws, provide subsidies or use other strategies to encourage or force producers to include all or most of the costs in the market prices of economic goods and services. That price would then become the full cost of the products and services we consume.

 

The 2 main goals of Full cost pricing are:

 

1.    Close the gap between real and false prices by having prices reflect both the internal and external costs of production, and …

2.    Have people and businesses pay the full costs of the harm they do to others and the environment. Full cost pricing involves internalizing the external costs that requires governmental action because few companies will intentionally increase their cost of doing businesses unless their competitors do what the government requires as well. Because the external costs would be internalized, the market prices for most goods and services would rise but it is believed such a price would help consumers make informed choices and not waste resources.

 

How useful is Cost-Benefit Analysis?

 

One of the tools governments and businesses use in making economic decisions is Cost-Benefit Analysis. It involves comparing the estimated short and long-term costs (losses) with the estimated benefits (gains). Cost-benefit analysis can be a useful guide and can indicate the cheapest way to do things. However, it can also be misused. To minimize possible abuses, economists suggest the following:

a)    Use uniform standards                   

b)    Clearly state all assumptions

c)    Evaluate the reliability of all data inputs

d)    Open the evaluations to public review

e)    Estimate the short and long term benefits and costs to

       all populations and species

 

The Merits and Shortcomings of the Cost-Benefit Analysis or the economics approach to valuing the environment.

 

The economist's approach to evaluating the environment is based on an ethical doctrine called utilitarianism. This doctrine is derived from the philosophical writings of such people as Bentham and John S. Mill.

 

The theory explains that to determine whether an undertaking profitable or a loss, we should in advance determine whether the anticipated profits outweigh the expected losses. Translated into a social goal, the utilitarian doctrine requires "the greatest good for the greatest number".

 

The technique for evaluating the positive (benefits) and negative (cost) effects of events and goods is the benefit cost analysis. In recent times, the benefit cost technique has been applied to societal risk problems including health, human life and environmental conditions.

 

Strengths of the approach

 

1.  Proponents of the benefit cost technique argue that in a world where resources are limited but society has to deal with a host of problems including risks, the benefit cost analysis provide a guide for making "fair" and rational decisions.

 

2.  The technique provides some form of standardization by which the various criteria and preferences of people could be harmonized and used to assist in comparisons between and among events.

 

3.  In making the major costs and benefits of an action explicit, the technique is believed to assist decision makers make conscious decisions and be accountable for their action.

 

4.  Faced with the criticism that the technique subjects goods and events of monetary and non-monetary values to a common criteria for evaluation, proponents responded by adopting variables such as lives saved and accidents prevented in an identical process termed risk benefit analysis. This version explains that more efficient alternate uses of the same amount of society's resources could save more lives or prevent more accidents.

 

5.  Others have used an indirect criteria based on "peoples willingness to pay" to convert events/goods to a common criteria to facilitate evaluation.

 

Limitations of the economic approach

 

1.  First, the application of benefit cost analysis to societal risk problems raises several concerns. The positive and negative act for satisfaction for most events extends beyond acts of immediate consequences. For example, how do we determine how the unborn generation of people will value a given forest resource?

 

2.  There is also the problem of ignorance that comes with the adoption of new technology. In the absence of certain knowledge, the only way to achieve long term net reduction in risk or cost is to try out a new activity.

 

3.  Moreover, our traditional evaluation/interpretation mechanisms including the market and government action are crippled by inadequate information, cases of political expediency and the need to accommodate citizens’ misconceptions. The current muddled mechanisms therefore make it difficult to reach a rational, well-informed decision that balances benefits and costs.

4.  Placing a monetary value on human life or on such things as environment and nature may end up reducing their value. The value of most of these are not based on market exchanges but on variables such as expectations, feelings and spontaneity so that if a negative change occur in a variable, it will cause a fall in the value of the items.

 

5.  The economist's assumption that people voluntarily trade off safety for monetary gains fail to consider the question on how much do individuals require as a priori compensation to voluntarily accept a small addition of risk. The economist takes an indirect approach to valuing the environment.

 

6.  Furthermore, the benefit cost technique fail to recognize the different risks that individuals associate with different conditions and situations.

 

 

7.  The measure of value of things based on people's willingness to pay for non-marketed goods assume no difference between the price people require for giving up something which they have a preexisting right (eg. car) and the price they will be willing to pay to enjoy something for which they have no right. It is also believed that, the willingness to pay approach has so far concentrated on goods and services exchanged in private transactions and not much in public decisions.

 

 

8.  In addition, professing to add up all expected costs and benefits of an act before undertaking or recommending such an act presupposes perfection in measurement and evaluation. But we are aware of mistakes in estimation.

 

 

9.  For many species, the market is not a good mechanism for determining possible benefits and costs. For example, a firm making a potentially hazardous good may have too much to lose by informing consumers of the risky characteristics of its product. The technique thus fails to consider unanticipated changes in the world.

 

 

10.   Many people are of the opinion that the technique is based on anybody's view whether good or bad. In the case of non-marketed goods/events, it is difficult to determine whose value should be used in determining the worth. People in society differ in terms of their experiences, preferences and expectations. Since all these variables affect the way we value things, it is not possible for even any two people from two cultural backgrounds to value things in the same way. For example, the emphasis people in capitalist societies place on private property and monetary assets differ significantly form the value placed on such things in societies where "we feeling" and hence community relations are very strong. The question then is whose value should we adopt to evaluate events and provide some universal standard for everybody.

 

 

11.  The basis of the utilitarian doctrine of maximizing benefits for the society as a whole against the interest of individuals is that the cost borne by individuals will be compensated. But sometimes this does not happen and even in some cases it is difficult to identify the losers. This is especially so when the individuals are members of the future generation. In fact, the failure of profits to trickle down form beneficiaries in the market is well documented and the case of externalities is well known.

 

 

12.  It is also argued that individuals do not strive to maximize expected net benefits in all decisions they make. For example, in dealings with loved ones such as a son/daughter who may be in some danger, people make sacrifices that are not related to the balance of costs and benefits of the value of their lives.

 

Methods For Achieving Sustainable Growth?

 

1.  Regulation is a command and control approach to achieving sustainable growth and clean environments. It involves enacting and enforcing laws, e.g. that set pollution standards, regulate harmful activities, ban release of toxic materials and chemicals, and require that certain irreplaceable and slowly replenished resources be protected from unsustainable use or from any use at all.

 

In several ways government regulation in the United States have led to improvements in resource use efficiency that reduces costs and leads to innovative products and industrial processes that increase profits. Business leaders and environmentalists agree that some pollution control regulations discourage innovation and are too prescriptive and costly and need be modified. They propose regulations to set goals then free industries to meet such goals in any way that works.

 

2.  Market Forces can help improve environmental quality and reduce resource waste mostly by encouraging the internalization of external costs. One way to achieve this is to phase in government subsidies that encourage earth-sustaining behavior and phase out current perverse subsidies that encourage earth-degrading behavior. The problem is that these decisions are political and can therefore be swayed by powerful economic interests that want to preserve ecologically unsound subsidies to increase their profits.

 

3.  One other way is for the government to grant tradable pollution and resource-use rights. For example, total limit on emissions could be set and the total would then be allocated among manufacturers or users by permit. Permit holders not using their entire allocation could use it as a credit against future expansion, use it in another part of their operation or sell it to other companies.

 

4.  An Economic approach could be to enact Green taxes and Effluent Fees that would help internalize many of the harmful external costs of production and consumption. These could include charges on each unit of pollution discharged into the air or water, each unit of virgin resources used and each unit of fossil fuel used. The problems with this tax punishment is that (1) because the taxes or effluent fees are set politically and not by the markets, elected officials find it easier to aim at popular approval rather than for economic and ecological efficiency. (2) Elected officials are likely to see such taxes as ways of raising revenue rather than improving economic and ecological efficiency.

 

5.  Charging user fees is another method. For example users would pay fees to cover all or most costs for grazing livestock, extracting lumber and minerals from public lands, using public lands for recreation etc.