Environmental Economics & Management:

Theory, Policy, and Applications 5e

Scott J. Callan and Janet M. Thomas

MODULE 1 Modeling Environmental Problems

Chapter 1 The Role of Economics in Environmental Management

“We can lead the world, secure our nation, and leave our children a planet that is safer and cleaner and healthier than the one we inherited.” Barack Obama (1961- ) p. 2, our textbook

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1. Economics and the Environment • Economic theory _______ what we observe in reality, including environmental problems • Recognize the link between economic activity and the environment using ________ – Circular Flow Model – Materials Balance Model

A model is an abstract representation of reality; built with words, diagrams, and mathematical statements; should be as simple as possible to accomplish its purpose

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Circular Flow Model • Shows the real and monetary _______ economic activity through the _______ of and ________ 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 4

Circular Flow Model 5

Outer arrows: Firms supply goods/services to households Households demand goods/services Households supply resources to firms Firms demand resources 6

Inner arrows: Households pay for goods/services Firms receive revenue Firms make factor payments to households Households receive income 7

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 ___________________ from the environment to the economy • The focus of

Natural Resource Economics

– Flow of ________ • The focus of from the economy to the environment

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

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Materials Balance Model The Interdependence of Economic Activity and

Nature

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

Science and the Materials Balance Model • • • The flow of resources and residuals are balanced according to laws of science _____________________________ – Matter and energy can neither be created nor destroyed _____________________________ – Nature’s capacity to convert matter and energy is not without bound

Thermodynamics: physics that deals with the mechanical action or relations of heat

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2. Fundamental Concepts in Environmental Economics Terms and Definitions

Environmental damage , or pollution —the presence of matter or energy whose nature, location, or quantity has undesired effects on the environment.

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Causes of Environmental Damage • Natural Pollutants processes in nature arise from ____________ • e.g., ocean salt spray, pollen • Anthropogenic Pollutants are _____________ and include all residuals associated with consumption and production • e.g., chemical wastes, gases from combustion • Of greater concern to environmental economists 12

Sources of Pollution • • Sources grouped by mobility – ____________ Source : fixed-site – _________ Source : any nonstationary source Sources grouped by identifiability – _______ source : single identifiable source Point sources are discrete conveyances such as pipes or man-made ditches.

– _________ Source : a source that cannot be accurately identified, degrading in a diffuse way Agricultural runoff from farmland: a nonpoint polluting source if rainwater transports chemical pesticides and fertilizers to nearby lakes and streams.

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Scope of Environmental Damage • • • ________ Pollution – Damage not far from the source • e.g., urban smog __________ – Pollution Damage extends well beyond the source • e.g., acidic deposition ________ Pollution – Involving widespread environmental effects with global implications • e.g., global warming, ozone depletion 14

3. Identifying Environmental Objectives • • • _______________________ – reduction in anthropogenic contamination to socially acceptable levels ______________________ – management of resources to ensure long-term quality and abundance __________ – assuring the variety of distinct species, genetic variability, and variety of inhabitable ecosystems 15

4. Environmental Policy Planning: An Overview • • Environmental planning involves many segments of society In the U.S., the Environmental Protection Agency (EPA) acts as liaison to numerous constituents within each sector 16

Environmental Policy Planning

Source: Adapted from Vaupel (1978), Figure 5-3, p. 75.

EPA headquarters are in Washington, D.C., and there are 10 regional offices across the nation.

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National Environmental Policy Act (NEPA) of 1969 • • • Directs the integration of effort across agencies, executive departments, and branches of government in the U.S.

Guides U.S. federal environmental policy Requires that environmental impact of public policy proposals be addressed – Calls for an Environmental Impact Statement (EIS) on proposals or major federal actions 18

Risk Analysis --Chief Tool Guiding Policy Planning • Two decision-making procedures – _______________ – qualitative and quantitative evaluation of risk posed by an environmental hazard – ________________ – decision process of choosing from alternative responses to environmental risk 19

Risk Management

a. Policy Evaluation Criteria • • Economic Criteria – – Allocative Efficiency appropriated such that benefits are equal to costs – requires resources be Cost-effectiveness – requires the least amount of resources be used to achieve an objective Equity Criterion – Environmental Justice – concerned with the fairness of the environmental risk burden across segments of society or geographic region 20

b. Government Policy Approach • • ___________________________ – regulates polluters through the use of rules ________________ – incentive-based policy that encourages conservation or pollution reduction – Can follow the “

polluter-pays principle

” whereby the polluter pays for the damage caused

see page 19

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•

In theory, the price assigned to pollution is set to cover any damages to health or the ecology caused by pollution. The polluter is made to pay this price for every unit of pollution released to nature. The full costs of production are captured. The profit maximizing producer has an incentive to reduce residuals.

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c. Setting the Time Horizon • Management Strategies – a short-term strategy intended to manage an existing problem • Pollution Prevention (P2) – a long-term strategy aimed at reducing the amount of toxicity of residuals released to nature 23