Environmental management Economics Topic 3 Economic Issues

Lyn Tran Notes

Environmental sustainability ecologically sustainable development private and social costs and benefits externalities, market failure public and private goods free riders Environmental issues: preservation of natural environments pollution, climate change depletion of renewable and non-renewable resources.

Introduction:
The natural environment is the whole interaction of the climate, soils, and plants and animal life. Environmental management refers to a wide range of issues affecting the natural environment :

Protecting the quality of air, water and soil

Preserving natural environments, biodiversity and ensuring the sustainable use of renewable and non-renewable resources.

Minimizing the negative environmental consequences of economic activities.

Some key challenges y y y Reducing emissions of greenhouse gases Ensuring adequate supplies of water for use by households, farmers and businesses Preserving the health of forests, waterways and ecosystems Farming Mining
Lead to

Economic activities like

y y

Depletion of resources Extinction of plants and animals Pollution of water systems

Industry

Ecologically Sustainable Development (ESD)

Emphasizes need to pursue a sustainable level of economic growth taking into accounts the effects of economic activities on the environment Fast growth -> rapid depletion of resources, polluted atmosphere and decreasing quality of life Sustainable Economic Growth: Idea that growth should be maintained at a level that is not so low that unemployment increases, yet not so high that inflation and CAD increases

Environmental management Economics Topic 3 Economic Issues

Lyn Tran Notes

Growth that is inconsistent with maintaining natural resources will lead to fall in future potential output (diagram below) Primary Goods Now The Long term impact of resource overuse on the PPC

Future Manufactured Goods ESD involves CONSERVING and ENHANCING the community s resources so that ecological process and the quality of life are MAINTAINED It is a level of economic activity which is compatible with the long term preservation of the environment rather than the maximum level of growth possible in the short term AIM of economic growth and environmental protection: - Give people the best quality of life - If the environment is damaged then the number of material wants is also diminished (depletion of natural environments -> dangerous to health etc) - Also reduces potential future growth (limits natural resources and impacts environmental degradation) - ONE major principle of ESD is the principle of fairness between generations (intergenerational equity) -> to make sure that future generation will enjoy the same benefits

Review Questions

1. Describe what is meant by ESD and explain how it fits within the study of economics
ESD involves the conservation of resources in order for quality of life to be maintained. It is an important factor in resource allocation.

2. Outline the concept of intergenerational equity and discuss the impact of policies to encourage intergenerational equity on economic growth
Intergenerational equity is the concept of allowing future generations to enjoy and benefit everything that currently exists. It is to maintain the current high standard of living for future generations. ESD policies (since 1989) requires governments to focus on growth that is suitable to Australia s resources yet do not exceed the maximum sustainable yield of the environment (e.g. protecting biological diversity).

Externalities
The social and environmental costs associated with economic activity, which are not reflected in the private costs of production not accounted by the price mechanism. y Positive Externalities

Environmental management Economics Topic 3 Economic Issues

Lyn Tran Notes

Beneficial spill-over effects from economic activity e.g. Use of trucks is a negative externality but it is also a positive since it creates new jobs. Goods and services that have positive externalities are known as MERIT GOODS. Negative Externalities Adverse spill-over effects on the environment from economic activities e.g. Pollution, bad air quality, noise. Negative because society bears the cost of the damage (e.g. to roads etc) Known as DEMERIT GOODS.

Demand and supply diagram demonstrates the role of externalities in the marketplace [page 243 in text]

Price ($) Ps Pm

S (Social cost) S (Private cost) D Ps Pm

D (Private benefits)

S (Private costs) D (Social bene.)

Negative Externalities

Qs

Qm

Quantity

Positive Externalities

Qm

Qs

Quantity

NTS: The socially optimum price (Ps) is above the market price [Negative externalities PPC] thus indicating Price
mechanism undervalues the natural environment. The socially optimum quantity (Qs) is below market level market forces result in overuse of natural resources. If social cost taken in account then $$ and quantity produced

Market takes into account of private costs and benefits of production Price of Pm and output level of Qm * If the negative externality were borne by Consumer or producer, the price would rise to Ps reflecting the cost of production and output would FALL to Qs showing that G & S with native externalities tend to be OVERPRODUCED. * Positive is the opposite, thus if it is enjoyed by the producer or consumer, price would rise to Ps reflecting value of the good s production. Output would RISE to Qs, showing G & S tend to be UNDERPRODUCED.

Market Failures (tragedy of the commons)

Occurs when price mechanism takes account of private benefits and costs of production to consumers and producers, but does not take into account indirect costs (damage to environment) -> does not take into account of social costs either Reflects the weaknesses of the Price mechanism in representing environmental considerations Ignores costs and benefits associated with production which arise :

The costs of additional production include the marginal cost of production (extra $$ of inputs required to produce more output does not take account of additional social or environmental costs

Price mechanism does not take into account of future demand for G&S that may not be satisfied or how the economy s ability to grow in the future may be affected due to resource depletion or destruction

Environmental management Economics Topic 3 Economic Issues

Lyn Tran Notes

Cost and benefits of Economic Growth

Cost
y y y y Lowers environmental sustainability Inflation rise Income inequality Depletion of Non-renewable resources and renewable resources

Benefits
y y y y Increases demand for G&S Increase living standards Decrease unemployment Increases Government Revenue

y y

However the price mechanism can also play a limited role in environmental protection Resources become scarce, the cost of natural resources increase = reducing number of resources consumed $$ induce producers and buyers to look for and develop alternative inputs to production However the price mechanism plays no part in allocating environmental resources which can be used free

Review questions
1. Explain why Individuals and businesses may not pay for environmental costs
Environmental cost is not accounted for in the Price mechanism nor is it a factor of production thus the cost is not borne to either consumer or producer.

2. Explain why the price mechanism fails to take into account of social and environmental costs of economic activity
The PM does not take into account of social and environmental cost because it is not borne either by individual producers or consumers. Also it does not take account of future demand for G&S or the potential growth of an economy in the future once resources may be affected due to resource depletion or destruction.

3. Suppose a particular good has high social cost that is not accounted for by the PM. Using a diagram, contrast the socially optimum equilibrium with the market equilibrium outcome S (social cost) S (private costs) Ps Pm Qs Qm D If social cost was taken in account of the price would increase and the quantity would decrease as seen in the diagram

Public and Private Goods

Public Goods Private Goods

Environmental management Economics Topic 3 Economic Issues Non-excludable (street lights, park) Non-rival (consumption does not reduce quantity of the good)

Lyn Tran Notes Excludable (Only for those who pay e.g. food) Rival (Consumption reduces quantity of the good being supplied

Free riders: Groups or individuals who benefit from a good or service without contributing to the cost of supplying the G&S thus the G&S tend to be undersupplied in relation to the total demand e.g. Fishing company benefits from clean oceans without paying for cleanup costs

Public Goods and Public sector Goods differ

Public Sector Goods: Provided by the Government, not all are Public Goods e.g. Train services require a fee to use thus it is excludable

Public Goods: Non-excludable, non-rival. Not all Public Goods are provided by the government

Environmental Issues Preservation of Natural environments

y Problems effect health thus measures are put in place to reduce the damages and avoid the social and economic problems that arise Restriction on developments in environmentally sensitive areas (mining in national parks) Controls over emissions of waste product New plantation in areas where logging has occurred Actively protecting natural environments from threats non-native plants or animals Raise community awareness ESD strategies to balance short term economic costs against long term or future economic gains Ensure that the polluter pays Principle of intergenerational equity is about ensuring the fair access of resources for future generations

Statistics
Australia protects 10% of its total land area (form of national parks) compared with 24% US, 24% NZ Very poor record of preserving biodiversity

Government
Short term: Intervention result in a reduction in economic growth and intervention in Price mechanism causing high prices or reduced supply. Thus correcting PM s failure to take into account of environmental costs.

Environmental management Economics Topic 3 Economic Issues y

Lyn Tran Notes

These changes are unpopular e.g. Agricultural producers opposing reduction in water allocations for irrigation Industries face higher cost if they comply with rigorous environmental standards. This makes Australia less competitive as a place to do business thus missing out on opportunities that could increase economic growth. Interest groups like farming or mining industry lobby groups may prevent strict environmental protection policies Cost of repairing environmental damage borne by taxpayers

Pollution and Climate change

Pollution occurs where the natural environment is degraded in some way Affects atmosphere, water, resources and land

Pollution problems and policies to address Climate change

y Depletion of the ozone layer To reduce this problem an international agreement as finalized in 1987, the Montreal Protocol signed in 1987 to phrasing out production of ozone depleting products by 2000 Global community to control the problem Kyoto Protocol since 1997 is signed by 181 countries designed to lower emissions of carbon emissions to combat global warming requiring industrial countries to deduce average emissions by 5%, Australia joined in 2007 (Kevin Rudd) Cap and trade emission scheme to be introduced in 2010 businesses will be issued or have to buy permits for the emissions of greenhouse gases

Climate change
Known as Global warming caused by emission of greenhouse gases Caused by the burning of fossil fuels (1/3 of world s greenhouse gas emissions) Agricultural practices (Deforestation, irrigation, livestock farming and landfill 1/3) Rising emissions with increasing per capita incomes and growth in world population Standards improve, greater demand on the limited supply of natural resources

y y

Dangers of Climate Change

Melting polar ice caps causing increase in sea levels 18-59cm Weather conditions becoming unpredictable Skin cancer rates increase by 140% Increase in environmental refugees 200million Coastal flooding Intense droughts and floods

Depletion of Renewable and Non-renewable resources

Environmental management Economics Topic 3 Economic Issues y y

Lyn Tran Notes

Renewable: Naturally regenerate or replace themselves in a relatively short period of time.

However can be depleted to the point of becoming non-renewable e.g. overfishing Non-Renewable: Natural resources limited in supply, can only be replenished over a long period of time or not at all. E.g. Minerals, coal, natural gas. Depletion of natural resources effect intergenerational equity Hard to access optimal rate of use of resources cannot predict the needs of future generations Australia s abundant natural resources have underpinned its success as a primary commodity producer Also have large concentrations of non-renewable mineral and energy resources e.g. zinc, lead, nickel, uranium, goal, coal, iron, ore, copper, gas, oil Discoveries of these have played an important role in Australia s economic development and population flows Alternative energy sources y Wind y Solar Power y Bio Fuel y Recycling Sources of Greenhouse Emissions

Waste and wastewa ter 3%

Energy and supply 26%

Industry 19%

Data from UN report 2007

Forestry 17% Resident ial and commer cial buildings 8%

Transport 13%

Agriculture 14%

Review Questions
1. Outline two difficulties facing governments that seek to introduce policies to preserve environment
The government will face opposition from businesses and lobby groups as well as consumers since prices will rise whilst supply will decrease. The cost is a major factor.

2. Using concepts of market failure, Public Goods, free riding, explain why international agreements may be more successful than individual government policies in addressing climate change
In an individual economy prices for G&S are not affected by economical or social costs. Public goods are seen as non-excludable and nonrival hence it is freely enjoyed by all and free riding is a concept that looks into the benefits of G&S without contributing to the cost of supplying it. With International agreements it forces the countries to commit and strive in order to achieve the same goal thus it puts greater pressure on the governments to put in place policies in order to preserve the natural environment due to the pressures of global standings.

3. Identify 3 examples of negative externalities and 3 examples of positive externalities resulting from economic activities
Negatives: Air and water pollution, road damages, noise Positives: Increase employment, decrease poverty, increase quality of life

4. Explain the importance of renewable and non-renewable resources for Australian Economy and the environment
The preservation and conservation of renewable and non-renewable resources is essential for long-term sustainability. Australia relies on the mining industry to boost its economic activity Australia invests greatly on natural minerals. With the depletion of renewable and nonrenewable resources, Australia s economic growth will decrease drastically leading to a poorer standard of living.