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Environmental Economics

    Environmental Economics    

"Only after the last tree has been cut down, the last river has been polluted, we will discover you cant eat money”

Paul Hawkens the coauthor of the book ‘Natural Capitalism’ wrote in an article in Mother Jones magazine way back in 1997, “Somewhere along the way to free-market capitalism, the United States became the most wasteful society on the planet.

Most of us know it. There is the waste we can see: traffic jams, irreparable VCRs, Styrofoam coffee cups, landfills; the waste we can't see: Superfund sites, greenhouse gases, radioactive waste, vagrant chemicals; and the social waste we don't want to think about: homelessness, crime, drug addiction, our forgotten infirm and elderly.

Nationally and globally, we perceive social and environmental decay as distinct and unconnected. In fact, a humbling design flaw deeply embedded in industrial logic links the two problems. Toto,
pull back the curtain: The efficient dynamo of industrialism isn't there.

Even by its own standards, industrialism is extraordinarily inefficient.” Good old conventional economists will argue that growth is good. But who pays for polluting and degrading this planets non-renewable ‘natural capital’? Enter the environmental/ecological/green economist.

    What is Environmental economics ?   

It is a distinct branch of economics that acknowledges the value of both the environment and economic activity and makes choices based on those values. It tries to achieve the challenge of the balance in the economic activity and the environmental impacts by taking into account all the costs and benefits.

These green eco theories are designed to take into account pollution and natural resource depletion, which the current model of market systems fails to do. This “failure” needs to be addressed by correcting prices so they take into account “external” costs.

For example, should not motor car manufacturers be made to pay for the pollution they cause and the owners be responsible to compensate for all that parking space they use up!? As countries like India and China industrialise and the already developed ones begin to realize the “limits of growth” this exciting new field of environmental economics (also described by the more radical as green or ecological economics).

As the title of the another book on the subjects notes “You cant eat GDP - studying economics as if ecology mattered’. Besides new businesses in a world  concerned with sustainable development will need the knowledge and expertise of such green economists to remain competitive and to survive.


Key Concepts

External costs: Uncompensated side effects of human actions. If a stream is polluted by runoff from agricultural land, the people downstream suffer a negative external cost or externality. Market failure: Defined as the inability of markets to reflect the full social costs or benefits of a good, service, or state of the world. The environment provides resources (renewable and nonrenewable), assimilates waste, and provides aesthetic pleasure to humans. However, traditionally, their value was not recognized because there is no market for these services (to establish a price), which is why economists talk about “market failure”.


Historically, goods and services (like clean water and air) provided by the environment were seen to be limitless, having no cost, thus not considered scarce. Scarcity is a misallocation of these services (which are not limitless) due to a pricing problem. If resources
were properly priced to include all costs, then the resource could not be over-exploited because the actual cost would be too high. This is a powerful tool in environmental problems…proper pricing.

Natural Capital:

Everyone is familiar with the traditional definition of capital as accumulated wealth in the form of investments, factories, and equipment. "Natural capital," on the other hand, comprises the resources we use, both nonrenewable (oil, coal, metal ore) and renewable (forests, fisheries, grasslands). Although we usually think of renewable resources in terms of desired materials, such as wood, their most important value lies in the services they provide. These services are related to, but distinct from, the resources themselves. They are not pulpwood but forest cover, not food but topsoil.

Natural Capitalism:

Creating the Next Industrial Revolution, by Paul Hawken, Amory Lovins, and L. Hunter Lovins, is the first book to explore the lucrative opportunities for businesses in an era of approaching environmental limits. In this groundbreaking blueprint for a new economy, three leading business visionaries explain how the world is on the verge of a new industrial revolution—one that
promises to transform our fundamental notions about commerce and its role in shaping our future.

Natural Capitalism describes a future in which business and environmental interests increasingly overlap, and in which businesses can better satisfy their customers' needs, increase profits, and help solve environmental problems—all at the same time.


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Environmental Economics