Environmental economics is one of the main areas of economics, which deals with the studies of the financial impacts of environmental studies. Environmental economics uses different approaches to perform studies that determine the theoretical and empirical effects of environmental policies on the general economies. This is one of the crucial areas of economic studies, involving environmental policies, which economists create to help protect the environment. The also follow these studies to analyze the effects and merits of existing or proposed policies. When there are any proposed policies, they do not go into effect unless they follow specific procedures involving environmental issues.
The term scarcity is used in economics to define human needs and the decisions people make when faced with scarcity. Human wants are unlimited, and yet they rely on the limited resources available. Economic theory states that the main goal of every human is to live a happy life. They, therefore, make rational decisions based on what makes them happier. They compare all options before them, and anything that causes more risk than profit is cast aside. For one to achieve these goals, they will require a good financial position or have material possessions that elevate their statuses in society. But they still have to work to achieve these statuses, which means one has to look for a job. Still, the lack of jobs on the market means one still has to struggle before securing one.
Since we cannot produce everything, we need to live a good life; we rely on what other people produce. In other words, human beings depend on each in any economy, with markets supplying goods and services, and households consuming. These products require raw materials, which mostly come from the natural environment. Unfortunately, nature does not produce infinite services like the labor or commodity markets. The more we make things to improve our lives, the more we affect our environment.
When an entrepreneur seeks to start a new business or a firm looking to expand their territory, they have to get necessary approvals from the environment's ministry. This makes sure that the activities of their firm will not have a bad impact on the environment. Under this subject is the economy of conservation, which uses the general environmental economy's data to protect threatened species of plants and animals.
Environmental economics main idea is that there are environmental costs of economic growth that are popular with the current market model. Economic growth has a direct relation to environmental concerns. For instance, when there is overpopulation in a certain area, it increases economic activities, which leads to economic growth. At the same time, they have to clear some forests or areas of land to find an excellent area to stay in. Human activities have always been the biggest threat to the environment. It would mean a complete cessation of economic growth to save the environment, which is not possible under the current market structure.
There is too much development in terms of technological advancement and scientific innovations that would make it hard to cease economic growth. The modern man depends on their economic status to ensure a good life. And this is why there are a lot of costs of economic growth on the environment that go unaccounted for.
The results of these activities include externalities like air pollution and other forms of environmental degradation. And if they are not controlled, they can lead to complete market failures. As such, environmental economists use various resources and data to analyze the costs and benefits of specific economic policies, which involve running theoretical tests and studies on potential results of environmental degradation. Once these consequences have been established, concerned parties use different methods to protect the environment.
The study of environmental economics has become a fundamental part of human development. Human beings are always in direct confrontation with the environment. When a forest is cleared somewhere, it causes a negative change in whether, including causing desertification. Environmental conservationists come with different ideas to replant trees as a way of covering for the lost once. Besides, people breathe out carbon IV oxide to the environment, which toxic to humans but good for plants. Therefore, plants take in the same CO2 and excrete oxygen, which people breathe in. This is a symbiotic relationship that balances nature. When we cut down trees, there will be too much pollution in the air, which also means we may not be able to work effectively.
Economic growth depends more on the demand and supply of the labor market than any other market. Investing in good health leads to effective work for better production. On the other hand, economic development has a direct negative impact on the environment. Economists in this are recommended how much materials should be taken from the environment by manufacturers. How much, how much oil or minerals should be extracted at any given time.
The study of environmental economics has become a major concern in the twenty-first century than before. I…. "undertakes theoretical or empirical studies of the economic effects of national or local environmental policies around the globe…. Particular issues include the costs and benefits of alternative environmental policies to handle air pollution, water quality, toxic substances, solid waste, and global warming."
It is crucial to distinguish environmental economics from ecological economics. Ecological economics focuses on the economy as a subsystem of the ecosystem. It is more about preserving natural capital. A study by German economists revealed that ecological and environmental economies are different schools of thought. On one side, ecological economist emphasize 'strong' sustainability, while refusing to accept that human-made capital can be used instead of the natural capital. Ecological economics is about the preservation of the natural environment in its original state. This means they do not conform to any other proposition that says otherwise.
Environmental economics goes beyond the general human relationship with the environment. Perhaps it seeks to establish a common line where economic activities can operate without creating too much impact on the environment, which is not possible.
There are several topics studied in environmental economics. They include Market failure, Externalities, common goods, and valuation.
Market failure is a central aspect of environmental economics. This subject means markets are not able to allocate resources as efficiently as they are expected to. "A market failure occurs when the market does not allocate scarce resources to generate social welfare. A wedge exists between what a private person does give market prices and what society may want him or her to do to protect the environment. Such a wedge implies wastefulness or economic inefficiency; resources be reallocated to make at least one person better off without making everyone else worse off" (Hanley and White 2007).
As mentioned in the beginning, scarcity is one of the biggest issues that face economic development. A much as we all want to live happily, there are just not enough resources to deliver the kind of life we desire. Natural resources are limited, whereas human needs are limitless, which means only a few people can use them effectively to live a happier life. On the other hand, people are social beings, where every decision they make affects others around them and the general environment. Deontology and utilitarian theory dictate that a person must behave in a manner that produces positive results to them and the people around them. They all agree that people must always strive to do good.
When these rules are followed, together with scarce resources, it becomes hard to avoid market failures. Ideally, markets have to find a way to allocate scarce natural resources into their operations. Common forms of such failures include externalities, non-excludability, and non-rivalry.
We are all faced with the decision-making situation at every given time, which we must make. And since human beings exist in a social setup, one person's decisions can extend into the life of another person. When one makes a choice that affects the other person in a way that cannot be accounted for in the market price, an externality exists. Externalities can be positive or negative, though negative ones are the most studied under environmental economics. Consider this; if there is water seepage happening on the upper floors of residential buildings, it may affect those living on the lower floor. Whether the person doing the action knows what they are doing, or it happens without proper understanding, it may still negatively affect the same area. Also, think about how selling Amazon timber disregard the amount of carbo iv oxide released during the cutting process. It causes a serious environmental issue on the people living around the area, as well as the entire ecosystem.
Another example is where a firm is emitting pollution without considering how much damage these emissions will have on others. We have seen many people in different areas taking manufacturing firms to courts over air pollution, which may occur in excess of the 'society efficient' level, above what is required if the market were to account for the pollution.
Heller and Starrett (1976) define externality as a situation where "The private economy lacks sufficient incentives to create a potential market in some good and the nonexistence of this market results in losses of Pareto efficiency." Again, the term market failure appears here because economic terminologies list externalities as a form of market failure. In a successful market, economic activities involve leading to an efficient outcome, which is not the case with externalities.
Sometimes it is too costly to access an environmental resource that some people cannot afford. This situation can be called either a common property resource, where there exists rivalry for the resource with one person's access reduces the chances of other people using the same resource, or a public good, where there is no rivalry on its application. Each of these cases suffers likely inefficiency in market allocation.
Harding (1968) recognized these challenges when he observed the concept of the tragedy of commons in challenges involving non-exclusion and common property. 'Common' is a term used in the environmental asset itself and refers to the property right regime that allows specific groups of people to scheme ways of excluding others, allowing the future benefits streams to be captured. 'Open-access' is no ownership in such a manner that no one owns the proper owned by everyone. This is one of the biggest issues in economies. In case people ignore the scarcity value of commons, they will spend too much effort resulting in overharvesting the resources.
In theory, Hardin says where restrictions don't exist, users of an open-access resource will use it more than if they had to pay for the same. This leads to environmental degradation and general economic issues. Ostrom (1990) shows that people using common property resources have worked to establish a self-governing system of rules to reduce the risk of tragedy on these goods. A perfect example of a public good is climate change mitigation that does not put its benefits completely in the market price.
One of the main topics with the field of environmental economics is assessing the economic value of the environment. Values must be placed on the use and indirect use of tangible benefits coming from natural resources and ecosystem values. There are other non-use values of these assets, including existence, option, and bequest values. For instance, some societies value the existence of a set of species with their environment, regardless of the effects of the loss of a species in the services offered from an ecosystem. These species may exist with an option value since it may be used for human consumption, as certain species of plants are being used for medicinal purposes. Some individuals may find it valuable to leave a pristine environment for their future generations.
Environmental economies are a wide subject that requires a transnational approach. It is one of the main areas of concern for modern economists as they seek a balance between economic development and caring for the general environment. It comes with many issues, but they are all a part of the bigger picture in creating sustainable development.
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