Environmental Economics

What Is Environmental Economics?

Environmental Economics is a strand within Economics that is concerned with the economic implications of growing environmental issues, and the policies and structures which can be employed to ameliorate environmental degradation.

As a result of increasing twenty-first-century environmental consciousness, Environmental Economics has grown to become a larger field within the study of Economics. Many key concepts within the field are concerned with viewing ecological problems through the lens of traditional economic theory.

Examples of this can be found in theory surrounding market failure, valuation, subsidies, and public goods, among several others. These concepts will be traversed in further detail later in the article.

The subject largely focuses on the arguably under-discussed environmental consequences of economic growth, while policy in this area is generally targeted towards the goal of more sustainable economic growth. 

To name a few examples, these include ideas of renewable energy and environmentally conscious policies, among others.  

The following brief YouTube video explains the basics of environmental economics:

Origins of Environmental Economics

Though perhaps not an exact measure of its beginnings, Environmental Economics can loosely trace its roots back to the mid-twentieth century. 

During this period, one could witness increasing industrialization. This industrialization, coupled with a growing awareness of the paramount intrinsic need for environmental stability, resulted in a boom in what has been termed ‘environmental activism.’

The perceived adverse effects of environmental deterioration also contributed to an upsurge in environmental advocacy. The effects of fast economic expansion on the environment were made known to the globe.

According to environmental economists, the environment serves as a type of natural capital that gives humans comforts and other necessities for survival. 

Neoclassical economics, which addresses issues including ineffective resource management, market failure, negative externalities, and the administration of public goods, served as the foundation for environmental economics.

The concept of a negative externality was far from new at the time. Negative externalities refer to those actions which hold an exacerbating effect on a third party (which will be discussed at length further in this article). 

However, the emerging discipline of Environmental Economics demonstrated clearly how the example of environmental degradation was an element within this idea.

In the twenty-first century, the field has grown, thanks immensely to the work of its contributors to accommodate the adapting discourse on the subject. Research and findings on the subject continue to evolve as a result of an attempt to find optimal solutions.

Scope of Environmental Economics

Environmental economists have proposed several potential strategies to alleviate the repercussions of the climate crisis and the general levels of environmental damage perpetrated.

Some of these strategies and solutions include:

• Greater environmental regulations
• Taxes on pollution
• Subsidies for environmentally-conscious actions
• Prohibition of certain high-emission technologies

Several important features and ideas exist within this discipline. These largely regard the different aspects of environmental decline as well as some of the causes and potential solutions to these issues.

Some of the most prominent ideas and concepts, in no particular order, are:

• Market failure and externalities: an example of market failure, externalities refer to an unintended consequence of an action, usually onto an uninvolved third party. 
• Valuation: within the context of Environmental Economics, this usually refers to the notion of placing an economic value on environmental goods.
• Subsidies: within the context of Environmental Economics, subsidies are usually provided as a reward for environmentally conscious behavior. Subsidies tend to be funded arguably to incentivize these environmentally friendly actions.
• Public goods refer to those goods from which the public cannot be excluded due to financial cost (as these goods are available free of economic charge).

Market failure and externalities

A considerable element of Environmental Economics is dedicated to the analysis of externalities. 

Externalities refer to a consequence (which can be either a cost or a benefit, depending on whether the externality is negative or positive, respectively) of an action that was unintended and unanticipated by the producer. Externalities are usually inflicted upon an uninvolved third party.

Applying this concept to the study of Environmental Economics, one can regard exacerbation of the environment as a negative externality of economic growth, with the ‘uninvolved third party in this instance referring to the environment.

An illustration of negative externality would be pollution brought on by industrial activity, which results in polluted air and water as well as various health problems. 

Even when their actions damage the environment and have a detrimental impact on the neighborhood, the polluting entities may not have to pay any expenditures to remedy the pollution.

An advantage that accrues to parties unrelated to its creation is known as a positive externality. 

People from outside the neighborhood who come to visit relatives and friends nearby and would not have helped fund the creation of the park can gain from it. "Free riders" are people who take advantage of an economic resource without helping to create it.

Externalities are one form among several others of what is termed ‘market failure’. Market failure refers to those instances when the market allocation of goods and services is not regarded as Pareto efficient. 

A situation is regarded as Pareto efficient if the economic condition holds whereby no party can be better or worse off without making the other involved party better or worse off. Market failure tends to result in an economic loss.

A clean ocean is one example of an environmental benefit. There are no marketplaces for clean water bodies where they can be exchanged based on how clean it is, making it impossible to estimate the worth of clean seas and oceans. It is a typical instance of a failing market.

Valuation

Environmental economics places a lot of emphasis on valuation since it may be used to assess a range of choices for dealing with problems related to the utilization of environmental and natural resources. 

The valuation of ecological resources is a challenging procedure since it is challenging to put a monetary value on intangible advantages like clean air and a healthy ecosystem.

It can be challenging to assign a value to resources that have numerous uses. For instance, mountains may give scenic beauty, regulate river flow patterns, flood prevention, and provide fertile soil for farming.

Values can be attributed to environmental resources based on techniques of use and non-use. By watching what customers are prepared to spend, it is simpler to place value on an item that is already in use.

The "use" concept can be used for opportunity cost pricing, replacement cost pricing, and hedonic pricing methodologies. The "non-use" approach employs the contingent value technique, which gauges customer willingness to pay for an item they will not use or enjoy.

Subsidies

Another key element within Environmental Economics draws from the concept of subsidies. This term usually refers to government-provided financial compensation.

Subsidies in favor of environmental protection primarily take the form of economic features like grants, loans, and/or tax relief; however, they can take many other forms. They can also be employed for several different uses.

Subsidies are usually employed as a reward for what is regarded by the respective government as environmentally-conscious behavior, such as reducing carbon footprints by different firms, etc. 

In this way, it is evident how they can be regarded as an incentive for environmentally-friendly actions by promoting greater consciousness of the environmental implications of these actions.

Subsidies have also been included within the category of ‘market-based instruments (MBIs), which refers to policy instruments utilized as tools in methods of government intervention. 

Other examples of MBIs include taxes, levies, and charges, among other various types of instruments.

Public goods: Tragedy of the Commons

Public goods and common property goods are those goods from which people cannot be excluded and are provided to the public without an attached financial cost. 

These goods are usually non-rival as a result, with environmental examples including public parks and beaches, among several others.

The term ‘Tragedy of the Commons’, initially coined by ecologist Garrett James Hardin in 1968 (though the theory behind the concept can be dated back to writer William Forster Lloyd in 1833), refers to the idea that access to a shared public resource results in less awareness of the resources’ scarcity value.

Applying this theory to the concept of environmental resources, over time, can result in its depletion and degradation due to a lack of awareness regarding its scarcity. 

According to this public goods theory, this is a result of a lack of sufficient care of the common pool resource, through forms like lack of investment or over-consumption, among various others.

Researched and authored by Kimberly Arab & Ankit Sinha

Reviewed and edited by Ankit Sinha | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Contagion
• Dutch Disease
• Industrial Revolution
• Public Goods
• Tragedy of the Commons