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Introduction to Environmental Economics

What Is Environmental Economics?

Environmental Economics is a sub-area in the field of Economics.  It focuses on the incentives rational humans have when deciding to use our natural environment’s scarce resources. 


Environmental economics, like many academic sub-fields, was established slowly and sporadically over an indefinite time period.  It shares many of the same concerns as natural resource economics, a field it gradually but vaguely differentiated itself from. Arthur Pigou (creator of Pigovian Taxes) wrote his work on taxation in the '30s and Ronald Coase first formulated his Coase Theorem in 1960. Though both of these seminal works weren't explicitly meant to establish environmental economics, they helped to form the fledgling field. Its establishment as a separate field intensified when the environmental movement took off in the mid '60s to early ‘70s (Cropper & Oates). This popular ground swelling of environmentalism was partially triggered by the book by Rachel Carson, Silent Spring. But it also had to deal with the growing realization among Americans of the detrimental effect pollution was having upon the natural resources and upon public health. The stories about rivers on fire because they were so toxic, and rivers running whatever color the chemical dye the plant was using that day are true. Smog was becoming an issue beyond big cities, as was water pollution and habitat loss. One particular example of the dire situation was the sulphur dioxide pollution from electrical utility plants. SO2 particulates have been shown to increase mortality and illness rates, and a reduction in lifespan of city-dwellers. (Nash 77-78). It has also been shown to cause a loss of biodiversity as it acidifies waterways (Nash, 52). These pressing problems gave environmental economics the push towards applying the theory to real-world issues.

How Are Economics And The Environment Related?

The concepts involved in environmental protection and economics are often seen as contradictory.  Economists are sometimes seen as having complete disregard for the environment.  Focus on profit maximization through efficiency seems to excuse, if not encourage, the serious negative effects of humans' desire to have the biggest, the best, the fastest,…the most.  Most production creates byproducts that, if not disposed of properly, can cause major harm to our environment.  Environmental economists can design policies to change the people's incentives and create better outcomes for the parties involved.   

What Is The Current State?

As we know, economics is all about incentives; when environmental problems arise, economists look for incentives that can change the response of rational individuals in the situation.  In the twenty first century, there is now a greater public awareness of humans’ effect on the earth. Problems include climate control, a decrease in biodiversity, and pollution in both the water and air.   These effects are called negative externalities and occur when the consequences of a decision affect someone not involved in the decision making process.  Environmental Economics works to correct negative externalities that arise from decisions about natural resources.  For many of us, these environmental problems are hard to detect in our daily lives so they often go unnoticed.  But by taking a closer look, it is obvious that the problems are growing.  In some respects, the damage can be arrested; in others it can actually be reversed.  To do this some people turn to the government for help while others turn to self-regulated property rights (among other things) to support our natural resources.

Are We Becoming More Aware?

Many politicians and celebrities discuss their support for preservation of certain natural resources.  More and more, consumer products indicate on the label that the production process used was "environmentally-friendly".  Some boast that their production process created little to no waste that is sent to landfills.  Others say their actual products are made of organic materials. These are visible indicators of a change in the U.S., and even the world, of increased concern about these issues.

Whose Turn Is It Anyway?

The concepts of public and private goods come up a lot in environmental economics.  Even with all the progress made, when a good like fresh air is discussed, it is easy for polluters to direct the blame to someone else and expect them to clean up the pollution.  When everyone gets equal benefit from pollution reduction, it is difficult to convince people that it is their turn to chip in.  The ones who would rather enjoy the benefits of environmental clean up without having to pay for it are called free riders. A free rider is someone that consumes the benefit of a good without bearing any of the costs.

How Do We Apply Economics to An Environmental Situation?

Through valuationcost-benefit analysis, and pollution control policies (among others), economics is applied to environmental problems.  As economics would explain, with limited amount of any natural resource, there must be a trade off (TANSTAAFL); and, decisions about allocation must be made.  These decisions are easily made by comparing the value of each option in quantifiable numbers (in the same unit).  The challenge here is to put a value on something like clean water, fresh air, and healthy coral reefs.


Can We Sum This Up?

The study of environmental economics gives people tools to quantify environmental values and enhance these values for current and future generation.  It also supplies us with models for incentive creation and implementation that can change the response of the rational humans involved in environmentally-related decisions.

Where Did You Get This Information?  Where Can I learn more?

Unless otherwise noted, the information in this section was summarized during a study of the following text: Hanley, Nick, and Jason F. Shogren and Ben White. Introduction to Environmental Economics. New York: Oxford University Press, 2001.

Background Notes: Cropper, Maureen L. & Wallace E. Oates. "Environmental Economics: A Survey." Journal of Economic Literature. June 1992. pp.675-740

Nash, Steve. Blue Ridge 2020: An Owner’s Manual 1999. University of North Carolina Press.

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