Importance of Environmental Economics

What is Environmental Economics?

It is an area that studies the financial impact of environmental policies and proposes solutions to the problems. A sub discipline that applies values and tools of microeconomics and macroeconomics to efficiently allocate environmental resources. The studies by Economists have revealed the impacts to determine the empirical and theoretical effects of the policies on the world economy. In the field of environmental economics, users are enabled to design appropriate policies and analyse the merits and effects of the proposed policies.

An overview of environmental economics

There are environmental costs of economic growth that go unaccounted for in the market model. The externalities, like pollution and other environmental degradation, results in market failure. Economists analyse the costs and benefits of economic policies, which involve theoretical tests and studies on the economic consequences of environmental degradation.

Strategies of Environmental Economics

Economists are concerned with the identification of specific problems, their rectification, but there are multiple approaches to solve the environmental problem. For example, when a state tries to impose a transit to clean energy, they have many options. The government can impose a limit on carbon emissions or can adopt more incentive and prescriptive solutions like, placing taxes on carbon emissions or offering tax credits to firms that adopt renewable power resources. All these strategies rely, in varying degrees, on the state intervention with-in the market; therefore, the degree of acceptance is an important factor in determining and formulating the environmental economic policy.

Example of Environmental Economics

  • The most evident example of environmental economics is the trade and cap system. Companies buy carbon offsets from environmental organizations to make up for the carbon emissions.
  • Another prominent example is the imposition of a carbon tax to penalize carbon-emitting industries.
  • Regulations of Corporate Average Fuel Economy (CAFE), are another example of environmental economics. The regulations specify the gallons per mile of gas for carmakers and cars.

Some Economic Terms

Economics is the study of the allocation of resources, including the functioning of markets and how incentives affect businesses and institutional behaviour. Environmental and natural resource economics is the application of principles of economics to study how these resources are managed and developed. Environment Protection Agency uses economic analyses to improve the effectiveness of environmental policies. Environmental economics is distinguished from ecological economics that is a subsystem of the ecosystem with its eyes on the preservation of the natural capital. The survey of German Economists showed that environmental economics and ecology are different schools of economics. While ecological economists emphasize “strong” sustainability and reject the proposition that “physical” capital can be a substitute for natural capital.

  1. Market failure One example of market failure is air pollution, as the factory is imposing an external cost on the community in a negative way. Market failure refers to the failure of markets to efficiently allocate resources. According to Hanley, Shogren, and White, a market failure happens when the market is unable to allocate scarce resources to generate social welfare. A wedge exists between what a person does give market prices, and what society wants him to do for the environment. This wedge implies economic inefficiency. Common types of market failures are externalities, non-excludability, etc.
  2. Externality An externality is when a person makes a choice that affects other people in a manner that the market price has not accounted for. An externality can be negative or positive but is usually negative in environmental economics. For instance, water seepage in buildings occurring in upper floors affects the lower floors as well. Another example, the sale of timber does not consider the amount of carbon dioxide that is released in the cutting. An externality is a situation in which the economy lacks enough incentives to create a potential market. In economic terms, externalities are market failures in which the market does not lead to an efficient outcome.
  3. Common goods Common goods are defined as goods that are rivalries and non-excludable. Examples of common goods are water and air that can be polluted, water flows can be tapped beyond sustainability, and the air is often used in combustion.
  4. Public goods Public goods refer to a service or a commodity that is available to all members of society. These services are administered by the government and collectively paid through taxation. Examples of public goods are national defence, law enforcement, and law rule. Public goods are more basic goods, like access to clean air and drinking water.
Solutions to overcome the challenges

There are some solutions advocated to correct externalities that include:

  • Environmental regulations: Under this, the economic impact is estimated by the regulator. This is done using the cost-benefit analysis. There is a growing realization that regulations are not so distinct from economic instruments.
  • Pollution quotas: Often it is advocated that pollution reductions should be achieved by way of tradable emissions permits, which if freely traded may ensure that reductions in pollution are achieved at the least cost. If such quotas are allowed, then a firm would reduce its pollution load, and if doing so would cost less than paying someone else to make the same reduction.
  • Taxes and tariffs Increasing the costs will discourage polluting, and provide an “incentive,” that is, the dis-incentive will continue to operate as the pollution levels will fall. A pollution tax reduces pollution to the “optimal” level.
  • Defined property rights: This implies that assigning property rights will lead to an optimal solution if the transaction costs are short and the number of parties negotiating is limited.

Environment economics constantly presses forward because of its interdisciplinary nature, including efforts of realizing sustainable development and bringing attention to the degradation of resources that are held in common. Many environmental issues involve local and global pollutants that range from local water quality to the worldwide reduction of greenhouse gas emissions.