Chapter

Environmental Economics: Meaning, Definition and Importance

1.1 INTRODUCTION
Environmental economics is an emerging area in the realm of economic science. Before 1970s a little attention was paid for the growth and development of this part of the area of knowledge in economics. The first oil stock in 1971 and thereafter the emergence of relatively higher levels of environmental damages at the global level prompted the scholars in this field to apply economic tools to environmental science. Studies on environmental science are plentifully available, however they do not cover the economic content of environment. Similarly, early economists of the classical and neoclassical regime made specific comments about the significance of nature and environment, but did not include them in their exposition of theories. Today, people all over the world have realised that environment is not just the study of flora and fauna, but a synthesis of study of various branches of knowledge like Science, Economics, Philosophy, Ethics, Anthropology, etc. Therefore, a study of environmental economics calls for a detailed understanding about various environmental factors, their influence in the economy, their functions upon the environment, and their impacts upon the life of the people of the present and future.

1.2 MEANING OF ENVIRONMENTAL ECONOMICS

Arun Balasubramanian1 stated that no longer is economics merely a science of production and distribution, it has to take into account the ecological repercussions of economic activities that could affect both production and distribution. It means that economics as a subject cannot exist in isolation, it cannot even be a mere study of how goods and services are produced, but at the same time it has to take into consideration the impacts of the use of resources on the environment. The impacts may be in the form of externality, pollution, exhaustion, etc. Any study on the economic content of production, distribution, development, etc., cannot be completed without touching upon the environmental aspects like externality, pollution, damage, exhaustion, depletion etc. Environmental economics can therefore be

2 A Textbook of Environmental Economics

defined as that part of economics which deals with interrelationship between environment and economic development and studies the ways and means by which the former is not impaired nor the latter impeded2. It is thus a branch of economics which discusses about the impacts of interaction between men and nature and finds human solutions to maintain harmony between men and nature. Environmental economics teaches us how to promote economic growth of nations with least environmental damage. Classical and neoclassical school of thoughts underestimated the environmental issues of production and consumption, since they considered these issues merely as social issues. When the environmental goods get transferred into economic goods, the problems of environmental damage crop up, and therefore the need to interact with economic principles.

1.3 ECONOMY AND THE ENVIRONMENTINTERLINKAGES

Man cannot exist in isolation. Mans life is interconnected with various other living and non-living things. His life also depends on social, political, economic, ethical, philosophical and other aspects of social system. In fact, the life of human beings is shaped by his living environment. What exactly is living environment? Environment means all the conditions, circumstances, and influences surrounding and affecting the development of an organism or group of organisms. It also means that the complex of physical, chemical and biotic factors that act upon an organism or an ecological community and ultimately determine its form and survival. Environment, environmentalists, environmentalism etc., are the common words used in our ordinary life in recent years. Environmentalists are those who love and care for environment, who realise that any damage to the environment will affect the life of living things. Environmental concern of environmentalists and fundamental environmentalists are different. The former upholds and tries to popularise the need for environmental education. But the latter embraces environment in its virgin form and any intervention in the ecological balance of the environment mars the very survival of living things. Therefore, fundamental environmentalists are always treated as anti-developmentalists. But the works of such persons are always appreciated by the people at large. The words Ecology and Economics stem from the same Greek root Oikos which means habitation. Ecology is the study of the relationship or interdependence between living organisms and their environment. Hence in Greek root, Ecology deals with the household and nature, while Economics deal with the household of man. An ecological balance exists in the society in which all the living things live harmoniously. But the problem is that man in his aspiration for better living has upset the ecological balance thereby endangering nature as well as himself 3. Quite often we find that there is a conflict between Economy and Ecology. Ecology studies harmony between nature and man, whereas Economics spells out the disharmony between man and nature. The disharmony arises as a result of the incompatibility of the basic ecological principle of stability as a precondition for the sustainability of ecological system and the economic principles of business profitability. To restore harmony, to reconcile the interests of human beings and naturean ecological reorientation of the economic policy is required4. Environmental studies would help to create this awareness among the people.5 The relationship between the economy and the environment is generally explained in the form of a Material Balance Models developed by Alen Kneese and R.V. Ayres. The material balance models

For details refer: Environmental Economics and ManagementTheory, Policy and Applications by Callen and Thomas.

Environmental Economics: Meaning, Definition and Importance 3

are based on the first and second law of Thermodynamics. These models consider the total economic process as a physically balanced flow between inputs and outputs.6 Inputs are bestowed with physical property of energy which is received from the sun. The resulting output from input carries the same level of energy. Similar to this, there are wastes resulting from consumption activities. Materials and energy are drawn from the environment, which are used for production and consumption activities and returned to environment as wastes. So far as this balance is maintained, there are no environmental issues. The material balance model of the economy is given in the Figure 1.1.

Nature
Resid ual
Na t ur Re al sid re ua so ls of c

Na
s fr

s on ce pti ur m su on

al res ou om rc pr e od uc t
n io

tur

De

d an m

for

an ods go

ces d ser vi

Output

Supply o f go o ds

an ds er

vic
es

Households
3R s
3R s

Firms

ly

of

re so

urc

es

nd ma De

c ur so e r for

Factor market

Fig. 1.1 The material balance model: interdependence of economics and environment Source: Callen and Thomas Environmental Economics and ManagementTheory, Policy, and ApplicationsIrwin, USA, p. 6. A slight change in the Figure is incorporated. 3 Rs: Recovery, Recycling and Reuse.

The Figure 1.1 shows that environment is the supplier of all forms of resources like renewable and non-renewable, and it is also acting as a sink for cleaning up of wastes. Households and firms are connected to environment, and they are interconnected too. Households and firms depend on nature for resources. Both households and firms send out residuals of consumption and production respectively to nature. As mentioned earlier nature has the power to assimilate all forms of waste. But this power is conditional. So long as earth is not being disturbed by the excess amount of wastes, the earth can clean up natural wastes. When the earth fails to respond to 3 Rs, the symptoms of environmental damage

es

Su

pp

4 A Textbook of Environmental Economics

appears. Thus, there is a rhythm in the use and reuse of resources for men by men; Earth cannot respond properly to man-made or artificial wastes. Man-made wastes are piling up around us, and therefore, the extent of damage to the environment has been on the rise. All the wastes that are being sent out cannot be cleaned up by the sink earth. As long as earth can discharge this function of cleaning up of pollution due to wastes, there would not be any environmental issue. But earth has reached at the saturation point of this process, and it is helpless in cleaning up of several types of wastes resulting in major environmental issues in the world over. The impact of the transformation of material inputs and energy into output is subject to several changes in the biosphere. The process of transformation is better explained with the help of the laws of thermodynamics. The first two laws of thermodynamics are worth mentioning in this context. The first law of thermodynamics, which is often referred to as the law of conservation of matter and energy says that energy, like matter, can neither be created nor destroyed, but at the same time the forms of energy can be transformed. The law stresses that the total amount of energy created through production and consumption activities must be equal to the total sum of initial energy extracted from nature. Therefore, the first law of thermodynamics implies the accounting identities of material balance model. The second law of thermodynamics is known as the law of entropy. Entropy is usually considered as the measure of unavailability of the benefits of energy or simply wastes. When one form of energy is transformed into another (say for example, when the thermal energy of coal is converted into electrical energy) there is waste of energy, and the volume of waste depends upon the technological process. Entropy will be low, when materials and energy are highly structured and organised. When a piece of coal is kept idle, there is low entropy, but when it is burnt up, the same piece of coal is subject to high entropy, since heat and carbon dioxide are dissipated, but sometimes unavailable for use. Thus, the second law says that as long as there is utilisation of material inputs and energy for production and consumption activities, the level of entropy will be high. Economic activity helps to convert low entropy resources and energy into high entropy wastes i.e., resources into wastes. Economic activities cannot be stopped on account of high entropy, but at the same time, through recycling and waste management, it is possible to bring into the economic system, low entropy value. Use of natural resources, but at the same time with minimal waste or damage to the environment is considered as the key theme of sustainable development. It is a form of development path that is ready to meet the needs (not greed) of the present generation, at the same time without compromising the needs of posterity. A detailed discussion of sustainable development is included as a separate chapter in this book. We must know that the environment discharges the following economic functions: 1. The environment is the supplier of all forms of resources. 2. The wastes are cleaned up by the environment. 3. The environment maintains genetic diversity and stabilizes the ecosystem.7 The above mentioned functions of the environment are interlinked. In the name of economic activity the environmental resources are transformed into economic goods [converting low entropy resources into high entropy ones]. In this process of transformation, wastes are created. Resources are also getting depleted due to the over use. When environment is disturbed by the overuse and the huge amount of wastes, it cannot discharge the third function i.e., maintaining genetic diversity and stabilisation of ecosystems. It further affects the life and existence of flora and fauna. Therefore an integrated approach to the study of economy, ecology, and environment is essential, as all these are closely interlinked.

Environmental Economics: Meaning, Definition and Importance 5

1.4 DIFFERENCE BETWEEN ENVIRONMENTAL ECONOMICS AND RESOURCE ECONOMICS

Prior to 1980s little attention was paid to the study of environmental economics. Instead, the theory that was being popularised among the social scientists was known as Resource Economics. Until the early 1950s natural resource supply and conservation had been neglected by modern economists. Orris C. Herfindahl8 was the first to go beyond descriptive survey and to view mineral resources as economic goods. Therefore resource economics was concerned with the production and use of natural and mineral resources of both renewable and non-renewable character. The pollution aspect of resource use was not a concern of resource economists. They traced resource economics as flows with dynamic factors. Environmental economics is concerned with the impact of economic activities on the environment, the significance of ecosystem to the economy, and suggests the appropriate ways of regulating economic activity, so that cosmic balance is achieved in the society. Resource economics does not bother about the environmental impact of production and consumption, but environmental economics deals with these aspects. Environmental economists point out the right volume of pollution which the society can bear. In order to attain this balanced level of production and pollution, economists recommended economic tools like market mechanism principles. This is so because, in the case of environment, market fails to bring equilibrium. Market fails because environment is a public good. But by assigning true values to the environmental goods it is possible to apply market mechanism principles. These aspects are covered in environmental economics which distinguishes it from resource economics.

1.5 ENVIRONMENT AND ETHICS

Environment and ethics are two separate branches in human knowledge. Environment is the complex of physical, chemical and biotic factors that act upon an ecological community. Ethics on the other hand is a branch of knowledge which explains what is good and bad, and with moral duty and explanations. Stanford Encyclopaedia of Philosophy considers environmental ethics as the discipline that studies the moral relationship of human beings to and also the value and moral status of environment and its nonhuman contents. Ethical aspects of environment seems to have attained higher priority in recent years. Neglect of environmental ethics means neglecting the true or the intrinsic value of environment. Environment is not exclusively for homosapiens. Other innumerable species depend on environment for food and procreation. These points need to be followed by any student of environment or environmental economics. Thus under the branch of environmental economics, we may pose the following questions. These are known as the ethical questions of environment. 1. 2. 3. 4. 5. 6. Does the earth exist for the benefit of humanity? Do humans have any ethical obligation towards other living species? Do we have the right to take all the earths resources for our own use? Do we have the right to kill all other species for human needs? Do other species have an intrinsic right to exist? How do religions view humanitys relationship with the rest of living things?

These and other questions are addressed in the study of environmental ethics. Ethics of environment is seemed to have been isolated from the analysis of economic theories by the classical and neoclassical writers. Classicists believed that production of wealth would bring prosperity to individuals and society. But the ethical aspects of production was not clearly verified. For example, production of

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arms and amunitions contribute wealth, but is it the real wealth of the society? The craze of allotting huge amount of money for defence purpose by majority of the nations has been condemned by the philanthropists and environmentalists on the ground that such activity is against the ethical spirit of the society. Similarly in the name of development we destroy our environmental goods. The real benefits of development (sustainable development) is that it should listen to the ethical and environmental aspects of development. Ethical aspects of environment is the basic instinct of environmental protection and conservation. If the economy as a whole is not able to imbibe the true spirit of the ethics of environment, the impact and the dimensions of environmental damages would be very high.

1.6 ENVIRONMENTAL ECONOMICS AND ENVIRONMENTAL POLICY

Concern with the environment is brought on in large part by the coincidence of high income and high population density. If there were a few people in the world, earths environment would be capable of absorbing most of the wastes that they throw at it. The demand for environmental quality is income elastic. This is one of the reasons for higher levels of environmental damage, and this is quite dominant in developing economies. The higher income groups treat environment as luxury good. For the marginalised groups and the poverty stricken, environment is a perennial source of food and shelter. For them environmental concern is in their blood, and therefore they generally do not disturb the environment. But as the main concern of these groups of people is to earn food, they put environmental issues in the back seat. The poor are the worst suffers of environmental damage. There is an unacceptable theory being popularised in the Third World countries by the rich that the poor are the creators of environmental damage, because higher levels of population is found in these economies. As a reply to this argument, the leaders of the Third World countries point out that the environment of these countries are being damaged by the overuse of resources in order to meet the requirements of the rich West. It is found that there exists a positive correlation between income and the demand for environmental quality. Higher demand for environmental quality will result in higher levels of environmental damages. It means that as income (Y) increases, damages to the environment also increase. However this theory is not found suitable to developed economics. In such countries, higher levels of income
y Income elasticity of environmental quality S Y2 C B Y1 A Y

Income

Q1

Q2

Environmental quality

Fig. 1.2. Relationship between income and environmental quality

Environmental Economics: Meaning, Definition and Importance 7

promotes higher levels of environmental protection. But this argument need not be true always. When the rich nations grow substantially, they depend on other developing nations for resources. In such dependent economics, there will be higher levels of environmental damages. The relationship between income and environmental quality (Environmental damages too) is represented in Figure 1.2. The figure shows that when the income of the people increases from OY to OY1 and then to OY2, the demand for environmental quality increases from OQ to OQ1 and then to OQ2, correspondingly. In fact there exists a positive correlation between income and environmental quality. Income and environmental damages are also positively correlated. Students of environmental economics now think what role environmental economics can play to minimise the environmental damages. There are a few methods by which economics can interfere. 1. 2. 3. 4. Assign environmental costs to resources under use. Use price as a tool to avoid waste of resources. Allocation of environmental resources based on true costs and real benefits. Resource conservation through environmental management.

The above methods are basically economic in nature. However, due to internal and external factors, or socio-political reasons, the nations are constrained to accommodate economic principles in valuing resources. Environmental economics plays a crucial role in assigning true costs to scarce resources, as well as popularisation of environmental management. From the above discussion one is able to realise that separate environmental policies are required to address these critical issues. Therefore, suitable environmental policies applicable to each nation, and also at the same time to address transnational environmental issues are to be formulated. For example, in India, there are several environmental laws passed by both States and Union Governments. It means that to solve environmental issues that cropped up off and on, and also to avert the local or regional environmental threats that are likely to take place, a suitable environmental policy is essential. Each State government and the Central Government should declare their environmental policies from time to time so that the level and extent of environmental destruction can be minimised through laws. The environmental policies of India, Europe, and the USA differ in several respects.

1.7 BIOTIC AND ABIOTIC COMPONENTS OF ENVIRONMENT

An ecosystem consists of the biological community (biotic) and the physical and chemical factors (abiotic) that exist in the environment. The study of the ecosystem consists of the study of certain processes that link the living or biotic components to non-living or abiotic components. Energy transformations and bio-geochemical cycling are the main processes that comprise the field of ecosystem in Ecology. To understand the ecosystem more cogently, ecologists primarily divide all participatory elements into two basic subdivisions: (1) The biotic component, and (2) the abiotic component. 1.7.1 The Biotic Component It includes all living organisms that follow the process of birth and death. The biotic components are: (a) man, (b) plants, (c) animals including reptiles, rodents, insects, birds and fishes, (d) micro organisms including parasitic, saprophytic bacteria and fungi which feed primarily upon other living or dead organisms. Of these organisms plants produce their own food. They do so with the help of abiotic components like soil, nutrients, water, and sunlight. This process of food production is known as photosynthesis.

8 A Textbook of Environmental Economics

As the plants prepare their own food, they are also known as autotrophs or producers. All other biotic components depend directly or indirectly upon the autotrophs for their food. They are therefore known as heterotrophs. The heterotrophs include all living things that directly ingest food. Such living things are called phagotrophs or consumers. There are some creatures called osmotrophs which secrete digestive enzymes on their food, that helps to break it down to tiny parts which they absorb. The distinction between phagotrophs and osmotrophs is that the former eat their food directly, the latter convert their food into simple components and then absorb. Micro organisms belong to this category. They play a very important role in the decomposition of dead organic matter. This is why they are called decomposers. The four categories of living creatures found in the environment constitute the food chain. The driving or motivating force behind the actions of all living organisms is the struggle for survival, and this struggle ends up in constant search for food. As every specie on this earth search for their food, they also strive equally hard not to become the food of others. This constant process of hunting and being hunted, eating and being eaten up, being the predator and the prey is best understood in the study of ecology and environment. 1.7.2 Abiotic Component The above mentioned lifecycle would not be possible without the non-living component of nature or environment. It is a matter of surprise how the abiotic component of nature paves the way for the survival of biotic component. The role played by the air, water, soil, gases, etc., are equally important for the birth and growth of each of the living things. Like the lifecycle, the non-living aspects of nature form a complex interrelationship among each other, and with the biotic components. The abotic components of earth consist of the following three main elements: 1. The solid matter of the earth starting with top soil or dust and all its solid components. 2. The water in the ocean and in the rivers, lakes, ponds, including marshes and wetland. 3. The gaseous compounds around us including nitrogen, oxygen, and water vapour called the atmosphere. The radiant energy reaching the earth from sun is also considered as a abiotic element. It is this constant flow of energy from the sun that allows the maintenance of ambient temperature on the planet that makes life possible. It also enables photosynthesis or the food-making process of plants that is at the root of the food chain. The rotation and the revolution of the earth and the gravitational forces are the other factors that are responsible for seasons and create wind and tides. The bio-geochemical cycles of nature helps the growth and development of biotic elements and their interrelationship with the abiotic elements.

REFERENCES
1. Balasubramanian, Arun (1984) Towards a Philosophy of Environmental Education. Regional Institute of Higher Education and Development, Singapore. 2. Sankar, S. (2001) Environmental Economics, Margham Publications, Chennai. p. 7. 3. Karpagam, M. (2001) Environmental Economics, Sterling Publishers Pvt. Ltd., New Delhi-20. p. 5. 4. Ibid. p. 6. 5. Ibid. p. 6.

Environmental Economics: Meaning, Definition and Importance 9 6. Ibid. 7. Ibid. p. 9. 8. Herfindahl C. Orris (1974) Resource Economics: Selected Works of Orris Herfindahl. Resource for the Future Inc., John Hopkins University Press, London.