INTRODUCTION
Environment means the natural world as a whole or in a particular geographical area and the
surrounding conditions in which people operate. Economics is the branch of knowledge
concerned with production, consumption and transfer of wealth or the condition of a region or
group as regards material prosperity. The study of how the forces of supply and demand allocate
scarce resources.
Environmental economics can therefore be 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 impeded. 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.
CONCEPTS OF ENVIRONMENTAL ECONOMICS THEORY
Market failure
This is a central issue in environmental economics. This means that market failure determines
poor allocation of resources. A market failure occurs when the market does not allocate scarce
resources to generate the greatest social welfare. Common forms of market failure include
externalities, on rivalry and non excludability
Externalities and public goods
Much of environmental economics is concerned with two types of economic phenomena,
externalities and public goods.
Externalities arise where the utility of an individual or the production function of a country is
directly affected by the decisions of another agent in the economy (individual or firm), and
where this effect occurs without their consent.
A large number of environmental problems involve externalities, eg:
• The effects of motor vehicle emissions on human health
• The nuisance caused to local residents by aircraft noise at airports
• The social and economic consequences of climate change due to "greenhouse gas" emissions,
etc.
, Public goods are non-excludable and non-rival.
• Non-excludable: Once the good has been provided to one individual it is impossible to prevent
others benefitting from it.
Non-rival: An individual's consumption of the good has zero opportunity cost (i.e. does not
reduce the amount of the good available for consumption by anyone else).
Environmental policy is often concerned with the provision (or preventing the destruction) of
public goods
• Nature reserves
• The global climate
• Biodiversity (as a natural "bank" of possible future value)
Public goods
Non-excludability implies public goods cannot be provided by normal private sector mechanism
(supplying the good in exchange for payment)
Non-rivalry implies exclusion would be inefficient, even if practicable
An additional individual's consumption involves zero opportunity cost to society.
A key idea is the idea of the "prisoner's dilemma”. Even though it may be in everyone's interest
that public goods should be provided, it may be in no one's individual interest to provide them
(everyone may do better by trying to "free ride" on the actions of others).
Valuation
Assessing the economic value of the environment is a major topic within the field. Use and
indirect use are tangible benefits accruing from natural resources.Non use values include
existence, option and bequest values. For example, some people may value the existence of a
diverse set of species, regardless of the effect of the loss of a species on ecosystem services. The
existence of these species may have an option value, as there may be possibility of using it for
some human purposes.
Use and indirect use values can often be inferred from revealed behavior, such as the cost of
taking recreational trips in which values are estimated based on observed prices.Non-use values
are usually estimated using stated preference methods such as contigent valuation.Contigent
valuation typically takes the form of surveys in which people are asked how much they would
Environment means the natural world as a whole or in a particular geographical area and the
surrounding conditions in which people operate. Economics is the branch of knowledge
concerned with production, consumption and transfer of wealth or the condition of a region or
group as regards material prosperity. The study of how the forces of supply and demand allocate
scarce resources.
Environmental economics can therefore be 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 impeded. 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.
CONCEPTS OF ENVIRONMENTAL ECONOMICS THEORY
Market failure
This is a central issue in environmental economics. This means that market failure determines
poor allocation of resources. A market failure occurs when the market does not allocate scarce
resources to generate the greatest social welfare. Common forms of market failure include
externalities, on rivalry and non excludability
Externalities and public goods
Much of environmental economics is concerned with two types of economic phenomena,
externalities and public goods.
Externalities arise where the utility of an individual or the production function of a country is
directly affected by the decisions of another agent in the economy (individual or firm), and
where this effect occurs without their consent.
A large number of environmental problems involve externalities, eg:
• The effects of motor vehicle emissions on human health
• The nuisance caused to local residents by aircraft noise at airports
• The social and economic consequences of climate change due to "greenhouse gas" emissions,
etc.
, Public goods are non-excludable and non-rival.
• Non-excludable: Once the good has been provided to one individual it is impossible to prevent
others benefitting from it.
Non-rival: An individual's consumption of the good has zero opportunity cost (i.e. does not
reduce the amount of the good available for consumption by anyone else).
Environmental policy is often concerned with the provision (or preventing the destruction) of
public goods
• Nature reserves
• The global climate
• Biodiversity (as a natural "bank" of possible future value)
Public goods
Non-excludability implies public goods cannot be provided by normal private sector mechanism
(supplying the good in exchange for payment)
Non-rivalry implies exclusion would be inefficient, even if practicable
An additional individual's consumption involves zero opportunity cost to society.
A key idea is the idea of the "prisoner's dilemma”. Even though it may be in everyone's interest
that public goods should be provided, it may be in no one's individual interest to provide them
(everyone may do better by trying to "free ride" on the actions of others).
Valuation
Assessing the economic value of the environment is a major topic within the field. Use and
indirect use are tangible benefits accruing from natural resources.Non use values include
existence, option and bequest values. For example, some people may value the existence of a
diverse set of species, regardless of the effect of the loss of a species on ecosystem services. The
existence of these species may have an option value, as there may be possibility of using it for
some human purposes.
Use and indirect use values can often be inferred from revealed behavior, such as the cost of
taking recreational trips in which values are estimated based on observed prices.Non-use values
are usually estimated using stated preference methods such as contigent valuation.Contigent
valuation typically takes the form of surveys in which people are asked how much they would
