Environmental issues and economics

Economic growth, unemployment and a better standard of living have always been the main objectives on the agenda of economists throughout the world. The environment is and has always been the major attribution to achieving these goals as it is the source of natural resources, many amenities and as a place to dump whatever waste, whenever necessary. Up to the 1960s there had never been the awareness of problems affecting the environment’s role. The population started to grow rapidly since the industrial revolution, first in the west and then in the 20th century developing countries followed. Today the world population is over 6 billion and in relation to the rate of economic growth there has been a mass of extra pressure put on the environment.

There is a great list of issues, disasters and environmental problems that have been discovered during the last forty years that are on the constant agenda of the majority of economist’s decisions and that are in desperate need of a solution. Some economists choose to dismiss the issue altogether, for example the USA who make up only 5% of the population, yet contribute to using 25% of the world’s energy and produce 22% of the world’s CO2. For them to dismiss the allegations of their contribution to damaging the environment is a very serious issue as they refuse to cease the growth of their economy i.e. their car market. Their only attempts at solving this problem are unrealistic and would do little towards helping the environment.

The main issues are the problems caused to the environment by global warming, nuclear disasters, water pollution, intensive farming, the loss of non-renewable sources and of course the cause of it all, rising population.

When the environment becomes damaged it is due to a failure of the market (Demand and Supply). That is, as the environmental damage has not been taken into account when applying the concepts of economic growth. This can generally be accounted for by the lack of property rights, as there is nobody who can take the side of the environment and hold to account those who damage the sea, air, rainforest etc, so there is very little done about it. In almost every circumstance it is cheaper for businesses/ firms to pollute the environment than to attempt to clean up the damage they have caused.

A good way of analysing the effects of production on the environment is to draw it on a diagram of the production possibility curve/ frontier to comprehend a range at which there can be production and environmental protection.

At point Y – Maximum production and worst environmental conditions.

At point Z – Environment is perfect but there is no production at all.

At range X – There is production and

environmental protection.

There are five main aims of government policy which ...

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At point Y – Maximum production and worst environmental conditions.

At point Z – Environment is perfect but there is no production at all.

At range X – There is production and

environmental protection.

There are five main aims of government policy which all contribute to affecting the environment in their own way. One of the main objectives of government is to reach full employment, which is economically, a very good position to be in for an economy. Full employment can and often does however lead to more factories, offices, shops, purchased cars, manufactured goods and therefore the possible loss of countryside which all lead to pollution, congestion etc. The same kind of damage is also caused by economic growth. A policy set by the government (especially monetarists) is to fight inflation that ordinarily results in unemployment, which is seen clearly from the Phillips Curve. Targeting and achieving low inflation will cut aggregate demand and so the environment actually suffers less damage. Improving the balance of payments deficit also contributes to less damage on the environment, as there is again a cut in aggregate demand. The final aim of government policy is to redistribute income accordingly to a specific school of thought e.g. 1945-1979 The rich were taxed heavily (income tax) to pay welfare state (help the poor) which inevitably boosted aggregate demand, harming the environment.

Since about 1970 the concept of sustainable development has been more widely discussed. Sustainable development is about economic growth being the cause of damage to the environment. An economist named R.K. Turner once quoted that sustainable development is “to leave future generations an amount of wealth, which is at least equal to that inherited by the current generation”.

Agenda 21 set up in 1992 was an attempt to solve this world problem for the generations. It was a conference in Rio where all the countries governments agreed to an outline plan to protect the environment, especially global warming. To follow this attempt, a further conference was set up in 1997 in Kyoto. In this conference legally binding targets were introduced to reduce CO2 emissions with the exception of developing countries that were allowed to increase CO2 emissions up to a limit as they industrialise.

In order to apply these individual targets set for the environment within a country would have to produce an evaluation to establish whether the benefits are greater than the costs to the environment before starting a project. This is done through Cost-Benefit analysis, which is a way in which economists assess the private internal costs and benefits (relates to the firm/ businesses) and the social external costs and benefits (relates to society). The problems that arise with this method of assessment though is that it is very subjective and open to wide interpretation, as you cannot value pollution e.g. an eye sore or the gains of a quicker journey to work.

Solutions to pollution and other social costs can be approached in two ways, through the private sector and the government sector. I order to control pollution and social costs in the private sector without the interference of the government, several approaches would need to be made. Property rights would need to be extended, the polluters and the pollutee would need to bargain (Coarse Bargaining) about pollution, there might need to be a merging between the polluter and the pollutee so that it would be in the polutee’s best interest to clean up their act as the social costs would affect their profit levels. There might also have to be some altruism, which they can use as a marketing strategy. The price mechanism is also a strong solution to solving the problem of losing non-renewable goods e.g. oil. When demand exceeds supply then the prices rise and products like oil are instantly rationed which leaves an incentive to find alternatives. Alternatively for some products such as glass, paper, cans etc, it may become more economic to recycle as the prices for these scarce resources rise. However, i.e. with bottles, the factories used for recycling pollute the atmosphere as do the lorries collecting the bottles from the bottle bank as do the cars used by the public to take the bottles to the bank.

Should the public sector fail to take these factors into account (market failure), there is a case for government intervention in order to apply a solution to pollution and other social costs. The government often sets standards as either an outright ban e.g. CFC’s or as a partial ban e.g. leaded petrol. Other standards are also introduced that are often more difficult to enforce as they are not as effective as taxes and the government may face possible costs e.g. MOT tests.

Taxes are deemed as effective and are therefore often imposed in an attempt to internalise external costs. These are effective, as the buyer has to pay the equivalent price for the damage to the environment; this is an effective disincentive to buy e.g. VAT and excise duty on petrol.

The effect caused by added taxes is in this supply and demand diagram

OP (price) & OQ (quantity) do not take damage to the environment into account

As the taxes are introduced supply shifts to S2 due to the high price change at OP2. Subsequently this makes us aware of the damage caused to the environment and demand contracts to OQ2.

The problems that arise however with indirect taxation are that the poor are consequently more affected than the rich are.

One strategy that is now in the progress of being experimented within the USA that requires a combination of both the private and government sector. This involves the issuing of “permits to pollute”. This allows firms/ businesses to compete amongst themselves after the government has set up a structure by which permits are sold for the right to pollute. Over several years the permits are then cut and it is left to the private sector companies to compete with each other or to put investment into efficient power generators that are more environmentally friendly that require less or no need for permits.

It is clear that there are many arising environmental issues becoming apparent to the economist throughout the stages of meeting government policies. Despite that there has been noticeable actions taken out since these problems have been discovered, there is still a long way to go.

Sources:

“Economics” Third Edition – Alain Anderton

Pages - 77, 175, 395-404, 379, 76, 125, 121-122, 400, 76, 401-403, 458, 77, 121, 400

“Economics Today – Back to Basics: Externalities” November 1995