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What is Environmental Economics?

Posted by Kevin Patterson On April - 10 - 2014 Economics

Definition
The environmental economics is a sub-field of economics that studies the impact of environmental policies on a nation. Some of the aspects it investigates are the benefits and costs of alternative policies that deal with pollution, toxic substances, water quality, global warming and waste disposal. The environmental economists research existing policies, determine the effect they have on the economy and calculate the costs and benefits for alternative policies.

Market failure
The concept of market failure is essential for the environmental economics. Market failure occurs when the markets so not allocate their resources in an efficient manner so that it generates the highest social welfare. The most common forms are non-excludability, non rivalry and externalites. Environmental economics determines the causes of the market failure like misuse of common property and failure to determine the market value based on the externalized costs and generates solutions.

The misuse of common property, or “tragedy of the commons” happens when a resource is destroyed by exploitation although it is in the common best interest to use it reasonably. The best example is air pollution. Air is shared by all nations but one nation can pollute it more for economic benefits. The failure to determine the market value is another common cause. A good produced with pollution can have the same price as one produced without pollution and although the material costs are lower, the long-term costs of dealing with pollution have a much higher price that is impossible to determine.

Externality
Because the market in not required to account for the pollution emitted so that it remains at a “socially efficient” level, excessive pollution can occur. The externality appears when a person makes a choice that affects others and is not accounted for the market price. It is a situation in which the insufficient incentives of an economy to create a market and the lack of it leads to decreased Pareto efficiency.

Valuation
It is important to measure the value of human preference regarding changes in the environment’s state. The environment has no value of its own, without the human factor. There are two types of values, use value and non-use value. The use value includes direct use of a service or good like hiking, hunting and fishing. The non-use value is places on something that people know exists, but they don’t use it or see it, like the Amazonian Forest.



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