HL.bA Environmental economics and its key concepts Notes

Economics

It plays a crucial role in understanding how resources are allocated and how economic systems function.

Key Aspects of Economics

Supply and Demand

1. The foundation of economic theory revolves around supply (producers providing goods/services) and demand (consumers wanting them).
2. Prices are determined based on the interaction of supply and demand in the market.

Market Interaction

1. Markets facilitate exchanges between buyers and sellers, influencing resource allocation.
2. Economic models analyze how decisions made by individuals, businesses, and governments shape economic outcomes.

Microeconomics vs. Macroeconomics

1. Microeconomics: Focuses on individual behavior such as how businesses set prices, consumer choices, and market structures.
2. Macroeconomics: Examines large-scale economic factors, including inflation, unemployment, GDP, and economic growth.

Resource Allocation

1. Economics studies how societies decide what to produce, how to produce, and for whom to produce.
2. It examines the scarcity of resources and how they are allocated efficiently through market or government intervention.

Economic Systems

1. Capitalism (market-driven), socialism (government-controlled), and mixed economies (a blend of both).
2. Different economic systems impact wealth distribution, growth, and environmental sustainability.

Environmental Economics

1. Environmental economics applies economic principles to environmental issues, aiming to balance economic growth with environmental protection.
2. It studies how economic activities impact the environment and how policies can mitigate negative effects like pollution, resource depletion, and climate change.

Two Perspectives in Environmental Economics:

Technocentric View (Environmental Economics)

1. Believes science and technology can solve environmental problems within the current economic framework.
2. Market-based solutions: Supports carbon trading, eco-taxes, and incentives for green technology.

Ecocentric View (Ecological Economics)

1. Advocates a fundamental shift in economic thinking, prioritizing nature over economic growth.
2. Recognizes the limits of economic growth and emphasizes sustainable resource use.

Key Economic Strategies for Environmental Management:

1. Market-based mechanisms (e.g., carbon pricing, cap-and-trade).
2. Government regulations (e.g., pollution limits, environmental taxes).
3. Valuing ecosystem services (e.g., putting a price on clean air and water).
4. Incentives for sustainable business practices (e.g., subsidies for renewable energy).

Market Failure and the Environment

Market failure occurs when the free market (where supply and demand determine prices) fails to allocate resources efficiently, leading to negative social or environmental consequences.

Causes of Market Failure in Environmental Issues:

Negative Externalities (Costs imposed on society)

1. Occur when economic activities harm third parties without compensation.
2. Leads to net welfare loss, society bears the cost while the polluter profits.

Public Goods and the Free Rider Problem

1. Public goods (like clean air, oceans, and forests) are non-excludable and non-rival, people benefit without paying.

Tragedy of the Commons

1. Shared resources get overused and depleted because individuals act in their own self-interest.

Lack of Property Rights

1. If no one owns or regulates a resource, it is often overexploited.

Solutions to Market Failure:

1. Government Regulations: Laws that limit emissions, waste, or resource use.
2. Market-Based Solutions: Carbon taxes, cap-and-trade systems, or pollution permits.
3. Subsidies for Sustainable Practices: Incentives for renewable energy, electric vehicles, or conservation efforts.

The Polluter-Pays Principle (PPP) & Market-Based Solutions

1. When market failure leads to environmental harm, the polluter-pays principle (PPP) ensures that those responsible for pollution bear the costs of managing and mitigating its impacts.
2. This reduces the financial burden on society and encourages sustainable business practices.

How the Polluter-Pays Principle Works:

Polluters must pay for:

1. Stopping pollution (emission controls, waste management).
2. Managing pollution (treatment plants, air filtration).
3. Cleaning up environmental damage (oil spill clean-ups, habitat restoration).

Goal:

1. To internalize externalities (make polluters pay for the real cost of their actions).
2. To create financial incentives for companies to reduce their environmental impact.

Market-Based Solutions to Enforce PPP:

1. Quotas: Limits on resource use (e.g., fishing quotas to prevent overfishing).
2. Fines: Financial penalties for exceeding pollution limits (e.g., oil spill fines).
3. Taxes: Charges on pollution (e.g., carbon taxes on fossil fuel emissions).
4. Tradeable Permits: Cap-and-trade systems where companies buy/sell pollution allowances (e.g., EU Emissions Trading System).
5. Carbon Neutral Certification: Companies must offset emissions through reforestation, carbon capture, or renewable energy investments.

Greenwashing: Misleading Environmental Claims

1. Instead of making real sustainability efforts, they spend more on advertising their "green" image than on actually reducing their environmental impact.

How Greenwashing Works:

1. Selective Disclosure: Highlighting minor eco-friendly actions while ignoring major environmental damage.
2. Vague Terminology: Using words like "eco-friendly," "natural," or "sustainable" without clear evidence.
3. False Labels & Certification: Creating fake "green" logos or misleading eco-labels.
4. Imagery & Colors: Using green packaging, nature images, and buzzwords to suggest sustainability.

How to Spot & Avoid Greenwashing:

1. Look for Third-Party Certification: Genuine eco-labels (e.g., Fair Trade, FSC, Energy Star).
2. Check for Transparency – Companies should provide clear evidence of sustainability efforts.
3. Beware of Buzzwords: Words like "green," "natural," or "eco-friendly" without specific details are red flags.

The Tragedy of the Commons: Overexploitation of Shared Resources

1. The tragedy of the commons occurs when a shared, limited resource is overused and depleted because individuals or companies act in their own short-term interest, ignoring the long-term consequences for the whole community.
2. This happens when no one owns or regulates a resource, and no market price is attached to it.

Solutions to the Tragedy of the Commons

1. Regulations & Laws: Governments set limits, quotas, or protected areas (e.g., fishing limits).
2. Market-Based Approaches: Taxes, permits, or pricing systems ensure sustainable use (e.g., carbon taxes).
3. Community Management: Local groups regulate resources effectively (e.g., Elinor Ostrom’s model).
4. Privatization: Assigning property rights makes owners responsible for sustainable management.

Elinor Ostrom’s Solution: Swiss Shared Pastures

1. Ostrom (1990) challenged the idea that the tragedy of the commons is inevitable.
2. She showed that local communities can manage shared resources effectively without government intervention or privatization.