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environmental economics

  A branch of economics which seeks to prevent or ameliorate environmental problems by using economic instruments. Environmental economics emerged in the late 1960s Europe and North America, although theoretically it can be traced to the earlier work of economists R.H. Coase (1960) and A.C. Pigou (1920). The environmental movement which emerged at that time argued that western industrial societies were guilty of \'growthmania\' (Daly, 1973, p. 5) predicated on a \'cowboy economy\' (Boulding, 1966, p. 9) in which the environment and resources were but means to the end of economic growth. Symptomatically, most academic and government economists prior to the late 1960s worked with theories (neo-classical, institutionalist, Keynesian) which were \'eco-blind\', that is, insensitive to the environmental effects of economic growth. By contrast, environmental economics seeks to incorporate environmental considerations into both economic theory and practice. It is founded on two axioms: first, that the economic system, when left unchecked, is a (the?) major cause of contemporary environmental problems; and second, conversely, that when suitably corrected the economy can be a powerful vehicle for ameliorating and even solving these environmental problems. Three decades after its inception, environmental economics is among the dominant approaches to diagnosing and managing environmental problems in the western social sciences, and is most associated with neo-classical economics. (See also resource management.)

Environmental economics takes two main forms, which diagnose and manage economically induced environmental problems in rather different ways (Turner, 1995).

The property rights approach derives from Coase\'s (1960) seminal essay \'The problem of social cost\'. The argument is that environmental problems arise from the absence of well-defined property rights in environmental assets. For instance, an unowned river may be polluted by a company with impunity. However, if ownership of the river is assigned to, say, a local angling association then the company would have to cease polluting the river or else compensate the anglers for the damage done to their fish.

The more influential pricing approach derives from Pigou\'s (1920) The economics of welfare. The argument here is that environmental problems arise because the environment is not priced and is thus a \'free good\'. From this perspective a problem such as ozone layer destruction would be an \'externality\' problem arising from the fact that the release of chlorofluorocarbons (CFCs) into the atmosphere is free and thus not factored into economic decision-making. The solution is thus to price the environment and to thereby amend existing market transactions or else create new markets in environmental assets. For instance, in the case of ozone layer destruction the imposition of a pollution tax on companies releasing CFCs or else a government subsidy to support alternatives to CFCs would be a case of pricing previously unpriced goods in order to amend existing markets in an environmentally friendly way. Alternatively, a government could issue pollution permits which together limit CFC emissions but which could be freely traded between companies so that those less able to reduce CFC emissions can purchase permits from those who are able to do so. This permit solution thus entails creating a new market in environmentally related goods. Decisions as to what level of tax, subsidy or permit ceiling to set are typically determined by cost-benefit analysis.

Clearly, both forms of environmental economics prioritize the market: environmental problems are seen as cases of \'market failure\' and, when suitably corrected, the market is seen as the key mechanism of problem solution. Reflecting its neo-classical origins, the corrected market\'s environmental economics advocates are seen as more efficient or \'Pareto optimal\' than uncorrected markets. In other words, with environment assets now priced, markets will better reflect the true costs of economic activity and patterns and prices of commodity supply and demand will settle at new equilibria.

Although environmental economics has many lucid academic and governmental advocates (e.g. Helm and Pearce, 1991), it has been subject to considerable criticism. Sympathetic critics point out that its persuasive theoretical logic rarely translates into practice because real markets are complex and imperfect. Additionally, they point out that its concern to fashion more efficient markets is a rather narrow objective which ignores the scientific and ethical questions of environmental quality (Eckersley, 1993). For instance, a pollution tax may simply make pollution more expensive rather than stop it altogether, but environmental economics is not concerned with ecological questions about the absorptive capacities of natural systems or qualitative questions as to the right and wrong of continued pollution (cf. ethics, geography and). More ecologically minded economists have therefore advocated an \'ecological economics\' which pays much more heed to these questions (Martinez-Alier, 1987). Finally, more radical \'ecocentric\' critics point out that environmental economics is \'technocentrist\' and anthropocentric. In other words, it seeks to tinker with, rather than overhaul, existing economic and social arrangements and to do so with a view to improving human — rather than natural — welfare. On this view, therefore, environmental economics is still ultimately implicated in the economic \'growthmania\' causing environmental problems in the first place and is unable to treat the environment as having existence value in its own right. (NC)

References Boulding, K. 1966: The economics of the coming spaceship earth. In H. Jarrett, ed., Environmental quality in a growing economy. Baltimore: Johns Hopkins University Press, 3-14. Coase, R.H. 1960: The problem of social cost. Journal of Law and Economics 3: 1-44. Daly, H.E. 1973: Introduction. In H.E. Daly, ed., Towards a steady state economy. San Francisco: Freeman, 1-36. Eckersley, R. 1993: Free market environmentalism: friend or foe? Environmental Politics 2: 1-19. Helm, D. and Pearce, D. 1991: Economic policy towards the environment: an overview. In D. Helm, ed., Economic policy towards the environment. Oxford: Blackwell, 1-24. Martinez-Alier, J. 1987: Ecological economics. Oxford: Blackwell. Pigou, A.C. 1920: The economics of welfare. London: Macmillan. Turner, R.K. 1995: Environmental economics and management. In T. O\'Riordan, ed., Environmental science for environmental management. Harlow: Longman, 30-40.

Suggested Reading Eckersley (1993). Turner, R.K., Pearce, D.W. and Bateman, I.J. 1993: Environmental economics: an elementary introduction. Hemel Hempstead: Harvester Wheatsheaf.



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