Environmental Economics

First of all let’s clear up what environmental economics is. In general it looks at how different economic activities and policies affect the environment. It deals with the benefits and costs of decreasing pollutions that we create to stop the global warming. Lately lots of people are concerned about the topic of climate change and of all the destroying for the planet humans’ actions and the topic became very popular. However all of the pollution does not have to necessarily follow our economic activity. This article is going to present different forms of available solutions and ways to decrease the damage to the environment.

What is the link between economics and the environment?

All the inputs of production, such as land, raw materials, water etc are natural resources. We can have renewable resources such as trees or nonrenewable ones such as coal. These goods can either be consumed by production of other goods from them, which might lead to harmful effects or be consumed on their own, for example beautiful landscapes, which might be called an environmental good. The production of economic goods might lead to the use of the environment and might be harmful due to the production of air pollution, gases and pesticides by releasing chemicals or using up nonrenewable resources. This leads to climate change that we can see all around us.

Why is pollution bad?

In many cases, decreasing the costs of production will lead to an increase in the amount of pollution that is created. Negative externalities would explain why it might be bad for the society, even though it appears to have positives for both the producers, since there is a decrease of costs, therefore an increase in production and the consumer can buy more of the good at a lower price. However an externality situation is where some action of person “A” has consequences for  a person “B”. For instance the cheaper coal heating, that many people often choose, can have a damaging influence on people’s health and cause many diseases and decrease their quality of life.

What are common and public goods?

Common-pool resource is a resource whose capacity is limited, so that when one person uses more of  it, the other person’s usage decreases. An example of it, is coal whose amount is clearly limited and can not be produced. A public good is a good that has no limitations of usage and firms do not have to compete for it, such as free-on-air television, air etc. The theory of the tragedy of commons says that users aim to increase their own benefit and therefore often by depleting or spoiling a shared good. Garrett Hardin explored this theory in his article in 1968, saying, that if people relied on themselves, the number of children would not be an issue anymore, since it would differ according to what they are able to provide, as it is in the animal kingdom. The problem is, that people ignore the scarcity of commons which can lead to destruction of the environment.

What can we do?

To solve or at least decrease the level of negative externalities and control the level of pollution there has to be some public intervention and policies introduced. Environmental regulations, which control the level of pollution created by introducing a tax for pollution, which is usually put on producers rather than on consumers. In the 1980s and 1990s there was a development of acid rain policies in Europe. An international agreement was largely needed for countries like Scandinavia because the acid rain there was largely imported from other countries. On the other side, the UK had less incoming rains from abroad and the abatement would be less beneficial for it. Therefore the countries decided to split the gain that they would take from the agreement by making compensation payments so there would be no country that would be better or worse of.

In conclusion environmental economics measures the influence of economic actions on the environment. It is a very broad topic and if you would like to further read about it I would like to recommend you this book “Environmental Economics – A very short introduction” written by Stephen Smith which inspired me to write this article.


Click to access p570_unit_01.pdf


“Environmental Economics – A very short introduction” a book by Stephen Smith

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