Lecture 12 Topic: Economic aspects of environmental sustainability

The main idea: Follow the simple golden rule for an sustainable economy: “Leave the world better than you found it, take no more than you need, try not to harm life or the environment, and male amends if you do.” (Paul Hawken)

Lecture outline:

1. Economic systems and environmental problems

2. Measures of life and environmental quality

3. Concept of externalities

4. Economic strategies for pollution control

5. Solutions of reducing poverty

6. Sustainable strategies on economy

1. Economic systems and environmental problems

Economic resources:

1) Natural capital (natural resources) – earth’s resources and processes that sustain living organisms, including humans (goods and services produced by the earth’s natural processes).

These include: the planet’s air, water, and land; nutrients and minerals in the soil and deeper in the earth’s crust; wild and domesticated plants and animals (biodiversity); and nature’s dilution, waste disposal, pest control, and recycling services.

2) Manufactured capital – items made from earth capital with the help of human capital.

This includes: tools, machinery, equipment, factory buildings, and transportation and distribution facilities.

3) Human capital – people’s physical and mental talents.

Workers sell their time and talents for wages. Managers take responsibility for combining earth capital, manufactured capital, and human capital to produce economic goods.

Major types of economic systems:

1) Command economic system or centrally planned economy – all economic decisions are made by the government.

2) Market economic system – all economic decisions are made in markets, in which buyers (demanders) and sellers (suppliers) of economic goods freely interact without government or other interference. All buying and selling is based on pure competition.

3) Mixed economic system – fall somewhere between the pure market and pure command systems.

Economic growth and sustainability

Economic growth – an increase in countries’ capacity to provide goods and services for people’s final use (accomplished by means of population growth – more consumers and producers, or more consumption per person, or both).

Sustainability – meeting the needs of today without degrading the environment for future generations.

Ecologically sustainable development, or Sustainable development – the development that meets the needs of the present generations without compromising the ability of future generations to meet their own needs” (Brundtland Commission 1987).

Table: Sustainable living in economic system (compare and contrast)

Industrial age	Sustainability or ecological age
Multinational corporations	Community-based economics
Competition	Cooperation
Limitless progress	Limits to grow
Economic growth	Steady state, development
No accounting of nature	Economics based on ecology

2. Measures of life and environmental quality

Economic growth is usually measured by an increase in a country’s GNP.

Gross national product (GNP) – the market value in current dollars of all goods and services produced within and outside of a country by the country’s businesses for final use during a year.

Per capita GNP – the GNP divided by the total population of a country.

Gross Domestic product (GDP) – the market value in current dollars of all goods and services produced within a country for final use during a year.

! But GNP and GDP indicators are poor measures because they:

• hide the negative effects (on humans and ecosystems) of producing many goods and services.

• don’t include the depletion and degradation of natural resources or earthy capital on which all economies depend.

• hide or underestimate some of the positive effects of responsible behavior on society.

• tell us nothing about economic justice.

Environmental indicators – those that can give more realistic picture by subtracting from the GNP and GDP things that lead to a lower quality of life and depletion of earth capital.

• Net Economic Welfare (NEW) (W. Nordhaus and J.Tobin, 1972):

It is estimated as GNP minus a price for pollution and other “negative” goods and services, included in the GNP.

Estimations show that pollution and natural resources degradation subtract 1-5% from GNP of developed countries and 5-15% for developing countries.

• Net national product (NNP) (Robert Repetto et al. Have applied to Indonesia and Costa Rica):

It includes the depletion or destruction of natural resources as a factor in GNP.

• Index of Sustainable Economic Welfare (ISEW) (Herman E. Daly at al. have applied to US):

This comprehensive indicator measures per capita GNP adjusted for inequalities in income distribution, depletion of nonrenewable resources, loss of wetlands, loss of farmland from soil erosion and urbanization, the cost of air and water pollution, and estimates of long-term environmental damage from ozone depletion and possible global warming. After rising by 42% between 1950 and 1976, this indicator fell 14% between 1977 and 1990.

• Genuine progress indicator (GPI) – (applied in US):

In 1973-1994 the GDP rose from $8000 to $17000 per person while GPI fell from $6500 to $4000 per person.