The Environment and Economics

It occurred to me recently that it might not be immediately obvious to all people why the environment is an important issue in economics and, more specifically, why environmental policy is an important issue from an economic perspective.

For the economy, the environment is a resource. It provides a steady stream of benefits, both in the form of natural resources and in the form of recreation and other benefits, such as natural beauty. These benefits can, at least theoretically, be treated the same as ordinary goods, like television; in fact, the branch of environmental economics deals entirely with placing a market value on the non-market goods provided by the environment.

The problem with environmental goods that makes them different from more normal goods is that they exist outside the market, hence the term non-market good. This means that any effect to the environment that occurs during the production or sale of a non-market good is not incorporated in the price of that good. This is referred to as a negative externality, as there are negative effects of market goods that exist outside the market.

These negative externalities are what make environmental policy important. Think of it this way - without regulation, corporations can create a fairly sizable amount of pollution without it having any effect on the price of the goods they produce. This means that they have no incentive to not create pollution. Since pollution obviously has a negative impact on society by removing the or lowering the benefits provided to us by the environment, this creates a serious problem.

The purpose of environmental policy is to ensure that businesses are required to pay for the negative externalities that they create in the form of pollution. The purpose of environmental economics is to find the optimal amount of regulation and remuneration to society to provide for the most efficient use of the possible benefits that the environment can grant.

This may seem a somewhat cynical view of the environment and why we protect it, but, ultimately, economics is a human science that deals solely with human benefits, human concerns, and human preferences. This means that understanding and maximizing the human benefit of any resource, such as the environment, is the sole concern of economics.

Now that that's out of the way and, hopefully, the last post makes a bit more sense, I'm moving on to another topic! By request of a few individuals, I'm going to take a while and a few posts to write about the impact of large national debt on individuals and the economy. Let us hope you all find it interesting.