HSC Economics, Topic 3: Economic Issues, Part Six

Environmental management

Introduction

 Environmental management is an important, economic, social, political issue

o Increase in influence on policy by gov, international organisations in recent yrs
 Key environmental issues are often a consequence of economic activity
o Activities include farming, mining, industry
o Consequences include air/water/soil quality, sustainable use of non-renewable R, biodiversity, ozone depletion
 Significance of sustainable environmental management
o Sustainable source of natural R for production
o Sustainable receptacle for waste of industrial activity
o Improved quality of life
 Key terminology;
o Natural environment is the whole interaction of the climate, soils, plant and animal life
o Environmental management refers to a wide range of issues affecting natural environment

Ecologically sustainable development

Ecologically sustainable development

 Using, conserving and enhancing the community’s resources so that ecological processes, on which life depends, are maintained
and the total quality of life now and into the future can be improved
 There are five principles of ecologically sustainable development
o Integration of economic and environmental goals in policy and activities
o Appropriate valuing of environmental assets must occur, otherwise they are considered to be ‘free’
o Providing equity within and between generations
o Recognition of the global dimension
o Dealing cautiously with risk and irreversibility
 Comprised of three intertwining components; economic prosperity, social equity, environmental health
 Major national, global issue
o Increase in weight in gov policy (eg Carbon Trading Scheme)
o Increase in international pressures, agreements (eg Kyoto Protocol)
o Due to increase in publicity pertaining to global warming
 Implies a trade off bw economic growth, environmental quality, future quality of life
o Due to consequences of economic growth
 Increase in material welfare
 Increase in current quality of life (eg increase in net income, consumption)
 Increase in overall productive capacity of economy
 Greater than proportional decrease in environmental quality
 Increase in exploitation of natural R
o Depletion of NRR used in production
o Pollution of air/water/soil by by-products of industrial activity
 Decrease in future quality of life
o Eg decrease in health standards, overall utility
 Decrease in overall productive capacity of economy
o Government policy aims to achieve a sustainable level of EG with minimal environmental degradation
 Without reduction to potential future growth, with intergenerational equity
 Integrated into federal policy since 1989
 Eg Australia’s National Strategy on ESD (1992), core objectives include;
o Enhance individual, community well-being, welfare for current, future populations
o Provide equity within, between generations
o Protect biological diversity, maintain essential ecological processes, life support systems
o Illustrated explanation
 Economy exists on curve A
 Point 1: higher rate of economic growth, lower environmental quality
o Opportunity cost of lower environmental quality in future
 Point 2: lower rate of economic growth, higher environmental quality
o Opportunity cost of lower current quality of life
 PPF shifts outward to B
 Due to increase in technology, increase in productivity in use of natural R
 Point 1 to point 3: unchanged economic growth, increase in environmental quality (ESD)
 Point 1 to point 4: increase in economic growth, unchanged environmental quality (EunSD)
 PPF shifts inward to C due to decrease in R due to depletion
 Long term effect of ecologically unsustainable development
  Interaction of the economy, natural environment
o Eg households, firms, environment
 Main flows include;
 Environmental inputs (eg air, water, soil, forests, climate, fish)
o Used in production, consumption, recreation
o From environment to households, firms
 Biodegradable, non-biodegradable waste
o Produced by production, consumption, recreation
o May cause pollution
o From households, firms to environment
 Amenities
o Eg beautiful landscapes, beaches, harbours, forests, lakes
o Used for recreation, leisure
 Anthropocentric system; focus is on how humans can use, exploit natural resources
 Cost-benefit analysis
o An analytic tool used to make decisions about specific cases, projects or environmental policy matters by assisting in
the evaluation of competing alternatives
 Used to identify, evaluate alternatives according to private, social costs, benefits
o Steps include:
 Identify competing uses
 Identify private and social costs and benefits of each alternative
 Value costs and benefits
 May involve:
o Consideration of opportunity cost (eg define value of a forest by value of trees for timber)
o Consideration of net present value
 The sum of present values of the benefits of a proposal
 Calculate value of net benefit to society for each alternative
 Rank alternatives in order of preference

Private and social costs and benefits – market failure

 Market failure occurs when the price mechanism takes account of private benefits and costs of production to consumers and
producers, but it fails to take into account indirect (social) costs eg damage to the environment
o Private costs refer to the expenditure incurred by producers in using resources to produce output, or the cost incurred
by consumers in giving up a part of their real Y in buying g/s
o Private benefits refer to the profits made by producers in selling g/s, and the utility gained by consumers from
consuming g/s to satisfy needs, wants
o Social costs refer to the costs imposed on or borne by society as a result of private actions
 Eg excessive private production of industrial output
 Reduced quality of air, soil and water
 Defined as negative externalities
o An unintended negative consequence of private action
 Eg excessive private consumer of fast food, tobacco or alcohol
 Increased strain on health system
 Market failure may occur where:
o Property rights are not clearly defined
 A property right is the right to own and dispose of property and g/s flowing from the use of the property
 Difficult to create a market for environmental benefits (eg attractive scenery, diversity of flora/fauna)
o All costs, benefits are not accounted for in the market price or externalities occur
o Consumers, producers lack information about the consequences of their actions or information gaps occur
 Eg ignorance of health impacts of toxic substances in the food choice, risks of genetic engineering to natural
and agricultural populations, impact of noise pollution of health of community, social harmony
 o The non-use values (existence, option, intergenerational) of a g/s are not accounted for in the market price
 The price mechanism fails to account for;
o Additional social, environmental costs
 Market price of output is not reflective of true cost of environmental R used to produce it
 Eg cost of table is not reflective of cost of deforestation
o Future economic growth, D for g/s
 Depletion, contamination of R may restrain this
 Implications
o Market may account for some environmental resources
 Eg depleted resources
 Applies to resources sold in markets
 Supply is limited; this drives up the price of the good and reduces the demand for the good
o Market does not account for some environmental resources
 Eg clean air and water
 Applies to resources not sold in markets
 Property rights are ambiguous or absent
 Property rights give individuals/groups exclusive right of usage, ownership over certain resources
o Essential to the function of the price mechanism
o Effectiveness is exhibited by 3 important features;
 Excludability
 The owner of a property right has the right to exclude others from
enjoying the benefits of using the property
 Transferability
 Property rights may be bought or sold
 It is in the interest of the owner to maintain, improve property
 Enforceability
 Property rights are legally binding
 Those who violate others’ property rights will be penalised
 This creates the ‘tragedy of the commons’
o A situation where the failure of the market to assign costs to individuals leads to an
overuse of resources which have no single owner
o Negative implications; over-exploitation, depletion, contamination of resources
o Due to an inability to assign costs to individuals
 Reserves of resources are too large to divide into smaller groupings
o Eg over exploitation of marine resources
 Implications; reduction to biodiversity, extinction of some species

Public and private goods – free riders

Public goods, private goods and the problem of free riding

 Private goods
o A good that is rival and excludable in consumption
o Private goods are excludable
 The benefits of the good are restricted to the individual who is willing/able to pay for it
o Private goods are rival
 The good is consumed, no longer available for consumption by anyone else in the market
o Eg sale of cake
 This is excludable; enjoyment through the consumption of the cake is restricted to the consumer
 This is rival; once the cake is consumed, it is not available for consumption by anyone else
o Food, clothes, property, etc.
 Public goods
o A good that is non-rival and non-excludable in consumption
o Public goods are non-excludable
 The benefits of the good cannot be restricted to an individual due to the nature of its supply
o Public goods are non-rival
 An individual’s consumption of the good does not preclude another’s consumption of the good
o Implications; not suitable for supply in private markets
 Eg no producer would be willing to provide a non-excludable, non-rival good
 Supplied by local, state, federal governments
o Eg gov undertakes policy to reduce air pollution
 This is non-excludable; the benefits of cleaner air cannot be restricted
 This is non-rival; an individual’s consumption of cleaner air will not preclude another’s consumption
 National defence, police force, emergency services, etc.
 Free riding
o The act of benefiting from a good without contributing to the cost of supplying the good
o An implication of market failure
 o Applies to public goods where contribution to payment is voluntary
 This is countered by compulsory taxes enforced by government
o Implications
 Less than optimal or efficient level of supply due to strong demand, reliance on voluntary contribution
 May prevent market from developing due to refusal of contribution to payment by free-riders

Non use values of the environment

 Market failure occurs where the price mechanism fails to take into account the non-use value of certain goods
o Non use value
 Refers to the value of resources apart from current consumption
 Examples of non use values
 Existence value; the benefit obtained simply from the knowledge that the resource is in existence
(eg one may benefit from the protection of whales where one does not wish to consume them)
 Option value; the benefit obtained by the option of utilising the resource in the future (eg one may
benefit from the protection of oil for future use in production)
 Bequest/intergenerational value; the benefit of the current generation by preserving the
environment for use by future generations (eg one may benefit from the protection of rainforests
for use by future generations)

Issues
 Preservation of natural environments

Preserving natural environments

 Significant of preserving natural environments

o Resources are necessary for the production of goods
o Economic growth is restrained by limited supply of resources
o Environmental damage adversely affects human health
o Political and social unrest
 Methods of preserving natural environments
o Restrictions on development of susceptible areas (eg reefs, estuaries, coastal regions)
o Control over emission of waste produces
o Requiring new plantation in areas where logging has occurred
o Active protection of natural environment from preventable threats (eg introduction of foreign species of flora, fauna)
 Preservation of natural environments in Australia
o Adequate protection of land
 10% of total land area protected in the form of national parks
o Poor record of preserving biodiversity
 >25 mammals have become extinct in last 200 yrs
 >1,500 mammals, birds, reptiles, amphibians, plants are listed as threatened with extinction
 Impacts of failing to preserve natural environments
o Land and soil degradation
 In farming areas, mining areas, regions of heavy deforestation (eg Murray-Darling Basin due to irrigation)
 Eg soil erosion, acidity, salinity
o Land transformations
 In coastal and inland areas due to inappropriate development
 Eg instability of coastal, wetland, forest ecosystems
o Over exploitation of resources
 In regions of heavy deforestation, oceans, mining areas (eg desertification of copper mining areas in
Queenstown, Tasmania)
 Eg depletion of renewable, non-renewable resource stocks, reduction to biodiversity, desertification,
destruction of ecosystems
 Impacts of preserving natural environments
o Correction of market failure to take into account indirect environmental costs of economic activity
o Reduction to economic growth
 Price of good is increased, demand is reduced, supply is reduced
o Political opposition
 Individuals, businesses may resent rise in price
o Reduction to international competitiveness of domestically produced goods due to increase in price of goods
o Reduced appeal for investors
o Increase in tax
 Eg $2.6b Caring for Our Country package of the 2008-09 federal budget
 Aims include; protection of Great Barrier Reef, repair of fragile coastal ecosystems, activities to
deter the spread of cane toads

 Pollution control
The control of pollution

 Pollution as a negative externality

o A cost attributable to economic activity that is not reflected in the price of the g/s being produced
 Evident in all sectors of the economy
 Unavoidable element of the production process
 Eg the price mechanism does not account for true cost of the production of a g/s
o Eg water/air/land pollution, visual/noise pollution, radioactive and toxic substances
o Involved parties impose an unwanted cost on a non-consenting third party
 Third party is unable to avoid cost
 Third party does not receive compensation through the market
o Generating pollution is the act of a firm passing on some of their production costs to others
 Eg a chemical plant dumps its waste into a river; transferring the cost of production associated with waste
management on to the community
o An implication of waste creation
 An inevitable consequence of economic activity
 An input becomes a waste product when no further use can be found for it
 Takes many forms
 Household garbage, chemical residuals, plastic and paper packaging, mining tailings, heat
discharges into rivers, etc.
 May be transformed into a reusable product through recycling
 Cannot be eliminated entirely
o Due to:
 Some natural resources are zero cost
 Eg property owners who fail to maintain their holdings waste the quality of the community
 Eg timber millers who fail to replant deforested areas was the quality of the natural environment
 Absence of well defined property rights
 No responsibility is attached to their use
 No punishment is allocated to misusers, no incentive to maintain quality of resource
o Extent is determined by:
 Economic incentive of trying to achieve high profits
 Technological and cultural change
 Eg a consumerist, throw-away society
 Eg development plastics, non-biodegradable materials
 Rate of population growth
 This increases D for g/s, pressure on environment
o Activities to reduce pollution
 Tax on pollution
 Corrects the difference bw the social, private cost
 Promotes a more sustainable allocation of resources
 Serves to influence; quantity of waste produced, form of waste produced
 Effect of tax on equilibrium price and quantity
o Tax is equivalent to vertical distance bw MPC, MSC curves
 Difference bw social, private costs
o Tax rises price of good from P to P1
 P is the equilibrium price for marginal private cost
 Where the curve of marginal private cost interests the curve of
marginal private benefit
 P1 is the equilibrium price for marginal social cost
 Where the curve of marginal social cost intersects the curve of
marginal private benefit
o Quantity of output is reduced from Q to Q1
  Subsidies or tax allowances for re-use of waste products
 This encourages recycling of waste products
 Reduction to total waste output
 Markets for waste products
 This encourages recycling of waste products
o Opportunity for profit, reduction to total waste output
 Tradable pollution permits
 This acts as a quota, sets a tolerable level of pollution
 Fines for illegal dumping of waste
 This encourages reduction to waste produced
 This promotes sustainable management of waste
 Measures to decrease population growth
 Legislation and regulation
 Eg restrictions of waste emissions by cars, factories, houses

 Externalities

Market failure and externalities

 Market failure occurs when the price mechanism takes account of private benefits and costs of production to consumers and
producers, but it fails to take into account indirect (social) costs
o The actions of individuals affect others not directly involved in the market
 Eg a person driving a car creates noise, air pollution
 The impact of this is not included in the cost of the car
 The impact of this is negative, on a non-consenting third party, not involved in the original
transaction of the good
o Eg the community experiences a reduction to air, sound quality
o Creates inefficient allocation of natural resources
 As market price does not reflect true price
 Externalities are unintended advantageous or disadvantageous consequences of private actions
o External effects or ‘spill over’ effects
o Total cost, benefit of transaction of good is not accounted for in original cost of good
 May implicate a misallocation of goods
o May be harmful or beneficial
 Harmful; negative externality or external diseconomy
 Beneficial; positive externality or external economy
o May affect consumption or production of goods
 Effect of a negative externality
o Equilibrium market price, quantity for leaded petrol is denoted by P, Q
 Intersection of marginal private cost (MPC) curve, marginal private benefit (MPB) curve
o Equilibrium true cost, quantity for leaded petrol is denoted by P, Q
 Intersection of marginal social cost (MSC) curve, marginal private benefit (MPB) curve
 Not reflected by marginal private cost curve
 Due to social cost of pollution produced by the petrol
 Market price at true cost would signify a more efficient allocation of resources
 Reduction to quantity produced reduces total pollution
 Increase in price covers cost of servicing pollution

 Activities to reduce negative externalities

o Externality is internalised
 Externality is valued, additional cost is added to production of good
 Methods of valuing externalities;
 o Understanding the level of demand
o Considering opportunity cost
o Considering substitutes, proxies
 This results in:
 A rise in price
o Fewer resources concerned are used
o Resources are used lest wastefully
o Environmental assets are conserved
 Lower economic growth due to reduced production

 Depletion of renewable and non-renewable resources

Depletion of non-renewable and renewable resources

 Refers to the exploitation of renewable and non-renewable resources to a threatened or exhausted extent
 Non-renewable resources
o Refer to those natural resources that are in limited supply because they can only be replenished over a long period of
time, or cannot be replenished at all
 Those that cannot be sustained with increasing usage
 Supply is finite and may be exhausted
o Eg fossil fuels (coal, crude oil, natural gas)
o Technological advancements may implicate;
 Increased capacity for recycling
 Reduced dependence on non-renewable resources
 Through the development of alternatives
 Increased productivity of the resource
 Increased access to reserves, discovery of new resources
 May augment existing supply
 Renewable resources
o Refer to those natural resources that can naturally regenerate or replace themselves in a relatively short period of time
 Those that can be sustained despite usage
 Supply is unlimited but may become finite or exhausted through overuse
 Eg may become non-renewable resources
 May yield renewable resource flow
 Eg crops from farmland
o Eg biological resources (plants, animals, trees)
o Sustainability is a key issue
 Renewable resources may be non-renewable through over-exploitation through unsustainable management
 Implications; reduced access to resources for future generations
 Activities to reduce resource depletion
o Sustainable use, management of resources
 Through estimated optimal use of resources over time1
 Calculated for renewable resources
o Determination of a threshold exploitation level
 Optimal level at which resource may regenerate
 Calculated for non-renewable resources
o Determination of a suitable rate of decline
 Challenging due to ignorance of existing quantity, needs of future generations

Government policy to maintain environmental sustainability

 Current protection of the environment

o Total pollution, abatement and control expenditure is about 1% of GDP
 Business enterprises account for 32%
 Commonwealth government accounts for less than 1%
 Large contribution by state, local governments
 Introduction to policy
o Policies to promote environmental sustainability;
 Regulatory or command and control regimes
 Compulsion based
 Examples include: clean air, water legislation; land use zoning and licensing; pollution laws;
maintenance of national parks; use of environment regulations, standards for individuals, firms
 Market based economic instruments
 Incentives based
 Examples include: pollution charges or taxes; tradable pollution permits; tradable fishing quotas;
incentives for recycling; private management of public nature reserves; incentives for eco-tourism;
 pricing policies for use of environmental resources; tax incentives for use of ‘green’ technologies
and products
 Eg system of tradable pollution rights
o Licenses allow firms to pollute, can be traded in market
 International obligations
 Compulsion based
 Examples include: Montreal Protocol; Rio Earth Summit; World Heritage Convention; Antarctic
Treaty; Kyoto Protocol (ratified by Rudd gov at UN Framework Convention on Climate Change in
Bali, December 2007; aims to reduce total greenhouse gas emission by participating nations; to be
updated w new Kyoto agreement in 2012)
 Historical overview of policy
o ‘Partnership approach’ adopted in past decade
 Involved regulatory, economic and voluntary instruments
 Regulatory: eg corporate environmental management
o Eg in mining sector
o Enough environmental activity to prevent gov regulation
 Economic: eg environmental licensing
o Case by case, differs across states
 Voluntary: eg Greenhouse Challenge initiative
 Environmental protection
o Trend of increase in funds allocated to environmental protection
 From 1997-98 to 2008-09
 Aims to combat environmental issues such as;
 Land degradation, resource depletion, pollution, biodiversity, water conservation
 Administered by Departments of Agriculture, Fisheries, Forestry; Environment and Heritage; Climate Change
 Examples include:
 Natural Heritage Trust
o Introduced by 1997-98 federal budget
o Aims to fund, co-ordinate environmental protection activities (eg Bushcare, Ocean Policy)
 National Water Initiative
o Introduced in 2005
o Established Murray-Darling Basin Commission in 2006
o Established national water markets
 Funding for maintenance of national parks, world heritage sites
 Climate change initiatives in the 2008-09 federal budget
o Introduction of Renewable Energy Target in 2008
 20% of Australia’s electricity to be supplied by renewable sources by 2020
 $2.3b over 5 yrs to support this
 Central components;
o Introduction of emissions trading scheme by 2010
o 2008-09 budget initiatives: National Clean Coal Fund; Renewable Energy Fund; Green Car
Innovation Fund; Energy Innovation Fun; Clean Business Australia Programme
 Carbon pollution reduction scheme
o Outcome of;
 Garnaut Climate Change Review by Department of CC, July 2008
 Release of the Green Paper on a Carbon Polluting Reduction Scheme by Department of CC, July 2008
o The Green Paper
 Key conclusions;
 Pertaining to potential global activity;
o Only a global agreement has any prospect of reducing risks to acceptable levels
o Global initiative will only be effective reduction to risks are considerable, consistent with
continued economic growth, rising living standards
 Pertaining to potential Australian activity;
o There are two possible scenarios Australia can follow;
 Support the objective of achieving a national agreement restricting
concentrations of CO2 to 450ppm
 20% reduction to 2000’s CO2 levels by 2020
 90% reduction to 2000’s CO2 levels by 2050
 Support the objective o achieving a national agreement restricting
concentrations of CO2 to 550ppm
 10% reduction to 2000’s CO2 levels by 2020
 80% reduction to 2000’s CO2 levels by 2050
 Key recommendations;
 Design of an emissions trading scheme
o Nature of the scheme
 A regulatory agency to establish targets, set pollution limit for each potential
polluter and limit permits
  To be sold competitively in an independent carbon bank
 Revenue from permit sales allocated to;
o Households (50%)
o Support for research, development, commercialisation of
new technologies (20%)
o Business as credits, cuts in taxes for trade-exposed activity
(30%)
o Possible implications
 Incentives to producers, consumers to invest in low GHG products,
technologies, processes
 Technological innovation
 Reallocation of resources from high GHG producing products, technologies to
low GHG producing products, technologies
 Research, application of new knowledge
o As applies to low-emissions technology
 An equitable distribution of the burden of mitigation internationally and in each country
o Half of the trading permit’s revenue should be paid to households with a focus on those
receiving lower incomes
 Protection of Australia’s resources
o Introduction of Water for the Future
 2008-09 federal budget
 $12.9b over 10 yrs
 Central components;
 National Urban Water and Desalination Plan
 National Water Security Plan for Cities and Towns
 National Rainwater and Greywater initiative
o Introduction of Caring for our Country Programme
 2008-09 federal budget
 $2.2b over 5 yrs
 Aims to manage rehabilitation, conservation of national environments