Economics and our Future

Chapter 23: Economics: Tools for Creating a Sustainable Future.

Economics – The Science that seeks to understand and explain the production, distribution, and consumption of good and services.

Historically, economics has been concerned mainly with inputs and outputs.

Inputs – The commodities that companies need to produce goods and services, including raw materials, labor, and energy.

Outputs – Goods and Services provided by the company.

Command Economies – The government owns and operates the factories and makes decisions of what is produced and how much is produced.

Market Economies – Companies produce goods and respond to monetary signals from the consumers to determine what will be produced.

Law of Supply and Demand – The price of goods and services is determined by how much of that good is produced and how much people want it.

What is wrong with current Economic models

Economic Externalities – Costs that are not observed in the pricing of an object. Environmental and social costs of producing items are not usually paid by the company but by taxpayers.

Gross National Product (GNP) – The sum total of goods and services produced by a nation’s economy, including all government expenditure and business activities in other countries.

Gross Domestic Product (GDP) – The sum total of goods and services produced within the countries borders.

Both GNP and GDP fail to distinguish between good and bad economic activities. Money spent producing life saving medicines or books is counted the same as money spent cleaning up oil spills or hazardous waste.

Alternative Economic Ideas

Index of Sustainable Economic Welfare (ISEW) – Is a new measure developed by Herman Daly. It adds up all of the beneficial economic gains and subtracts from that negative economic output.

Natural Capital – The nation’s ecological wealth, including topsoil, forests, grasslands, open spaces, farmlands, fisheries, and wild species.

Myths about Economy and Environment

Environment protection is bad for the economy. Environmental cleanup is necessary and extremely expensive, so prevention before pollution occurs is the best solution. Two of the healthiest economies among industrialized nations (Germany and Japan) are the most energy-efficient.

Environmental protection is about quality of life and economics is about survival. In truth, luxury spending drives most economic activity. Only about 30% of our spending deals with basic necessities.

Economic growth is good, even essential. Economic growth is supposed to provide prosperity for all, but the rich truly do get richer while the poor and middle class mostly remain where they are.

Sustainable Economy – An economy that produces goods and services in a manner that does not reduce our natural capital and can be maintained for future generations.

Economics of Resource Management

Time Preferences – The period in which economic return on an investment is desired.

Opportunity Costs – The cost of lost opportunities resulting from certain policies and actions.

Discount Rates – The economic return on an investment. The World Bank which lends money to less developed countries requires a 10% return on its investment or discount rate.

Replacement Costs – The cost to replace a natural resource. How much would it cost to replant a tropical rain forest and reestablish the complex ecosystem?

Economics of Pollution Control

Law of Diminishing Returns – Initial investment in pollution control will result in a substantial reduction in pollution, but as more money is spent less pollution is removed.

Cost Benefit Analysis – A common way of determining the economic benefit of an endeavor, but this has traditionally left out economic externalities.

Pollution Prevention – An attempt to eliminate production of pollution.

Pollution Control – An attempt to capture pollution after it has already been produced.

Some Economic Solutions