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Nature of Economic Environment

Economic Environment is considered both as positive and normative science. It also covers both micro and macro aspects of different pollution problems.

Positive and Normative aspects

Environmental economics is an application of scientific theories and general application of welfare economics. When we study the cause and effect relationship, it covers the positive aspect. For example, the laws of thermodynamics are equally applicable to economic process.

If the problem is related to policy measures, then it is considered as normative aspect. Therefore, environmental economics is a normative science because it prescribes the goals of environmental policy. As pointed out by B. C. Field, “Environmental degradation is the result of human behaviour that is unethical or immoral. Thus, for example, the reason people pollute is because they lack the moral and ethical strength to refrain from the type of behaviour that cause environmental degradation. If this is true, then the way to get people to stop polluting is somehow to increase the general level of environmental morality in the society.” Field calls it as moral approach to environmental issues.

A Study of Micro and Macro Aspects

Economists such as Pigou, Hoteling and Nordhaus have formulated their models in relation to individual firms and natural resources. Therefore, it covers the micro and macro aspects of the pollution problem. There are many examples of micro and macro aspects of environmental problems in the present times.

We generally observe crowded market places, industrial units, and even residential areas in a city like, Delhi. We do not get enough fresh air at these places. Its solution lies in micro level planning. On the other-hand, when the pollution problem is related to the economy as a whole such as rise in temperature, then it is related to macro aspect of environmental planning.

Environmental economics draws more from microeconomics than from macroeconomics. It focuses primarily on how and why people make decisions that have consequences for the natural environment. It is concerned also with how economic institutions and policies can be changed to bring these environmental impacts more into balance with human desires and the needs of the ecosystem.

As Static and Dynamic

Classical and Neoclassical economists have applied both static and dynamic approaches in relation to environment. They have applied economic welfare approach to environment which is static in nature whereas under dynamic approach, they focus on forests, minerals, fossil fuels and water resources etc.

As A social science

Environmental economics deals with economic and managerial aspects of pollution and natural resources. It interacts between human beings and their physical surroundings. It studies the impact of pollution on human beings and suggests national utilization of resources in a proper way so that there may be an increase in social welfare or minimization of social costs.

Environmental economics is also concerned, with the natural environment, but not exclusively so. For example, man-made and cultural or social environments may also be a part of the nature of environmental economics.

Environmental Pollution as an Economic Problem

Environmental pollution is an economic problem because it requires us to make choices and to resolve conflicts of interests. It is an economic problem because the means by which pollution can be reduced are themselves resources using. Further, it also reduces the value of some resources that society has at its disposal.

It means that pollution is a problem of scarcity in terms of waste disposal capacity. The main problem of choice is how to utilize the scarce resources in relation to society’s needs. The market forces will be helpful in determining these scarce resources in most rational manner. The equilibrium will be attained at the equality of demand and supply of environmental quality.

Since resources are scarce they cannot be used to produce all types of goods simultaneously. Therefore, if they were used to produce one thing, they have to be withdrawn from other uses. The problem of choice facing a modem society is whether to maintain environmental quality or to increase industrial production (i.e. automobiles). It creates conflicts of interest between potential gainers and potential losers.

The problem of externalities is an important aspect of environmental quality. The external effects of industrial production may affect the environmental quality. Therefore, the economic problem is the optimal allocation of resources in the context of externalities.

One of the objectives of environmental quality is to restrict those production activities which enhance social costs to society. Environmental quality is largely influenced by human activities in terms of excess exploitation of resources and the production of waste. How much environmental quality is affected by exploitation of resources and production of waste depends on ecological conditions of the economy. More exploitation of it means more pollution.

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