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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-re
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  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      Implication s 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; a n 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
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