Environmental Economics: One Mark Questions, Book Back Answers and Notes

About Environmental Economics

Medium ~90 min study

For a long time, economics treated nature as an endless supply of raw materials and an endless dump for waste. Environmental economics rejects that view. It sees the economy as part of the environment: whatever we take out of nature as inputs must go back to nature in some form, and when we damage air, water or soil, that damage has a real economic cost.

The chapter begins with the Material Balance Model developed by Allen Kneese and R.U. Ayres, which traces materials from nature through production and consumption and back to nature as residuals. It then explains why markets fail to protect the environment: clean air and water are public goods, and polluters do not pay for the harm they cause to others. The later sections cover air, water, noise and land pollution, global warming, acid rain and e-waste, and end with sustainable development, the Sustainable Development Goals and practical steps such as organic farming and seed balls.

Many one-mark questions here are straight definitions of a public good, an externality, sustainable development or global warming. Be ready to give an example of a positive and a negative externality, to name the causes and effects of each type of pollution, and to explain what makes organic farming different from chemical farming.

What you'll learn

• Explain the Material Balance Model and how it links the economy with the environment.
• Explain why environmental quality is a public good and how this leads to market failure and free-riding.
• Distinguish positive and negative externalities in production and consumption with examples.
• State the causes and effects of air, water, noise and land pollution.
• Explain global warming, climate change, acid rain and e-waste and their effects on people.
• Define sustainable development and outline the Sustainable Development Goals.
• Describe the benefits of organic farming, tree planting and seed balls.

Before you start

• The meaning of public goods, private goods and market equilibrium.
• Basic ideas of GDP and economic development.
• School science on conservation of energy and the gases in the atmosphere.

Environmental Economics explained

The Economy and the Environment

The Material Balance Model

The Material Balance Model of Kneese and Ayres rests on the first law of thermodynamics: matter and energy can be neither created nor destroyed, only changed in form. Raw materials and energy taken from the environment are used in production and consumption, and every bit of them eventually returns to the environment as residuals such as smoke, sewage and solid waste. So the economy is not a one-way flow from resources to consumption. The more materials an economy uses, the more waste the environment has to absorb, and nature's ability to absorb waste is limited.

Market Failure and Externalities

Environmental quality is a public good. It is non-rival (one person breathing clean air does not reduce it for another) and non-excludable (no one can easily be stopped from enjoying it). Since no one can be charged for it, markets do not price it, people tend to free-ride, and the resource gets overused. This is market failure. Externalities make it worse. An externality is an effect of production or consumption on a third party who is neither paid nor charged for it. A factory releasing smoke creates a negative externality: its private cost is lower than the social cost, so it produces too much and pollutes too much. A beekeeper whose bees pollinate a neighbour's orchard creates a positive externality.

Types of Pollution

Air pollution comes mainly from industrial emissions, vehicle exhaust and burning of fuels. It causes respiratory diseases, and sulphur dioxide and nitrogen oxides in the air lead to acid rain. Water pollution is caused by untreated sewage, industrial effluents and fertiliser run-off; these reduce dissolved oxygen, and excess nutrients cause eutrophication that kills fish and other aquatic life. Land pollution results from excessive use of chemical fertilisers and pesticides and from solid and electronic waste. Noise pollution from traffic, industry and loudspeakers causes stress and hearing damage.

Global Warming and Climate Change

Greenhouse gases, mainly carbon dioxide from burning fossil fuels and from deforestation, along with methane and others, trap heat radiated by the Earth's surface. As they build up, the average surface temperature rises. This global warming leads to climate change: melting ice, rising sea levels, changing rainfall and more extreme weather. Since greenhouse gases spread across the whole atmosphere, no single country can solve the problem, and each country is tempted to let others bear the cost of reducing emissions.

Sustainable Development and Green Practices

The Brundtland Commission (1987) defined sustainable development as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. In 2015 the United Nations adopted 17 Sustainable Development Goals, to be reached by 2030, which combine economic growth, social inclusion and environmental protection. At the practical level, organic farming uses farmyard manure, compost, crop rotation and biological pest control instead of synthetic chemicals, which keeps the soil fertile. Tree planting and seed balls, made of seeds wrapped in clay and compost and scattered on open land, help restore green cover.

Common mistakes to avoid

• Treating environmental economics as the same as ecology. Environmental economics studies how environmental resources are allocated and how prices, costs and policies affect them.
• Thinking sustainable development is only about cutting carbon emissions. It also covers poverty, equity and inclusion along with environmental protection.
• Assuming only factories create negative externalities. Consumption does too, for example smoking in public places or driving a polluting vehicle.
• Judging organic farming only by short-run yield. Its benefits include lasting soil fertility, less water contamination and less land degradation.
• Assuming that clean air or biodiversity has no economic value because it has no market price. Their loss imposes real costs on health, farming and livelihoods.
• Saying greenhouse gases trap incoming sunlight. They let sunlight through and trap the heat that the Earth's surface radiates back.

Test yourself on these with the practice test, then check the worked reasoning in the solved MCQs.

Frequently asked questions

What is the Material Balance Model?

It is a model developed by Allen Kneese and R.U. Ayres, based on the first law of thermodynamics, which says matter and energy are neither created nor destroyed. The materials taken from nature for production and consumption must therefore return to nature as residuals. Over time, the mass of materials the economy takes in equals the mass it puts back as waste.

Why does the market fail to protect environmental quality?

Environmental quality is a public good. Clean air and water are non-rival and non-excludable, so no market can charge people for using them. Everyone uses them without paying (the free-rider problem), polluters do not pay for the damage they do, and the result is overuse and degradation.

What is the difference between positive and negative externalities?

An externality is an effect of an activity on people outside the transaction. A positive externality gives an unpaid benefit, such as a beekeeper's bees pollinating a neighbour's fruit trees. A negative externality imposes an uncompensated cost, such as a factory discharging effluents into a river that people downstream use for drinking.

How is global warming different from climate change?

Global warming is the rise in the Earth's average surface temperature caused by the build-up of greenhouse gases. Climate change is the wider, long-term change in weather patterns that follows, such as altered rainfall, rising sea levels and more frequent extreme events. Both cause economic losses through crop failure, property damage and health problems.

What is sustainable development?

Sustainable development is development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs. This definition comes from the Brundtland Commission report of 1987. It stresses fairness between generations, so the stock of natural resources should not be run down by present consumption.

How does organic farming help the environment?

Organic farming avoids synthetic fertilisers and pesticides and uses farmyard manure, compost, crop rotation and biological pest control. This keeps the soil healthy, protects biodiversity and stops chemical run-off into rivers and ponds. Green practices like tree planting and seed balls add to this by restoring vegetation, which also absorbs carbon dioxide.