Page 165 - Environment: The Science Behind the Stories

equals demand. By applying similar reasoning to environmental Are costs and benefits internal? A second assump-
issues, economists can determine “optimal” levels of resource tion of neoclassical economics is that all costs and benefits
use or pollution control (FIguRE 6.10b). For instance, reducing associated with an exchange of goods or services are borne
pollution emitted by a car or factory is often cost-effective at by individuals engaging directly in the transaction. In other
first, but as pollution is reduced, it becomes more and more words, it is assumed that the costs and benefits are “internal”
costly to eliminate each remaining amount. At some point the to the transaction, experienced by the buyer and seller alone.
cost per unit of reduction rises to match the benefits, and this However, many transactions affect other members of
break-even point is the optimal level of pollution reduction. society. When a landholder fells a forest, people downstream
To evaluate an action or decision, neoclassical economists suffer poorer water quality and people nearby experience
use cost-benefit analysis. In this approach, economists add up dirtier air and less wildlife. When a factory, power plant, or
the estimated costs of a proposed action and compare these to mining operation pollutes the air or water, the health of people
the sum of benefits estimated to result from the action. If bene- who live nearby is harmed. In such cases, members of soci-
fits exceed costs, the action should be pursued; if costs exceed ety not involved in degrading the environment end up paying
benefits, it should not. Given a choice of actions, the one with the costs. Costs of a transaction that affect people other than
the greatest excess of benefits over costs should be chosen. the buyer or seller are known as external costs (FIguRE 6.11).
This reasoning seems eminently logical, but problems Often whole communities suffer external costs when certain
arise when not all costs and benefits can be easily identi- individuals experience private gain. External costs commonly
fied, defined, or quantified. It may be simple to quantify include the following:
the value of bananas grown or cattle raised on a tract of
land cleared for agriculture, yet difficult to assign monetary • Health problems, stress, or anxiety experienced by people
value to the complex ecological costs of clearing the forest. downstream or downwind from a pollution source
Because monetary benefits are usually more easily quan- • Property damage
tified than environmental costs, benefits tend to be over- • Declines in desirable features of the environment, such as
represented in traditional cost-benefit analyses. As a result, fewer fish in a stream
environmental advocates often feel such analyses are pre-
disposed toward economic development and against envi- • Aesthetic damage, such as from air pollution, clear-cutting,
ronmental protection. or strip-mining
• Declining real estate values, lost tourism revenue, higher
healthcare expenses, etc., resulting from these problems
Neoclassical economics
has environmental consequences If market prices do not take the social, environmental, or
economic costs of environmental degradation into account,
Today’s market systems operate largely in accord with the then taxpayers bear the burden of paying them. When econo-
principles of neoclassical economics. These systems have mies ignore external costs, this creates a false impression of
generated unprecedented material wealth for our societies. the consequences of our choices, and people continue to be
Alas, four fundamental assumptions of neoclassical econom- unjustly subjected to the impacts of activities in which they
ics often contribute to environmental degradation. did not participate. External costs are one reason that govern-
ments develop environmental policy (pp. 183, 184).
Are resources infinite or substitutable? One
assumption is that natural resources and human resources
(such as workers) are either infinite or largely substitutable
and interchangeable. This implies that once we have depleted
a resource, we will always be able to find a replacement for
it. As a result, ecosystem goods and services are treated as
free gifts of nature, endlessly abundant and resilient. The
market imposes no penalties for depleting them, as they are
assumed to be ultimately substitutable by human technologi-
cal ingenuity.
Certainly it is true that many resources can be replaced.
Our societies have transitioned from manual labor to ani-
mal labor to steam-driven power to fossil fuel power, and
they may yet transition to renewable power sources such as
wind and solar energy. However, Earth’s material resources
are ultimately limited. Nonrenewable resources (such as fos-
sil fuels) can be depleted. Many renewable resources (such
as soils, fish stocks, and forest products) can be used up if
we exploit them faster than they are replenished. And even
seemingly inexhaustible resources can become so polluted FIguRE 6.11 People commonly suffer external costs from
that we can no longer use them (such as contaminated water air pollution. Here, residents of Sampit, Indonesia, cycle through
164 supplies). smoke from fires set to clear forest for oil palm plantations.

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