Flashcards in Chapter 4 Deck (29)
Why is economic valuation needed?
Natural resources are often undervalued
Ecological economics (studies the interaction between ecology and economy)
-There are basic assumptions and exceptions to economics
We must evaluate large development projects for their potential effects BEFORE they proceed (via a cost benefit analysis)
Why are natural resources often undervalued?
costs of environmental damage are ignored
depletion of natural resource stocks are disregarded
future value of resources are discounted
result: people treat the environment in a wasteful shortsighted manner.
What is ecological economics?
Emerging field that studies the interaction between economic and ecological systems
goal is to develop a sustainable world
What are the basic assumptions of economics?
monetary- transcations take place only when beneficial to both parties
everyone acts in self interest
this works great; leads to benefit of all society.
What are the exceptions to the basic assumptions of economics?
existence of hidden costs or benefits: externalities
can result in market failure: society as a whole becomes less prosperous, although some individuals may benefit at the expense of others
What are the two most important negative externalities?
1. environmental damage to open-access resources
-owned by everyone
-e.g., pollution of water, air, soil.
2. overharvesting of open-access resources
-lack of regulation, air
-lack of enforcement
What is the tragedy of the commons?
The value of open-access resources are lost to all because of overuse
What is a negative externality?
A negative externality occurs when an individual or firm making a decision does not have to pay the full cost of the decision.
If a good has a negative externality, then the cost to society is greater than the cost consumer is paying for it.
Why should we evaluate development projects?
must evaluate large projects for their pottential effects before.
How do we analyze development projects?
cost-benefit analysis (sometimes hard to calculate)
Downfalls of cost-benefit analyses
They are difficult to calculate
They are distorted by perverse subsidies
They often use discount rates.
What is a cost-benefit analysis?
environment or economic impact assessments
used to compare values gained against the costs
-of projects or
-of the resource use
e.g., three development alternatives in the Philippines showed the different costs or economic benefits of tourism and logging
Why are cost-benefit analyses hard to calculate?
benefits and costs change over time
they are difficult to measure.
-Precautionary principle: if there is uncertainty about risks, it is better to err on the side of doing no harm
How can cost-benefit analyses be distorted by "perverse subsidies"?
government subsidies that promote specific industries
these subsidies may support environmentally damaging or expensive activities
-overfishing in the ocean
-farming in inappropriate areas
What are discount rates in cost-benefit analyses?
rate of reduction of the current value of a resource that will be used at some point in the future
-assumes that money you have now will grow
-economists therefore assign a lower current value to resources to be used in the future
-better to have money now then and invest it for greater wealth
Leads to short-sighted decisions to use resources right away
-should reduce or eliminate discount rates
Attempts to include loss of natural resources in the GDP:
Define what the GDP is
gross domestic product
measures economic activity
but without accounting for all the costs of non-sustainable activities
-costa rican forest loss
-UK agriculture's environmental cost.
Exclusions of environmental costs and loss of resources may distort economic health of a country
-exxon valdex oil spill
What are alternatives to the GDP?
ISEW, GPI, ESI
What is the ISEW
index of sustainable economic welfare
What is the GPI?
genuine progress indicator
measures economic activity
includes loss of resources and environmental costs
-impact of acid rain
-loss of wetlands
-number of people living in poverty
-effects of pollution on human health.
Use of GPI reveals that many modern economies are achieving their growth through non-sustainable consumption of natural resources.
What is the ESI?
environmental sustainability index
uses 21 environmental indicators
ranks countries according to:
-the health of and threats to their ecosystems
-vulnerability of their population to an adverse environment
-ability of their society to protect their environment
participation in global environmental protection efforts
Does high ESI imply low competitiveness in world economy?
thought maybe yes because too much protection of environment
countries like finland have lots of protection and they're very competitive.
How do we attempt to assign economic value to biodiversity?
There are 3 levels that we assign value to
marketplace/harvest value of resources (meat harvested from wild gaur)
value provided by resources in unharvested states (animal's value in the wild for ecotourism)
future value of resources (potential for cattle breeding program)
What are the two categories of use values?
direct use values (consumptive and productive)
indirect use values (current benefits and option values)
What is the difference between consumptive and productive use values?
consumptive: like collecting and burning firewood
productive: like hunting something and then selling it.
What are two ways we assign economic value to biological diversity
Use values (direct and indirect)
Non-use values (existence value)
Define direct use value
products harvested by people
aka commodity values, private goods.
e.g., timber, seafood, medicinal plants
Define consumptive use.
local use of goods
fuel, food, medicine, materials
value can be asisgned by considering how much people would have to pay if it wasn't available.
What is productive use?
use in the marketplace
valuation based on price paid at first point of sale
huge varity of products