What is meant by environmental and resource economics?

1. What is meant by environmental and resource economics? • In South Africa there are a variety of environmental concerns relating to: • The availability of clean water • Air pollution • Land use and degradation • Loss of biodiversity and alien invasion, etc. • A large proportion of these issues occur due to a lack of understanding of the economic value and the overall ecological importance of these resources.

2. The traditional economic assumption that the environment (natural capital such as fauna and flora, minerals, soil and water) does not play a limiting factor on economic growth and productivity has lead to improper economic and development decisions, often resulting in the unsustainable use of resources, and pollution. The field of environmental and resource economics endeavours to assist decision-makers in the process of making appropriate trade-offs between the environment, the economy, and, to a lesser degree, society. Let’s consider a definition of ERE.

3. ERE assumes that there are interactions between the environment and the economy, AND THAT ARE INTERDEPENDENT. • ERE can thus be defined as the application of economic principles to the management of environmental resources. • ERE sets out to : • Understand how & why individuals make decisions that have consequences for the natural environment • Implement economic solutions to environmental problems

4. Traditionally the economy existed in isolation from the natural environment. • With the introduction of ERE the economy is seen as existing WITHIN THE ENVIRONMENT, and as reliant on the environment in a number of ways. • Two distinct but related fields exist within ERE. These are: • Natural Resource Economics, which deals with the role of the environment as a source of raw materials for the economy, and • Environmental Economics, which deals with the effects of the economy on the environment, i.e. pollution

5. Before we see how the economy relates to the environment, let’s consider the linkages within a traditional economy. As you know, an economy consists of producers (or firms) and consumers. Firms produce consumption goods such as soft drinks and paper, and capital goods such as canning machines and chainsaws. Consumption goods are consumed directly and provide utility to consumers, whereas capital goods are used to produce consumer goods, and thus represent future consumption. As mentioned before, the environment was considered to be an infinite resource, and was not seen being a limiting factor on the growth of the economy. This figure represents the traditional linear economy, which does not take the environment into account.

6. The environment provides three basic types of goods and services to the traditional linear economy. These are: • Natural resource inputs such as timber and agricultural produce. This self-explanatory and the next two will be discussed in a little more detail. • A waste sink and • 3. A source of amenity value

7. The second linkage between the environment and the economy is the environment as a waste sink receiving waste produced within the economy. This waste can be generated during the production process, in the form of air pollution, effluent and landfill waste, etc.; or during the consumption process, e.g. the disposal of packaging. The environment also receives waste from the environment itself, e.g. leaf litter. Some of this waste can be recycled, such as plastics, paper and glass. This provides additional resources for the economy. However some waste is not recycled and the environment has some capacity to assimilate this waste, i.e. to render the waste harmless. This assimilative capacity is, however, limited; and once a threshold is reached where waste exceeds the environment’s assimilative capacity, environmental degradation occurs.

8. Thirdly, the amenity value of the environment is that utility value derived by individuals from the direct, non-consumptive use of the environment. E.g. an individual may derive utility by enjoying a scenic view, hiking up a mountain or having a picnic in a natural environment. This derived value can be positive or negative depending on the state of the environment. The examples mentioned above all provide positive amenity to consumers. Example of negative amenity value include dissatisfaction or disutility resulting from a bad odour from a nearby landfill site, or from a view of a polluted river. These three linkages thus constitute the circular economy, where activities in the economy are seen to relate to those in the environment.