Environmental & Natural Resource Economics Research Paper Starter

Environmental & Natural Resource Economics

(Research Starters)

This article focuses on the complex interface between economic forces and social responsibility, in particular highlighting environmental resources: Products of value to the whole, as opposed to the individual. Natural resources, once considered limitless, face rapid depletion of substantial proportion as the roller coaster of economic growth careens toward losses too great for the world to sustain. Businesses, like people, care most about things that directly impact their well-being, and they have less interest in things not directly affecting them. By nature, self-interest often supersedes what is right for the greater good. Air, water and soil, all natural resources, are considered environmental capital, even though they may not fit the conventional accounting definition of such. Because natural resources, like air and water, are "owned" by everyone, a conflict develops between our natural desire to meet self-needs and the expectation to incorporate common goals for all. The reader of this essay will see, paradoxically, that the markets' economic growth relies on consumption and trade but contributes mightily to the destruction of our natural resources. Environmental resources improve humankind's wellbeing, but over-consumption and its by-products levy hefty costs to the environment.

Keywords Cap-and-trade; Carbon Dioxide; Clean Air Act; Climate Exchange; Commodities; Consumption; Emissions; Emissions Controls; Environmental Resources; Environmentalist; Externalities; Global Warming; Green House Effect; Green House Gases; Market Failure; Natural Resources; Pollution

Economics: Environmental


Extent of the Environmental Issues

Humankind is leaving an irreversible footprint on the face of the home we call earth. Economic growth, population expansion, financial incentives, entitlement, ignorance, greed, prosperity and consumption are but a few of the contributing factors to the crisis we now face. Companies enjoying economic growth, financial gain and prosperity are threatened not only by vocal environmentalists, but by their own consciences; recognizing that they are degrading the social welfare and are ethically responsible to mitigate the damage they are causing. Delayed action means a decreasing quality of life for the population. The United States, closely followed by China, is a major contributor to the world's environmental concerns. We must come face to face with the ramifications of ignoring our actions, economically painful though they may be. For many years already, economic development models have placed insufficient focus on environmental integrity and committed too few resources to incorporating natural resource support as a component of the same.

Green House Gases — A Critical Resource in Danger

The Greenhouse Effect, warming of the air near the earth's surface, is a serious concern to the survival of the planet. Researches portend frightening increases in temperature, a key measure crucial to our very future. Although a good number of greenhouse gases are produced naturally, the dramatic increase in global average air temperature over the last 100 years is reported in the literature as being the direct result of human activities such as industrial activities, human consumption activities and tropical deforestation.

"Are we spending the world's natural capital in unsustainable ways? The answer is yes, according to the Millenium Ecosystem Assessment prepared by the Organization for Economic Development (OECD) for the United Nations secretary-general. The report concluded that 'over the last 50 years, humans have changed the world's ecosystems more rapidly and extensively than at any comparable period in history.' And it's only going to get worse. The International Energy Agency estimates 'that China will overtake the U.S. as the major source of greenhouse gases by the end of the decade'," (Barnes, 2007).



Growth and production spell economic success; market activity strengthens the country's gross productivity. Growth of product in the market is typically assumed to enhance social welfare; however, society cannot disregard the destructive impact that increasing productivity is having on our ecology. Market transactions assume that the buyer and seller are both better off financially and socially when a mutually-acceptable transaction has occurred. Believing that greater oil production and consumption is beneficial to both the seller and the consumer is short-sighted; we must consider the environmental impact of the transaction. The harm caused by such a transaction — pollution — impacts more than just the two parties involved in the exchange. The economic term "externality" refers to the damage (cost) caused by any market transaction. When externalities occur, and unfortunately they are common, the outcome is considered a "market failure." Put simply, the transaction itself does not meet the criteria for enhancing social welfare; it is a human-driven transaction which causes harm to others. When market failure occurs, governmental intervention is commonly the route taken to improvement. Emitting pollutants is not against the law unless governmental regulation is set in place to make it so. Decreasing emissions per unit output is likely to cost the producer handsomely; business sense tells the company to continue financially-beneficial production without emissions improvements until a sanction or incentive is imposed.

Economic Realities in Business

Companies understand their demand curve; how much of their product will be purchased at a given price. Every economist and business manager understands the relationship of cost to demand for product. Lower cost equals higher demand; conversely an increased price of a product leads to lower public demand. People find they can live with less of something when the price becomes too high for their pocketbook's comfort. Consumption and cost of public goods (commodities) behave differently than services and products regulated by standard market and economic behaviors. Purchasers of oil, for example, are not consistently responsive to increased cost, sometimes because they can't decrease their use (e.g. oil consumption is crucial to their survival) or because they are not impacted dramatically enough to make a behavior change.

So how do companies decide when and how to respond to emissions mandates in the most financially beneficial manner? Facing costly improvements to aging facilities is a concern for organizations, especially those with tight margins already. It is a difficult ethical and financial quandary at the very least.

Said Nobel Laureate Eric Maskin, in an article highlighting his work on mechanism design theory, "Classical economic theory assumes buyers and sellers have complete knowledge of the available alternatives and therefore can make logical informed decisions. But in fact that's often not the case," (Maskin, 2007).

Paul Ormerod, author of "Why Things Fayl," comments that "…companies which use large amounts of energy and which participate in {the} trading scheme realize that they can...

(The entire section is 3180 words.)