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The Economy in the Environment – basic concepts The Holistic View

The Economy in the Environment – basic concepts The Holistic View. The Cowboy Economy. Circular flow between firms and consumers Seemingly perpetual Success measured by the amount of stuff moving through Reckless, romantic, not realistic. The Spaceship Economy. Expanding system boundaries

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The Economy in the Environment – basic concepts The Holistic View

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  1. The Economy in the Environment – basic conceptsThe Holistic View

  2. The Cowboy Economy • Circular flow between firms and consumers • Seemingly perpetual • Success measured by the amount of stuff moving through • Reckless, romantic, not realistic

  3. The Spaceship Economy • Expanding system boundaries • Limited reservoir of materials on earth • Economy uses inputs from the environment and emits waste • Must limit throughput • Limits to growth?

  4. The Big Picture Input from the environment • Resources • Life support services • Amenities • Waste-sink • Last time established the economic importance of environmental input

  5. The Big Picture • Continually trying: • Not to overwhelm regenerative capacity of the environment • Not to overwhelm the waste-assimilative capacity of the environment

  6. First - a few concepts • Thermodynamics • Matter = energy and materials • Energy = ability to do work • Entropy = unavailable bound energy - represents level of chaos or disarray. Can also measure the quality of energy.

  7. First - a few concepts • Systems: Two or more entities that interact • Open system: Exchanges energy and materials with its surroundings • Closed system: Exchanges only energy with its surroundings.

  8. Is the earth open or closed?

  9. Is the economic system open or closed?

  10. Laws of Thermodynamics The first law: • Matter (energy or materials) can neither be created nor destroyed Implications: • Whatever comes in will come out (implies waste) • Economic processes simply rearrange things

  11. Laws of Thermodynamics Second law:The entropy law • All processes require energy - and as they do they reduce the quality of the energy used - increasing entropy in the universe • The arrow of time: over time we always will see an increase in entropy • Energy cannot be recycled - continually goes from a high quality state to a low quality state

  12. Laws of thermodynamics • Implications for the earth as a whole • A closed system, and thus quantity of materials is constant • Constant flux of energy into the system • Energy cannot be recycled but materials can • No process is 100% efficient • Implications for economic systems?

  13. Natural Capital • Capital: A stock that yields a flow of goods and services into the future • Natural capital: Those stocks in nature that provide goods and services into the future • Example: A fish stock (capital) yields a flow of goods (harvested fish) into the future

  14. Natural Capital • Two types: • Renewable or active capital • Providing extractable renewable resources, and provide services without being extracted (ex. Waste assimilation). • Nonrenewable or passive capital • Inactive (passive). Provide no services until extracted. Ex. Fossil fuels • Perpetual resources - only provide flow services and have no stock counterpart

  15. Stocks and flows

  16. The Big Picture • Resources: • Flow resources • Stock resources • Nonrenewable • Renewable

  17. Stock resources • Non-renewable • Depletable, scarce (if used) • Resources vs. reserves • Economic feasibility • Provide services only if extracted

  18. Non-Renewable Resources

  19. Non-Renewable Resources • Rate of regeneration is slower than extraction • St = St-1 + Gt - Et Where: Gt = 0 • Example: Fossil fuels - Others?

  20. Economic theory of nonrenewable resources • Describes the optimal extraction path for non-renewable resources • Hotelling principle • By definition scarcity increases as extracted which should increase price • Has it?

  21. Economics of non-renewable resources • Optimal extraction rule: Extract such that rent rises at the rate of interest • What happens if interest rates increase? Extract more? Less?

  22. Economic theory of non-renewable resources • Prices increase over time • Extracted quantity declines over time • Total size of the resource declines over time • All true in reality?

  23. Economic theory of non-renewable resources • More realistic picture • U-shaped price path • Technology • Scarcity • Shown by Slade 1982

  24. Economic theory of non-renewable resources • Is it possible to use non-renewable resources and be sustainable? • Why/why not? • If yes, how?

  25. Renewable Resources • Rate of regeneration faster than rate of extraction • Are all active • Provide services when extracted and also when left in place • St = St-1 + Gt - Et Where: Gt >0 Example: fish stocks

  26. Renewable resources - Population dynamics • Population: a group of individuals belonging to the same species • Population dynamics: The dynamics of population growth and how populations interact • Crucial for the management of renewable resources

  27. Renewable ResourcesPopulation growth • Focus on G • Exponential growth • Characterizes anything that can grow without limit • Pt = Pt-1*(1+r) • Doubling time: LogN2 =r*DT 0.693 = r*DT DT = 70/r

  28. Renewable ResourcesPopulation growth • Logistic or density dependent growth • Upper limit to the ultimate size • Determined by carrying capacity • What defines CC? • Growth curve u-shaped • Growth determined by: • Pt = Pt-1 + r*(CC - Pt-1)/CC

  29. Renewable resources Original Equation • St = St-1 + Gt - Et • Extraction affects stock size. • Sustainable yield: extraction equal to growth • G=E

  30. Renewable resources • Maximum sustainable yield (MSY) • Complex dynamics - stock possibly grows drastically with decreased harvest

  31. Renewable Resources Equilibrium and stability • Do populations ever reach an equilibrium? • Are growth curves ever smooth? • Can populations be stable without an equilibrium?

  32. Renewable Resources • A) Dampened oscillations - falling amplitude • B) Constant oscillations - constant amplitude • C) Exploding oscillations - increasing amplitude - collapse

  33. Renewable resources Population interactions • No species lives in isolation • Predator prey (Lotka Volterra) • Competition • Symbiosis

  34. Renewable resources • Resiliency - ability of a system to bounch back after a disturbance • What determines resiliency? • Diversity? • Keystone species? • The rivets analogy

  35. The Big Picture • Waste: definition “Unwanted” byproducts of economic activity • Conservation of matter - always waste into the environment

  36. Waste • Accumulation of waste • St = St-1 + W - D • W: inflow • D: assimilation • Function of S • D = d*S • With d from 0-1 • Recycling or reuse possible, intercepts flow • Industrial symbiosis

  37. Waste Damage relationships • Biomagnification • Increasing concentration as going up food-chain • DDT • Synergy: Two pollutants interact and create something worse - e.g. smog

  38. Waste Damage relationships • Dose response curves • Relationship between exposure and damage • Thresholds • Lagged response

  39. Amenity services • Pleasure of going to a park • Pleasure to run in a forest • Simply knowing that nature exists

  40. Amenity services • Sustainable amenity service • Relationship between the quality of the service and the number of visitors

  41. Life Support Services • Services that make human life possible • Purification of air and water • Stabilization and moderation of climate • Nutrient cycling • Pollination of plants

  42. Interactions • Various services interact e.g. • Inflow of fossil fuels creates an outflow of carbon • Increasing temperatures, affecting other services

  43. Summary • Various services received from nature • Valuable (33 trillion $) • Very complex dynamics • Non-linear movements • Lags • Thresholds • Interactions • Creates massive Uncertainty

  44. Threats to Sustainability • Resource depletion • Waste accumulation • Loss of resiliency • What to do? • Why those threats?

  45. Classical causes of Environmental degradation!

  46. Markets and efficiency • Market: • Is a system in which buyers and sellers of something interact. • Something is exchanged in return for money • Illustrates individual preferences

  47. Demand and Supply Demand function: • Describes the relationship between the quantity the buyers buy and price of the product • Inverse relationship • Qd = 30 - 6P • Maximum price – choke price • Usually not linear

  48. Elasticity • Describes how quantity changes as price changes. 1=elastic 0=inelastic

  49. Elasticity • Elasticity of demand (Ed) • Elasticity of supply • Cross elasticity of demand or supply • Income elasticity (IE) • Inferior goods (IE negative, Ed negative) • Normal goods (IE positive, Ed negative) • Luxury goods (IE positive, Ed positive)

  50. Supply function • Describes the relationship between the quantity that sellers are ready to sell and price • Upward sloping

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