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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