Transcript The Natural Environment and The Human Economy:

The Natural Environment and The Human Economy:
The Neoclassical Economic Perspective
Fundamental Assumptions
• Environmental (natural) resources are “essential” factors of
production. A certain minimum amount of natural resources is needed
to produce goods and services.
• Environmental resources are of economic concern to the extent that
they are scarce.
• The economic value of a natural resource (including the services of the
natural ecosystems) is determined by consumers’ preferences, and
these preferences are best expressed by a freely operating private
market system.
• Market price can be used as a measure (indicator) of resource scarcity.
Price ($)
S
Pe
D
Qe
Membe rship at a golf course
Figure 1.2 Demand and supply and market clearing (equilibrium) price, Pe ,
for a local gulf club members hip. The service of a local gulf club is scarce
because at zero price quantity de manded far exceeds quantity s upplied—
creating a shortage.
Price
($)
D
S
Availability of oxygen from the
ambient air
Figure 1.3 Demand and supply of oxygen. Oxygen is treated as a
free good because at zero price quantity supply exceeds quantity
demanded—a surplus.
Price
($)
0
Time
Figure 1.4: Long-run price trend of a hypothetical natural
resource. A declining price trend over time indicates increasing
abundance of the resource under consideration.
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• In both the production and the consumption sectors of an
economy, a specific natural resource can always be replaced
(partially or fully) by the use of other resources that are either
man-made (manufactured) or natural.
• Technological advances continually augment the scarcity of
natural resources.
K
K
K
A
Q0 = Isoquant
B
C
N
N
(A)
Q0
(B)
K0
Q0
N0
N
(C)
Figure 1.5: A graphical illustration of factor substitution possibilities
K
A
K0
K1
Q0
B
Q0
0
N1
N0
N
Figure 1.6: A graphical illustration of advances in production techniques
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• Nothing is lost in treating the human economy
in isolation of the natural ecosystems (the
physical, chemical and biological surroundings
that humans and other living species depend on
as life support). That is, the natural ecosystem
is treated as being outside the human economy
and exogenously determined.
An Economy
-HouseholdsConsumers of goods
Owners of Resources
Factor
Market
S.I.
Product
Market
-FirmsProducers of Goods
Emp loyers of resources
Figure 1.7: Circular flow diagram of the economic process. An economy is composed of a
flow of commodities (in the form of basic resources, goods and services); social
institutions primarily markets and legal tende rs; and people (broadly identifies as
households and firms).
IMPLICATIONS
• The human economy is composed of three
entities: people, social institutions, and
commodities.
• Since the value of resources is assumed to
emanate exclusively from their usefulness
to human, the economic notion of resource
is strictly anthropocentric, i.e., basic
resources have no intrinsic value.
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• In the production sector of an economy, what
is being continually created is value. Similarly,
in the consumption sector, what is continually
being created is an influx of utility from the
final use (consumption) of good and services.
Hence, in the human economy, matter and
energy from the natural environment are
continually transformed to create an
immaterial (psychic) flow of value and utility.
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• No explicit consideration is given to the extent
in which the material flow (commodities) in
the human economy is dependent on the
natural ecosystems. More specifically, the
natural ecosystems are simply viewed as a
“gift of nature” ready to be exploited by
humans and in strict accordance of the laws of
demand and supply.