Exploring an Economic Model towards Environmental Sustainability

Yih-da Edward Hsieh

People often draw the conclusion that overpopulation is the paramount force behind environmental degradation. They follow an assumption that higher population growth results in more people generating more pollution. Quite simply and as a generality, two persons cause more damage than one person alone. Although this assumption is valid and applies in certain circumstances, population growth fails to sufficiently address other factors affecting the environment, such as the development harmful technology. What appears to be a better indicator of environmental degradation is economic growth or the growth in Gross Domestic Product (GDP). GDP not only factors population growth in its calculation, but also the standard of living and the state of technology. For example, as opposed to making a generalization, as previously discussed, that “more people equals more pollution,” an economic analysis of the “environmental situation” in its entirety would provide a better representation of how the situation came to be. Slower population growth normally results in a rising per capita income, which influences individual demand for goods and services. The implication of an increased per capita income is that individuals now can and will demand more goods, such as gasoline and other environmentally harmful products. Therefore, in two economies with the same GDP, it is rash to assume that the one with more people will undoubtedly cause more harm to the environment. And therefore, the current hype over population control seems too elementary, if not unfounded, as concerns should involve the management of the size and composition of GDP when dealing with environmental control.

In order to manage the structure and growth of GDP, it is important to understand the factors that influence it. According to the neoclassical growth model, the long-run economy develops according to the following equation:

where the change in GDP equals the growth rate of capital (g k) plus the growth rate of the labor force (g n) plus the state of technology (solow residual). Although proper administration of the economy seems to have the most influence over environmental degradation, it does not throw population growth management out of the picture. Assuming the maintenance of full employment, the size of the population is directly related to the size of the labor force, which in turn is directly related to GDP. Population may also have an influence on technological progress, but its actual effect is widely debated. An increasing population should suggest an increasing number of talented individuals who advance technology; however, population growth also burdens the education system and retards the development of such talented individuals. Even though population growth has an unclear effect on technology, it does directly affect GDP through g n. So, while the size and composition of GDP is of utmost concern, population, capital, and technological growth are still a necessary consideration when managing the economy.

Management of the economy also requires an understanding of how the economy interacts with the environment. Economic activity relates to the environment through the consumption and production of goods and services. Growing economic activity requires larger inputs of energy and material, thereby generating more waste by-products. However, there is another aspect of the economy where higher income leads to an increased demand for goods and services that are less materially intensive and more environmentally friendly. Combining these two opposing practices when faced with economic and per capital income growth, results in the Kuznet’s inverted-U relationship between environmental degradation and economic growth. Basically, at lower levels of development, environmental degradation is limited by subsistence economic activity. As agriculture, resource extraction, and industrialization take off, resource depletion and waste generation accelerate. But, at higher levels of development, there is a shift towards information-based industries, more efficient technologies, and increased demand for environmental quality cause a decline in environmental degradation (Panayotou, 2003).

With proper economic management, societies can facilitate a shift towards the right side of the Kuznet’s curve. There are essentially two forms of thought pertaining to this process, the economist’s view and the ecologist’s view. The ecologist believes that to maintain biological survival, there must be an end to growth or a sharp curtailment of it. He focuses the left side of the Kuznet’s curve, where any economic growth directly harms the environment. Therefore, the ecologist adopts an absolutist attitude virtually banning pollution, and incidentally supports economic growth through top-down administration in an effort to save the environment. The economist, on the other hand, believes that economic growth is necessary for social survival. That it is the structure, not the existence of growth, which is the root cause of environmental degradation. Through trade-offs and careful cost-benefit analysis, a balance between growth and the environment is created, such that the costs (less supply of goods and services) equals the benefits (better environment). This tradeoff between economic growth and the environment would be implemented through a price system where price tags are put on the use of natural resources. (Oates et al. 2001)

Whether the economist’s or the ecologist’s economic ideology should be implemented is highly controversial. In my opinion, the economist’s take on environmental preservation appears to be the most feasible and socially friendly. While increased consumption and production may have deleterious effects on the environment, the ecologist’s zero economic growth is completely unrealistic. People possess an innate desire to increase knowledge and find easier ways of doing things. In addition, productivity or output per worker will continue to increase as we get smarter and more efficient. And therefore, returning to the neoclassical growth model, the solow residual is increasing due to inevitable advances in technology and g k should remain the same, assuming we don’t destroy or construct new factories. Thus, it appears that the only way to maintain zero growth in Y is a decrease in g n through a shortening of the average workweek. In addition, zero growth policy only prevents the rate of environmental degradation and does nothing to decrease it. We would have to actively restore the environment through costly steps, without the necessary growth to fund these measures, otherwise reduce the standard of living to pay for a cleaner environment (Hodgson, 1975). Unsurprisingly, these limitations on work and a decreased standard of living are socially and politically unreasonable, making the zero growth idea unattractive.

Unlike the ecologist, the economist’s view seeks to foster economic growth by using the market system, rather than a government regulator, to solve the problem. With respect to appropriable resources, such as fossil fuels and minerals, the economy is already regulating their usage. Historically, the rising prices of fossil fuels provided strong incentives for conserving remaining supplies and developing substitute materials and processes. The real problem arises with public goods, such as air and water, which can be exploited at no cost. However, the market system can also resolve this situation by placing a price tag on these public resources and virtually charging for them. Not only will this force producers and consumers to limit their usage of these resources, but stimulate research towards to the development of more efficient ways of utilizing resources and pollution-abating technology.

Unfortunately, there are some areas of concern with implementing such an expansive market system. The nature of some public goods and services make their monetary values hard to approximate. For example, placing a cost on the water runoff produced by each industrial or residential establishment is rather tricky. The negative monetary value of water runoff is hard to judge due to the nonlinearity of its cost curve; there is little or no cost when the discharges stay within the absorptive capacity of the environment, but a sudden rise in the cost when the concentration and accumulation exceed that capacity. However, governments have successfully dealt with this issue in the past. Solid waste disposal follows the same exponential cost curve and have been effectively “priced” by the government. Another issue arises when the exploitation of some resources cause irreparable damage, such as lead poisoning effect on humans or DDT’s effect on bald eagles. In this case, I make an exception to the economist’s model, and support the idea of banning all usage of such harmful substances. A ban on lead is different than the zero growth policy because it has different social and political implications. People will be more receptive to restrictions because lead is blatantly affecting their health and lifestyle.

Since the market system appears to have few disadvantages, the next logical question is why governments have not implemented such a system. Marden Hodgson in Population, Environment, and the Quality of Life, provides an explanation that I failed to consider in this brief review of economic models with environment sustainability. While the benefits of cleaner air may be attractive to members of the middle and upper class, the lower class would find the impact of increased costs much greater than any benefits of a nicer environment. For the market system to operate, the government would have to first resolve the issue of unequal incomes and social stratification.


Works Cited

Panayotou, Theodore. Feb. 2003. Economic Growth and the Environment. United Nations Economic Commission for Europe. 32: 45-72.

Hodgson, Marden. 1975. Population, Environment, and the Quality of Life. New York: AMS Press, Inc.

Oates, Wallace E., and Portney, Paul R. Nov. 2001. The Political Economy of Environmental Policy. Resources for the Future.

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last updated 4/26/06