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Ecological Economics

Ecological Economics

Conventional and ecological economics

Ecological goods and services

Use of renewable resources by humans

Ecologically sustainable systems


Conventional and ecological economics

Economics is a social science that examines the allocation of scarce resources among various potential uses that are in competition with each other and attempts to predict and understand the patterns of consumption of goods and services by individuals and society. A core assumption of conventional economics is that individuals and corporations seek to maximize their profit within the marketplace.

In conventional economics, the worth of goods or services are judged on the basis of their direct or indirect utility to humans. In almost all cases, the goods and services are assigned value (that is, they are valuated) in units of tradable currency, such as dollars. This is true of: (1) manufactured goods such as televisions, automobiles, and buildings, (2) the services provided by people like farmers, doctors, teachers, and baseball players, and (3) all natural resources that are harvested and processed for use by humans, including nonrenewable resources such as metals and fossil fuels, and renewable resources such as agricultural products, fish, and wood.

Ecological economics differs from conventional economics in attempting to value goods and services in ways that are not only based on their usefulness to humans, that is, in a non-anthropocentric fashion. This means that ecological economics attempts to take into account the many environmental and social costs associated with the depletion of natural resources, as well as the degradation of ecological systems through pollution, extinction, and other environmental damages. Many of these important problems are associated with the diverse economic activities of humans, but the degradation is often not accounted for by conventional economics. From the environmental perspective, the most important problem with conventional economics has been that the marketplace has not recognized the value of important ecological goods and services. Therefore, their degradation has not been considered a cost of doing business. Ecological economics attempts to find ways to consider and account for the real costs of environmental damage.

Ecological goods and services

Humans have an absolute dependence on a continuous flow of natural resources to sustain their economic systems. There are two basic types of natural resources: nonrenewable and renewable. By definition, sustainable economic systems and sustainable human societies cannot be based on the use of non-renewable resources, because these are always depleted by usage, a process referred to as mining. Ultimately, sustainable systems can only be supported by the use of renewable resources, which if harvested and managed wisely, can be available forever. Because most renewable resources are the goods and services of ecosystems, economic and ecological systems are highly interdependent.

In theory, renewable natural resources can sustain harvesting indefinitely. However, to achieve a condition of sustainable usage, the rate of harvesting must be smaller than the rate of renewal of the resource. For example, flowing water can produce hydroelectricity or for irrigation as long as the usage does not exceed the capacity of the landscape to yield water.

Similarly, biological natural resources such as trees and hunted fish, waterfowl, and deer can be harvested to yield valuable products, as long as the rate of cropping does not exceed the renewal of the resource. These are familiar examples of renewable resources, partly because they all represent ecological goods and services that are directly important to human welfare, and can be easily valuated in terms of dollars.

Unlike conventional economics, ecological economics also considers other types of ecological resources to be important, even though they may not have direct usefulness to humans, and they are not valuated in dollars. Because the marketplace does not assign value to these resources, they can be degraded without conventional economic cost even though this results in ecological damage and ultimately harms society. Some examples of ecological resources that markets consider to be free goods and services include:

(1) Nonexploited species of plants and animals that are not utilized as an economic resource, but are nevertheless important because they may have undiscovered uses to humans (perhaps as new medicines or foods), or are part of the aesthetic environment, or they have intrinsic value that exists even if they are not useful to humans;

(2) Ecological services such as control over erosion, provision of water and nutrient cycling, and cleansing of pollutants emitted into the environment by humans, as occurs when growing vegetation removes carbon dioxide from the atmosphere and when microorganisms detoxify chemicals such as pesticides.

Use of renewable resources by humans

As noted above, sustainable economic systems can only be based on the wise use of renewable resources.

However, the most common way in which humans have used potentially renewable resources is by overharvesting, that is, exploitation that exceeds the capacity for renewal so that the stock is degraded and sometimes made extinct. In other words, most use of potentially renewable resources has been by mining, or use as if it were a nonrenewable resource.

There are many cases of the mining and degradation of potentially renewable resources, from all parts of the world and from all human cultures. In a broad sense, this syndrome is represented by extensive deforestation, collapses of wild fisheries, declines of agricultural soil capability, and other resource degradations. The extinctions of the dodo, great auk, Stellers sea cow, and passenger pigeon all represent overhunting so extreme that it took potentially renewable resources to biological extinction.

The overhunting of the American bison and various species of seals and whales all represent biological mining that took potentially renewable resources beyond the brink of economic extinction, so that it was no longer profitable to exploit the resource.

These and many other cases of the degradation of renewable resources occurred because conventional economics did not value resource degradation properly. Consequently, profit was only determined on the basis of costs directly associated with catching and processing the resource, and not on the costs of renewal and depletion. Similarly, conventional economics considers non-valuated goods and services such as biodiversity, soil conservation, erosion control, water and nutrient cycling, and cleansing air and water of pollutants to be free resources so that no costs are associated with their degradation.

Ecologically sustainable systems

The challenge of ecological economics is to design systems of resource harvesting and management that are sustainable, so that human society can be supported forever without degrading the essential, ecological base of support.

Ecologically sustainable systems must sustain two clusters of values: (1) the health of economically valuated, renewable resources, such as trees, fish, and agricultural soil capability, and (2) acceptable levels of ecological goods and services that are not conventionally valuated. Therefore, a truly sustainable system must be able to yield natural resources that humans need, and to provide that sustenance forever. However, the system must also provide services related to clean air and water and nutrient cycling, while also sustaining habitat for native species and their natural ecological communities.

To achieve this goal, ecologically sustainable systems will have to be based on two ways of managing ecosystems: (1) as working ecosystems, and (2) as ecological reserves (or protected areas). The working ecosystems will be harvested and managed to yield sustainable flows of valuated resources, such as forest products, hunted animals, fish, and agricultural commodities. However, some environmental costs will be associated with these uses of ecosystems.

For example, although many species will find habitats available on working lands to be acceptable to their purposes, other native species and most natural communities will be at risk on working landscapes. To sustain the ecological values that cannot be accommodated by working ecosystems, a system of ecological reserves will have to be developed. These reserves must be designed to ensure that all native species are sustained at viable population levels, that there are viable areas of natural ecosystems, and that ecosystems will be able to supply acceptable levels of important services, such as control of erosion, nutrient cycling, and cleansing the environment of pollution.

So far, ecologically sustainable systems of the sort described above are no more than a concept: None exist today. In fact, humans mostly exploit the potentially renewable goods and services of ecosystems in a nonsustainable fashion. Clearly this is a problem, because humans rely on these resources to sustain their economy. Ecological economics provides a framework for the design of better, ecologically sustainable systems of resource use. However, it remains to be seen whether human society will be wise enough to adopt these sustainable methods of organizing their economy and their interactions with ecosystems.

See also Alternative energy sources; Ecosystem; Sustainable development.



Costanza, R. Ecological Economics: The Science and Management of Sustainability. New York: Columbia University Press, 1991.

Freedman, B. Environmental Ecology. 2nd ed. San Diego: Academic Press, 1995.

Jansson, A.M., M. Hammer, C. Folke, and R. Costanza, eds. Investing in Natural Capital: The Ecological Economics Approach to Sustainability. Washington, DC: Island Press, 1994.

Shortle, J.S., and Ronald C. Griffin, eds. Irrigated Agriculture and the Environment. Northampton, MA: Edward Elgar, 2001.


Hooke, Roger L. On the History of Humans as Geomorphic Agents. Geology, vol. 28, no. 9 (September 2000): 843-846.


International Society for Ecologicl Economics. Ecological Economics Encyclopedia <> (accessed November 21, 2006).

Bill Freedman

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Ecological Economics

Ecological economics

Although ecology and economics share the common root "eco-" (from Greek Oikos or household), these disciplines have tended to be at odds with each other in recent years over issues such as the feasibility of continued economic growth and the value of natural resources and environmental services.

Economics deals with resource allocation or trade-offs between competing wants and needs. Economists ask, "what shall we produce, for whom, or for what purpose?" Furthermore, they ask, "when and in what manner should we produce these goods and services?" In mainstream, neoclassical economics, these questions are usually limited to human concerns: what will it cost to obtain the things we desire and what benefits will we derive from them?

According to classical economists, the costs of goods and services are determined by the interaction of supply and demand in the marketplace. If the supply of a particular commodity or service is high but the demand is low, the price will be low. If the commodity is scarce but everyone wants it, the price will be high. But high prices also encourage invention of new technology and substitutes that can satisfy the same demands. The cyclic relationship of scarce resources and development of new technology or new materials, in this view, allows for unlimited growth. And continued economic growth is seen as the best, perhaps the only, solution to poverty and environmental degradation .

Ecologists, however, view the world differently than economists. From their studies of the interactions between organisms and their environment , ecologists see our world as a dynamic, but finite system that can support only a limited number of humans with their demands for goods and services. Many ecological processes and the nonrenewable natural resources on which our economy is based have no readily available substitutes. Further, much of the natural world is being degraded or depleted at unsustainable rates. Ecologists criticize the narrow focus of conventional economics and its faith in unceasing growth, market valuation, and endless substitutability. Ecologists warn that unless we change our patterns of production and consumption to ways that protect natural resources and ecological systems, we will soon be in deep trouble.

Ecological economics

Ecological or environmental economics is a relatively new field that introduces ecological understanding into our economic discourse. It takes a transdisciplinary, holistic, contextual, value-sensitive approach to economic planning and resource allocation. This view recognizes our dependence on the natural world and the irreplaceable life-support services it renders. Rather than express values solely in market prices, ecological economics pays attention to intangible values, nonmarketed resources, and the needs and rights of future generations and other species . Issues of equitable distribution of access to resources and the goods and services they provide need to be solved, in this perspective, by means other than incessant growth.

Where neoclassical economics sees our environment as simply a supply of materials, services, and waste sinks, ecological economics regards human activities as embedded in a global system that places limits on what we can and cannot do. Uncertainty and dynamic change are inherent characteristics of this complex natural system. Damage caused by human activities may trigger sudden and irreversible changes. The precautionary principle suggests that we should leave a margin for error in our use of resources and plan for adaptive management policies.

Natural capital

Conventional economists see wealth generated by human capital (human knowledge, experience, and enterprise) working with manufactured capital (buildings, machines, and infrastructure) to transform raw materials into useful goods and services. In this view, economic growth and efficiency are best accomplished, by increasing the throughput of raw materials extracted from nature . Until they are transformed by human activities, natural resources are regarded as having little value. In contrast, ecological economists see natural resources as a form of capital equally important with human-made capital. In addition to raw materials such as minerals, fuels, fresh water, food, and fibers, nature provides valuable services on which we depend. Natural systems assimilate our wastes and regulate the earth's energy balance, global climate , material recycling , the chemical composition of the atmosphere and oceans, and the maintenance of biodiversity . Nature also provides aesthetic, spiritual, cultural, scientific and educational opportunities that are rarely given a monetary value but are, nevertheless, of great significance to many of us.

Ecological economists argue that the value of natural capital should be taken into account rather than treated as a set of unimportant externalities. Our goal, in this view, should be to increase our efficiency in natural resource use and to reduce its throughput. Harvest rates for renewable resources (those like organisms that regrow or those like fresh water that are replenished by natural processes) should not exceed regeneration rates. Waste emissions should not exceed the ability of nature to assimilate or recycle those wastes. Nonrenewable resources (such as minerals) may be exploited by humans, but only at rates equal to the creation of renewable substitutes.

Accounting for natural capital

Where neoclassical economics seeks to maximize present value of resources, ecological economics calls for recognition of the real value of those resources in calculating economic progress. A market economist, for example, once argued that the most rational management policy for whales was to harvest all the remaining ones immediately and to invest the proceeds in some profitable business. Whales reproduce too slowly, he claimed, and are too dispersed to make much money in the long run by allowing them to remain wild. Ecologists reject this limited view of whales as only economic units of production. They see many other values in these wild, beautiful, sentient creatures. Furthermore whales may play important roles in marine ecology that we don't yet fully understand.

Ecologists are similarly critical of Gross National Product (GNP) as a measure of national progress or wellbeing. GNP measures only the monetary value of goods and services produced in a national economy. It doesn't attempt to distinguish between economic activities that are beneficial or harmful. People who develop cancer from smoking, for instance, contribute to the GNP by running up large hospital bills. The pain and suffering they experience doesn't appear on the balance sheets. When calculating GNP in conventional economics, a subtraction is made, for capital depreciation in the form of wear and tear on machines, vehicles, and buildings used in production, but no account is made for natural resources used up or ecosystems damaged by that same economic activity.

Robert Repeto of the World Resources Institute estimates that soil erosion in Indonesia reduces the value of crop production about 40% per year. If natural capital were taken into account, total Indonesian GNP would be reduced by at least 20% annually. Similarly, Costa Rica experienced impressive increases in timber, beef, and banana production between 1970 and 1990. But decreased natural capital during this period represented by soil erosion, forest destruction, biodiversity losses, and accelerated water runoff add up to at least $4 billion, or about 25%, of annual GNP. Ecological economists call for a new System of National Accounts that recognizes the contribution of natural capital to economic activity.

Valuation of natural capital

Ecological economics requires new tools and new approaches to represent nature in GNP. Some categories in which natural capital might fit include:

  • use values: the price we pay to use or consume a resource
  • option value: preserving options for the future
  • existence value: those things we like to know still exist even though we may never use or even see them
  • aesthetic value: things we appreciate for their beauty
  • cultural value: things important for cultural identity
  • scientific and educational value: information or experience-rich aspects of nature.

How can we measure this value of natural resources and ecological services not represented in market systems? Ecological economists often have to resort to "shadow pricing" or other indirect valuation methods for natural resources. For instance, what is the worth of a day of canoeing on a wild river ? We might measure opportunity costs such as how much we pay to get to the river or to rent a canoe. The direct out-of-pocket costs might represent only a small portion, however, of what it is really worth to participants. Another approach is contingent valuation in which potential resource users are asked, "how much would you be willing to pay for this experience?" or "what price would you be willing to accept to sell your access or forego this opportunity?" These approaches are controversial because people may report what they think they ought to pay rather than what they would really pay for these activities.

Carrying capacity and sustainable ddevelopment

Carrying capacity is the maximum number of organisms of a particular species that a given area can sustainably support. Where neoclassical economists believe that technology can overcome any obstacle and that human ingenuity frees us from any constraints on population or economic growth, ecological economists argue that nature places limits on us just as it does on any other species.

One of the ultimate limits we face is energy. Because of the limits of the second law of thermodynamics, whenever work is done, some energy is converted to a lower quality, less useful form and ultimately is emitted as waste heat. This means that we require a constant input of external energy. Many fossil fuel supplies are nearing exhaustion, and continued use of these sources by current technology carries untenable environmental costs. Vast amounts of solar energy reach the earth, and this solar energy already drives the generation of all renewable resources and ecological services. By some calculations, humans now control or directly consume about 40% of all the solar energy reaching the earth. How much more can we monopolize for our own purposes without seriously jeopardizing the integrity of natural systems for which there is no substitute? And even if we had an infinite supply of clean, renewable energy , how much heat can we get rid of without harming our environment?

Ecological economics urges us to restrain growth of both human populations and the production of goods and services in order to conserve natural resources and to protect remaining natural areas and biodiversity. This does not necessarily mean that the billion people in the world who live in absolute poverty and cannot, on their own, meet the basic needs for food, shelter, clothing, education, and medical care are condemned to remain in that state. Ecological economics calls for more efficient use of resources and more equitable distribution of the benefits among those now living as well as between current generations and future ones.

A mechanism for attaining this goal is sustainable development , that is, a real improvement in the overall welfare of all people on a long-term basis. In the words of the World Commission on Economy and Development, sustainable development means "meeting the needs of the present without compromising the ability of future generations to meet their own needs." This requires increased reliance on renewable resources in harmony with ecological systems in ways that do not deplete or degrade natural capital. It doesn't necessarily mean that all growth must cease. There are many human attributes such as knowledge, kindness, compassion, cooperation, and creativity that can expand infinitely without damaging our environment. While ecological economics offers a sensible framework for approaches to resource use that can be in harmony with ecological systems over the long term, it remains to be seen whether we will be wise enough to adopt this framework before it is too late.

[William P. Cunningham Ph.D. ]



Jansson, A.M., et al., eds. Investing in Natural Capital: the Ecological Economics Approach to Sustainability. Washington, D.C.: Island Press, 1994.

Krishnan, R., J.M. Harris, and N.R. Goodwin, eds. A Survey of Ecological Economics. Washington, D.C.: Island Press, 1995.

Prugh, T. Natural Capital and Human Economic Survival. Solomons, MD: International Society for Ecological Economics, 1995.

Turner, R.K., D. Pearce, and I. Bateman. Environmental Economics: an Elementary Introduction. Baltimore: The Johns Hopkins University Press, 1993.

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Environmental Economics

Environmental economics

Environmental economics is a relatively new field, but its roots go back to the end of the nineteenth century when economists first discussed the problem of externality . Economic transactions have external effects which are not captured by the price system. Prime examples of these externalities are air pollution and water pollution . The absence of a price for nature's capacity to absorb wastes has an obvious solution in economic theory. Economists advocate the use of surrogate prices in the form of pollution taxes and discharge fees. The non-priced aspect of the transaction then has a price, which sends a signal to the producers to economize on the use of the resource.

In addition to the theory of externalities, economists have recognized that certain goods, such as those provided by nature , are common property. Lacking a discrete owner, they are likely to be over-utilized. Ultimately, they will be depleted. Few will be left for future generations , unless common property goods like the air and water are protected.

Besides pollution taxes and discharge fees, economists have explored the use of marketable emission permits as a means of rectifying the market imperfection caused by pollution. Rather than establishing a unit charge for pollution, government would issue permits equivalent to an agreed-upon environmental standard. Holders of the permits would have the right to sell them to the highest bidder. The advantage of this system, wherein a market for pollution rights has been established, is that it achieves environmental quality standards. Under a charge system, trial-and-error tinkering would be necessary to achieve the standards.

Besides discharge fees and markets for pollution rights, economists have advocated the use of cost-benefit analysis in environmental decision making. Since control costs are much easier to measure than pollution benefits, economists have concentrated on how best to estimate the benefits of a clean environment . They have relied on two primary means of doing so. First, they have inferred from the actual decisions people make in the marketplace what value they place on a clean and healthy environment. Second, they have directly asked people to make trade-off choices. The inference method might rely on residential property values, decomposing the price of a house into individual attributes including air quality , or it might rely on the wage premium risky jobs enjoy. Despite many advances, the problem of valuing environmental benefits continues to be controversial with special difficulties surrounding the issues of quantifying the value of a human life, recreational benefits, and ecological benefits including species and habitat survival.

For instance, the question of how much a life is worth is repellent and absurd since human worth cannot be truly captured in monetary terms. Nonetheless it is important to determine the benefits for cost-benefit purposes. The costs of reducing pollution often are immediate and apparent, while the benefits are far-off and hard to determine. So, it is important to try to gauge what these benefits might be worth.

Economists call for a more rational ordering of risks. The funds for risk reduction are not limitless, and the costs keep mounting. Risks should be viewed in a detached and analytical way. Polls suggest that Americans worry most about such dangers as oil spills , acid rain , pesticides, nuclear power , and hazardous wastes, but scientific risk assessments show that these are only low or medium-level dangers. The greater hazards come from radon , lead , indoor air pollution, and fumes from chemicals such as benzene and formaldehyde. Radon, the odorless gas that naturally seeps up from the ground and is found in people's homes, causes as many as 20,000 lung cancer deaths per year, while hazardous waste dumps cause at most 500 cancer deaths. Yet the Environmental Protection Agency (EPA) spends over $6 billion a year to clean up hazardous waste sites while its spends only $100 million a year for radon protection. To test a home for radon costs about $25, and to clean it up if it is found contaminated costs $1,000. To make the entire national housing stock free from radon would cost a few billion dollars. In contrast, projected spending for cleaning up hazardous waste sites is likely to exceed $500 billion despite the fact that only about 11 percent of such sites pose a measurable risk to human health.

Greater rationality would mean that less attention would be paid to some risks and more attention to others. For instance, scientific risk assessment suggests that sizable new investments will be needed to address the dangers of ozone layer depletion and greenhouse warming. Ozone depletion is likely to result in 100,000 more cases of skin cancer by the year 2050. Global warming has the potential to cause massive catastrophe.

For businesses, risk assessment provides a way to allocate costs efficiently. They are increasingly using it as a management tool. To avoid another accident like Bhopal, India , Union Carbide has set up a system by which it rates its plants "safe," "made safer," or "shut down." Environmentalists, on the other hand, generally see risk assessment as a tactic of powerful interests used to prevent regulation of known dangers or permit building of facilities where there will be known fatalities. Even if the chances of someone contracting cancer and dying is only one in a million, still someone will perish, which the studies by risk assessors indeed document. Among particularly vulnerable groups of the population (allergy sufferers exposed to benzene for example) the risks are likely to be much greater, perhaps as great as one fatality for every 100 persons. Environmentalists conclude that the way economists present their findings is too conservative. By treating everyone alike, they overlook the real danger to particularly vulnerable people. Risk assessment should not be used as an excuse for inaction.

Environmentalists have also criticized environmental economics for its emphasis on economic growth without considering the unintended side-effects. Economists need to supplement estimates of the economic costs and benefits of growth with estimates of the effects of that growth that cannot be measured in economic terms. Many environmentalists also believe that the burden of proof should rest with new technologies, in that they should not be allowed simply because they advance material progress. In affluent societies especially, economic expansion is not necessary.

Growth is promoted for many reasons to restore the balance of payments, to make the nation more competitive, to create jobs, to reduce the deficit, to provide for the old and sick, and to lessen poverty. The public is encouraged to focus on statistics on productivity, balance of payments, and growth, while ignoring the obvious costs. Environmental groups, on the other hand, have argued for a steady-state economy in which population and per capita resource consumption stabilize. It is an economy with a constant number of people and goods, maintained at the lowest feasible flows of matter and energy. Human services would play a large role in a steady-state economy because they do not require much energy or material throughput and yet contribute to economic growth. Environmental clean-up and energy conservation also would contribute, since they add to economic growth while also having a positive effect on the environment.

Growth can continue, according to environmentalists, but only if the forms of growth are carefully chosen. Free time, in addition, would have to be a larger component of an environmentally-acceptable future economy. Free time removes people from potentially harmful production. It also provides them with the time needed to implement alternative production processes and techniques, including organic gardening , recycling , public transportation , and home and appliance maintenance for the purposes of energy conservation .

Another requirement of an environmentally acceptable economy is that people accept a new frugality, a concept that also has been labeled joyous austerity, voluntary simplicity, and conspicuous frugality.

Economists represent the environment's interaction with the economy as a materials balance model. The production sector, which consists of mines and factories, extracts materials from nature and processes them into goods and services. Transportation and distribution networks move and store the finished products before they reach the point of consumption. The environment provides the material inputs needed to sustain economic activity and carries away the wastes generated by it. People have long recognized that nature is a source of material inputs to the economy, but they have been less aware that the environment plays an essential role as a receptacle for society's unwanted by-products. Some wastes are recovered by recycling, but most are absorbed by the environment. They are dumped in landfills, treated in incinerators, and disposed of as ash. They end up in the air, water, or soil .

The ultimate limits to economic growth do not come only from the availability of raw materials from nature. Na ture's limited capacities to absorb wastes also set a limit on the economy's ability to produce. Energy plays a role in this process. It helps make food, forest products, chemicals, petroleum products, metals, and structural materials such as stone, steel, and cement. It supports materials processing by providing electricity, heating, and cooling services. It aids in transportation and distribution. According to the law of the conservation of energy, the material inputs and energy that enter the economy cannot be destroyed. Rather they change form, finding their way back to nature in a disorganized state as unwanted and perhaps dangerous by-products.

Environmentalists use the laws of physics (the notion of entropy) to show how society systematically dissipates low entropy, highly concentrated forms of energy by converting it to high entropy, little concentrated waste that cannot be used again except at very high cost. They project current resource use and environmental degradation into the future to demonstrate that civilization is running out of critical resources. The earth cannot tolerate additional contaminants. Human intervention in the form of technological innovation and capital investment complemented by substantial human ingenuity and creativity is insufficient to prevent this outcome unless drastic steps are taken soon. Nearly every economic benefit has an environmental cost, and the sum total of the costs in an affluent society often exceed the benefits. The notion of carrying capacity is used to show that the earth has a limited ability to tolerate the disposal of contaminants and the depletion of resources.

Economists counter these claims by arguing that limits to growth can be overcome by human ingenuity, that benefits afforded by environmental protection have a cost, and that government programs to clean up the environment are as likely to fail as the market forces that produce pollution. The traditional economic view is that production is a function of labor and capital and, in theory, that resources are not necessary since labor and/or capital are infinitely substitutable for resources. Impending resource scarcity results in price increases which lead to technological substitution of capital, labor, or other resources for those that are in scarce supply. Price increases also create pressures for efficiency-in-use, leading to reduced consumption. Thus, resource scarcity is reflected in the price of a given commodity. As resources become scarce, their prices rise accordingly. Increases in price induce substitution and technological innovation.

People turn to less scarce resources that fulfill the same basic technological and economic needs provided by the resources no longer available in large quantities. To a large extent, the energy crises of the 1970s (the 1973 price shock induced by the Arab oil embargo and 1979 price shock following the Iranian Revolution) were alleviated by these very processes: higher prices leading to the discovery of additional supply and to conservation. By 1985, energy prices in real terms were lower than they were in 1973.

Humans respond to signals about scarcity and degradation. Extrapolating past consumption patterns into the future without considering the human response is likely to be a futile exercise, economists argue. As far back as the end of the eighteenth century, thinkers such as Thomas Malthus have made predictions about the limits to growth, but the lesson of modern history is one of technological innovation and substitution in response to price and other societal signals, not one of calamity brought about by resource exhaustion. In general, the prices of natural resources have been declining despite increased production and demand. Prices have fallen because of discoveries of new resources and because of innovations in the extraction and refinement process.

See also Greenhouse effect; Trade in pollution permits; Tragedy of the Commons

[Alfred A. Marcus ]



Ekins, P., M. Hillman, and R. Hutchinson. The Gaia Atlas of Green Economics. New York: Doubleday, 1992.

Kneese, A., R. Ayres, and R. D'Arge. Economics and the Environment: A Materials Balance Approach. Washington, DC: Resources for the Future, 1970.

Marcus, A. A. Business and Society: Ethics, Government, and the World Economy. Homewood, IL: Irwin Publishing, 1993.


Cropper, M. L., and W. E. Oates. "Environmental Economics." Journal of Economic Literature (June 1992): 675-740.

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