In this Economics Society gathering the discussion addressed the contemporary issue of environmental problems from an economic perspective.

The key questions that Guy addressed were:

  • What is the nature of the environmental problems?
  • Why do environmental problems occur?
  • What are the problems that we face when confronted with this issue?
  • What are some ways of dealing with these problems?

The nature of environmental problems

The existence of environmental problems, from an economic perspective, is a market failure and can be described in terms of existing negative externalities within the market. These occur when there is a cost imposed on the third party (the society) which is not reflected in the free market transaction (i.e. MSC>MPC – see diagram below). This may lead to higher level of production than the socially optimum/desired level.

Why do environmental problems occur?

If unregulated, environment could be viewed as a public good since one cannot be excluded from utilising it nor does its use by one reduces the amount that can be enjoyed by another (for example clean air). Due to this nature of environment, firms can, and do, ‘free ride’ to meet their own ends. Thus, environmental problems result due to the lack of incentive any firm (or individual) has to pay for the use of environment which consequentially results in the exploitation of its resources.

The environmental dilemma

The central question posed dealt with the issue of fairness and ethics when deciding between growth and environmental protection:

Do we exploit the environment or seek to ensure our development in a world with an ever increasing development gap?

Although there may seem to be an intuitive answer, Guy highlighted some of the concerns that need to be taken into account when answering this question. Some of these are:

  • The problem of valuation and subjectivity: Can we put a value on the environment? If I value the scenery very much whilst you would rather have more housing space instead, there is a huge gap in the value that I place on the environment and the value that you might. Is there any way this problem of valuation can be reconciled between individuals, cultures and countries?
  • Is it fair for us to claim that India and China should reduce their carbon emissions given the effect these have on climate change given that developed countries have been major pollutants for years and did not face this restraint when developing?
  • Even if we were to give an answer to this question, how could we enforce it given the plurality of governments around the world? Is it then up to Politics or Economics to resolve the problem?
  • Environment problems are trans-frontier (cross all borders) and intergenerational. This further poses the free rider problem because if a single country (or few countries) reduce their emissions (their opportunity cost of this being the extra growth they would have had otherwise), other countries do not face the need to reduce their emissions in order to reduce environmental damage and hence can ‘free ride’ over others without facing any costs (in terms of growth) themselves.
  • The lack of incentive for a government in a democracy to invest in the environment given their short term in office. Their focus tends to be on getting re-elected and there is a lack of incentive for them to invest in long term projects.


Some Solutions

Some ways these environmental problems could be tackled are:

  • Through regulations and legal barriers – imposing a fixed cap on emissions which the firms cannot exceed (for example carbon emission caps)
  • Property Rights – endowing rights on some resources to people so that there is an incentive for the owners to raise their voice and demand compensation if their property is being exploited. This creates a disincentive for firms to continue polluting
  • Market Mechanism – Whereby polluting permits are bought by firms. This creates an incentive for firms to become more eco-friendly to reduce their costs of buying these permits. Two such schemes recently implemented are the European Emissions Trading Scheme and the Clean Development Mechanism. Both have been successful and have led to large reductions in carbon emissions in present markets.
  • Green tax – taxing firms that pollute heavily. This may also be a source of reducing budget deficit for the government.


Despite of the problems that we face when dealing with the issue of environmental problems, the message, Guy highlighted, was that ‘sustainability is the key’. Whatever economic decisions are made, the interested parties must ensure it is environmentally sustainable, which constitutes being economically sustainable. This should be achieved by the moving to utilise more renewable resources instead of finite and scarce resources.

The talk ended with several questions ranging from the inevitability of environmental problems given population growth to the role of politics in dealing with these issues. Thank you to all those who attended. Any further questions or comments on the themes discussed in this talk are hugely welcome.

Economics Society will next take place on 8th November (after half-term) where Helena Gostelow will be presenting on ‘China’.

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