Economic Growth and Climate Change - Literature review Example

Economic Growth and Climate Change Economic Growth and Climate Change Environmental economics are environmental issues affecting the Gross Domestic Product (GDP) of a country’s economy. Environmental issues include the benefits and cost of implementing alternatives of environmental policies to overcome issues such as global warming, air pollution, waste, quality of water and other toxic substances (Kolstad, 2000). This essay discusses on environmental issues and its effects to economic growth and climate change. According to Hanley (2007), market failure is a central concept that affects environmental economics. Market failure is the inability of a market to allocate adequate resources to output an ideal social welfare. For instance, a wedge can be created between what an individual does given market prices and what the immediate social environment wants him to do to protect the environment. The wedge created implies inadequate or inefficiency of resources, hence, this can be solved by reallocation of resources to the individual to make him/her better off without affecting other people or making them worse (Hanley, 2007). Other forms of marketing failure include; externalities, non-rivalry and non-excludability (Hanley, 2007). Externalities form of market failure exists when a person’s choice affects other people given that it’s unaccountable for in the market price. Externalities can take both positive and negative but mostly takes negative form in environmental economics. A perfect analogy of negative externalities is a firm emitting waste pollution and does not take into consideration the cost it imposes on other people. These levels of pollution are in excess level of the ‘socially efficient’ that would exist if the market would account for waste emitted (Hanley, 2007). Another instance of negative externalities is a car driver who does not take into account about the traffic congestion they cause on other motorists. As a result of the individual, organization or communities actions pursuing self-interests, a third party suffers indirectly. As stated by Hanley (2007), externalities is applicable when globalization allows an individual in a market who is unaccountable with biodiversity to reduce the rates of prices of another who is creating a race to the bottom in relation to rules and conservation. Eventually, this causes loss of natural capital of quality of water pollution, desertification, erosion and other outcomes which cause inefficiency in environmental economics. As a result, this concern is closely related to the subsystem of sustainable development with political relationship. Pillars of sustainability. When it is too pricey to exclude a consumer to access environmental resource, it is termed as either common property resource or public good. Common property resource occurs when rivalry for resources exists. For instance, when one person uses particular resources he or she reduces the chances of other people from using the resources. A case of public good exists when the use of resources is non-rivalry. However, in both instances of common property resource and public good, high chances are that market allocation is inefficient. According to Hardin’s concept of tragedy of the common, it refers to the challenges faced in common property and non-exclusion. According to Hardin’s concept of tragedy of commons, challenges have been identified involving non-exclusion and common property. Commons in ‘tragedy of common’ refers to an environmental asset or common pool resource (Hardin, 1968). Common pool resource allows collective body, organization, or communities to improvise schemes to eliminate others and therefore opening access to future benefits. According to this theory, collective body acts on oneself-interests disregarding collective body best interest while diminishing some common resource (Hardin, 1968) This concept of common tragedy is cited in relation to sustainable development connecting economic growth and protection of environmental resources. In this concept, ‘commons’ includes rivers, national parks, atmosphere, oceans, stocks and other shared resources (Hardin, 1968). Basic problem faced by people is over harvesting of resources given the paucity of cost of commons. Hardin’s theory implies that the excessive use of open-access resource without proper policing of restrictions will use it more than they had paid for hence, causing environmental degradation (Hardin, 1968). However, according to Ostrom, the use of common property resources has conventional ways of self-regulating policies to minimize hazards of tragedy of commons. Tuck (2008) affirm that the effect of climate change is an illustration of public good in which social benefits are not implicated fully in the market price. Climate change effect is a public good because the risks are in cooperation of non-rival and non-excludable. Climate change is termed as non-rival because climate moderation provided to an individual does not affect the level of mitigation that others delight in. Climate change is termed as non-excludable due to the fact that global consequences affect everyone without exclusion of any individuals. Tuck (2008) states that higher temperatures are seen to minimize economic growth of poor nations. They also minimize growth rates in these nations. Moreover, due to higher temperatures, these poor nations are likely to face reduced industrial output, reduced agricultural output, increased political instability and aggregate investment. For instance, if a country capitalizes in carbon, abatement is condensed. This is as a result of free-riding other countries efforts. According to a Swedish economist, public goods can be impoverished by the market by concealment of preference by people but still delight in them without paying (Tuck, 2008). Accessing the value of natural resources or ecosystem services techniques of uses and indirect use are employed. Both techniques of uses are used to evaluate the tangible benefits achieved from natural resources. Other form of value includes non-use whereby value is accessed by existence, option or bequest values. For instance, people may value existence of different species irrespective of outcome of loss of species in the ecosystem services (Tuck, 2008). Option value exists on instances whereby the existence of certain species can be used for human consumption or benefits. For instance, specific species of plants are used to research and manufacture drugs and medicines. Another instance is whereby an individual may opt to transfer ownership of pristine environment to their next of kin (Tuck, 2008). The use and indirect use is often publicized from exposed behavior e.g. the cost incurred on recreational trips. In some use value methods like hedonic methods values are estimated through observed estimate of prices. However, in non-use, values are estimated based on a calibrated preference method e.g. contingent valuation or choice modeling. Contingent valuation employs form of surveys whereby people are asked the amount of fee they would be willing to part with to observe and recreate. Contingent valuation uses willingness to pay in order to compensate environmental degradation or destruction caused. While using hedonic method, it examines the impacts that the environment has on economic decision making process through travelling expenses, park visitation fee and prices of houses (Hardin, 1968). Solution of Externalities Firstly, under solution of externality application of policies concerning environmental regulation should be put in place to govern environmental economic impacts which is done by a process called cost benefit analysis. These regulations also known as commands and control are similar to economic instrument. For instance, in case of pollution degradation, a fine is imposed on the firm causing the excessive amount of pollution. Another case scenario is whereby a firm polluting the environment is monitored and laws are enforced to prevent further degradation of the environment. In both case scenarios, an economist would state the main difference is cost of regulation imposed on polluters (Hanley, 2007). Command and control rules apply in cases of similar emission polluters. However, certain firms can subside less costly while others can abate expensively. Command and control rules first identify the cheapest emission followed by higher cost expensive abatement efforts. Secondly, the quotas of pollution are achieved by reducing of pollution through a method called tradable emission permits. This is achieved by imposing a high cost on firms polluting and vice-versa to the firms that pollute less, pay at a reduced rate. This form of approach to pollution has been affected in places like USA, sulphur dioxide program and also the EU Emission Trading Scheme. The practice is gaining popularity to solve environmental problems. Third is implementing of tax tariffs on polluting firms and other environmental polluting activities. The practice of introducing tariffs and pollution tax will lower the level of pollution to socially acceptable optimal levels. Under this form of solving externalities, some individual campaign a change in taxation tariffs from income and sales tax policy in a process called green tax shift (Kolstad, 2000). In conclusion, according the Coase theorem, passing of property rights to another individual provides maximum solution irrespective of who gets them. This takes place when the transaction cost is not important and the amount of people participating is minimal. For instance, if the individuals living near a firm that pollutes air are entitled to clean air, the firm should compensate the residents around the firm or the people should pay the firm not to pollute the air (Kolstad, 2000). However, residents around the polluting company could take action against the firm and take legal action for violating their rights. References Hanley, N., Shogren, J., & White, B. (2007). Environmental economics. Basingstoke [England]: Palgrave Macmillan. Hardin, G. (1968). Thirty-nine steps to biology. San Francisco. Kolstad, C. (2000). Environmental economics. New York: Oxford University Press. Tuck, R. (2008). Free riding. Cambridge, Mass: Harvard University Press. Read More