Notes

The economist views the environment as a system of scarce resources which exist to be exploited for the gains of humankind. The economic problem of the environment exists in how we should manage these resources to maximize economic efficiency and growth in the face of scarcity. This ethical standpoint is invalid because it views the environment from a purely anthropogenic perspective. The purpose of economic activity is to increase the well being of the individuals who make up the society. The fallacy in the economic view of the environment is that it defines the society or community strictly as humans, and neglects members of the ecological community such as plants and animals. It is impossible for a system to function to its full potential without all of its natural parts. Economics attempts to analyze the value of the environment only in terms of those resources that have tangible economic value in a market system.

The criterion for economic efficiency is known as Pareto Optimality. When an economy has reached this state it is impossible to rearrange the system to benefit one person without causing harm to another. To maintain this maximum level of efficiency it is accepted that no policy should be adopted unless it's overall benefits outweigh the aggregate of its costs to society. This is fair and theoretically follows the Pareto criterion because as long as the benefits outweigh costs, those considered gainers have the potential to compensate so-called losers (creating a situation in which there are only winners). This is known as the compensation criterion


The compensation criterion simply allows for the potential of compensation, whether it should be paid or how is left to be addressed as a separate ethical discussion. Also, a person's willingness to pay for something is directly related to their income level or ability to pay. As result, wealthier individuals' desires receive more attention in the compensation criterion.

Another economic problem with the environment is unclear property rights to common pool resources, such as air and water. To avoid a market failure that could be caused by for example, unlimited pollution, the government creates artificial incentives to limit pollution through regulations, taxes, and subsidies. One example is the formation of environmental quality standards (EQS). EQS are legally established levels of acceptable cleanliness. The Pareto optimality principle is used to determine EQS because the willingness to pay to clean up the environment is directly related to citizens' willingness to pay for the improvement.

The problem with the economic approach to standard setting is that there comes a point at which cleaning up the environment is much too costly. This means that there will always be an acceptable level of pollution and that eliminating pollution completely is not possible. Another problem is that cost benefit analysis is not exactly fair because it requires no sacrifice from those who benefit and provides no compensation to those who lose out in the standards that are set. This creates a cycle in which gainers are constantly calling for stricter standards and losers for more relaxed regulation.