Meaning and Scope of Environmental Economics

Traditional economics studies how a society allocates scarce resources — land, labour, capital — among competing uses. Environmental Economics extends this same question to a resource every other branch of economics used to take for granted: the natural environment itself — clean air, fresh water, forests, minerals, fertile soil, and the atmosphere's capacity to absorb waste.

The environment plays two distinct economic roles at once. First, it is a source — it supplies the raw materials (timber, ore, fish, fossil fuels, water) that feed every stage of production. Second, it is a sink — it absorbs and (up to a point) breaks down the waste, smoke, effluent and heat that production and consumption generate. Both roles have a limit: a forest can only regenerate timber so fast, and a river can only absorb so much effluent before its water quality collapses. Environmental Economics studies exactly this tension — how economic activity, if left unchecked, can use up the environment's source-role and overload its sink-role faster than nature can renew or absorb, and what a society can do about it.

The scope of the subject covers: the environment as an economic resource; the causes and economic costs of environmental degradation; market failure in environmental matters (why ordinary markets do not automatically protect the environment); the idea of sustainable development; and government/international policy responses.