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02/03/16'
Ecological Economics and
Sustainability
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
Origins'of'env.'thinking'in'economics'
•  Early'20th'century,'Pigou'and'the'pigouvian'tax.'
–  There'are'“third'parOes”'in'market'transacOons.'
•  1960s:'Rise'of'modern'environmental'movement.'
–  Influenced'by'“cult'of'wilderness”'and'as'a'reacOon'to'
toxic'persistent'polluOon.'
•  1970s:'Resurgence'of'limits'thinking'
–  Herman'Daly’s'steady'state'economics'
–  Forrester'and'Meadows'et'al.'World'Dynamics'and'
Limits'to'Growth.'
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
1'
02/03/16'
Early'Limits'Thinking'
•  Thomas'Malthus'and'his'Essay%on%Principles%of%Popula1on'
(1798).'
–  PopulaOon'growth'is'is'expected'to'outgrow'the'means'of'
subsistence,'i.e.'food'producOon'(geometric'versus'linear'
growth'pa_erns)'
•  David'Ricardo’s'(1817)'“iron'law'of'wages”'and'“the'law'of'
diminishing'returns”'se`ng'limits'on'the'growth'of'economic'
output.'
•  J.S.Mill'(1848)'of'“the'staOonary'state”,'where'there'is'
“constant'stock'of'human'capital”'and'a'“constant'stock'of'
physical'capital”.'
•  Marx’s'(1867)'“social'limits'to'growth”'arising'from'social'
conflict'emerging'from'income'distribuOon,'rather'then'
“biophysical'limits'to'growth”.'
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
profits
+
R4
B1
+
ENTREPRENEURSHIP
+
savings
R3
wage!bill
+
+
UNEMPLOYED
!
+ +
R2
R5
output
+
+
TECHNOLOGY
R1
+
+
investment
+
CAPITAL
LABOR
+
B2
!
LAND
+
hiring
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
2'
02/03/16'
Nonerenewable'resources'
•  Fossil'fuels'and'minerals'(all'abioOc)'
•  Hotelling'(1931)'–'basis'of'nonerenewable'resource'
economics'
•  Factors'in'control'and'management'
–  ProducOon'in'any'given'period'is'not'independent'from'
producOon'at'any'other'period'(accumulated'extracOon'
and'amount'and'grade'of'remaining'reserves)'and'current'
input'costs.'
–  Management'goal:'Maximize'total'profits'over'a'given'
Ome'horizon'(i.e.'maximize'infinite'horizon'profits'or'“net'
worth”).'
–  ExtracOon'cost'is'the'sum'of'its'extracOon'cost'and'the'
user'cost'(i.e.'the'loss'from'possible'future'use).'
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
3'
02/03/16'
Renewable'resources'
•  Biomass'and'abioOc'resources'provided'through'
geoebioechemical'cycles'(bioOc'and'abioOc)'
•  Gordon'(1954)'–'basis'of'renewable'resource'
economics'
•  Factors'in'control'and'management'
–  In'case'of'biomass,'decision'on'how'much'to'harvest'
and'when'to'harvest'are'interdependent,'because'the'
growth'depends'on'the'biomass'stock.'
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
4'
02/03/16'
StockeFlow'and'FundeService'
Resources'
•  Stockeflow'resource'is'materially'transformed'
into'what'it'produces.'Stock'provides'the'flow'
of'material,'and'the'stock'can'be'uOlized'
almost'at'any'rate'desired.'
•  Fundeservice'resource'suffers'wear'and'tear'
from'producOon'but'does'not'become'a'part'
of'the'thing'being'produced.'
Excludability'and'Rivalness'
•  Excludable'resource:'ownership'allows'the'owner'to'
use'it'while'simultaneously'denying'others'the'
privilege.'
–  Ex:'bicycle'is'excludable;'street'lamp'is'noneexcludable'
•  Rivalness:'consumpOon'or'use'by'one'person'
reduces'the'amount'available'for'everyone'else.'
–  Ex:'bicycle s'use'is'rival;'the'street'lamp s'use'is'nonerival.'
5'
02/03/16'
Main'tenet'of'environmental'
economics'
•  Mistreatment'of'environment'occurs'because'
we'do'not'recognize'the'posiOve'prices'for'
nature’s'economic'funcOon,'as'there'are'no'
market'prices'for'many'environmental'goods.'
•  Costs'to'the'environment'and'the'larger'
society'should'be'internalized.'
•  Costebenefit'thinking'should'guide'policies.'
•  Therefore'valuaOon'of'environmental'
resource'and'funcOons'are'important.'
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
Environmental'polluOon'as'an'external'
cost'
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
6'
02/03/16'
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
Costebenefit'thinking'
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
7'
02/03/16'
Main'tenet'of'ecological'economics'
•  I.'There'must'be'an'opOmal'scale'in'
macroeconomic,'where'marginal'costs'of'producOon'
equal'the'marginal'benefits'of'producOon.'
–  Microeconomics'default'rule:'stop'growing'when'
marginal'cost'equals'marginal'benefits'
–  Macroeconomics'default'rule:'“grow'forever
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
•  II.'Economy'is'not'a'perpetual'moOon'
machine'
money for factors of
production
factors of
production
FIRMS
HOUSEHOLDS
goods and services
money for goods
and services
8'
02/03/16'
•  But,'it'is'embedded'in'the'greater'environment,'
as'the'economy'operates,'the'source'and'sink'
funcOons'diminish'(mines,'wells,'soils,'fisheries,'
forests,'atmosphere'etc.)'
•  Therefore,'EE'is'commi_ed'to'the'laws'of'
thermodynamics:'
–  Neither'ma_er'nor'energy'can'be'either'created'or'
destroyed.'
–  We'can'recycle'ma_er'but'not'with'100%'efficiency.'
Because,'certain'amount'of'useful'energy'is'lost'at'
each'transformaOon'process.'
Fundamental'vision:'Spaceship'earth'
The throughput: flow of
energy and material from
sources to the sinks
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
9'
02/03/16'
•  The scale of the throughput depends on:
–  The scale of the economic activity;
–  The resource efficiency of the economic activity;
–  The waste efficiency of the economic activity.
Social Ecology, Lecture II, 2016
•  The problem of decoupling: Is it possible
for the economies to grow in GDP terms
while they restrain the growth in
throughput?
–  Relative decoupling: The growth in throughput
is less than the growth in GDP.
–  Absolute decoupling: The growth in throughput
is negative while the growth in GDP is positive.
Social Ecology, Lecture II, 2016
10'
02/03/16'
Back'to'sustainable'development'
•  Go'back'to'the'first'lecture:'The'Bruthland'
definiOon'and'sustainability'as'intere
generaOonal'equity.'
•  Transfer'of'capital'stocks'
•  Weak'and'strong'sustainability,'re.'idea'of'
capital'subsOtutability.'
•  Revisit,'precauOonary'principle.'
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
Sustainable'development'operaOonal'
principles'
•  Herman'Daly'principles:'
–  For'renewable'resources,'harvesOng'rates'should'not'
exceed'regeneraOon'rates'
–  For'renewable'sinks,'polluOon'rates'should'not'exceed'
assimilaOon'rates'
–  For'nonerenewables'–'sufficient'fracOon'of'profits'form'
extracOon'would'be'invested'in'renewable'subsOtutes'
•  Plus'
–  Market'failures'related'to'resource'pricing'and'property'
rights'should'be'fixed.'
–  Progress'in'efficiency'increasing'technology'should'
dominate'progress'throughput'increasing'technology'
–  Watch'overall'scale'and'follow'“precauOonary'principle”'
Boğaziçi'University'2016:'Esc'59M'Lecture'II'
11'