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  • Print publication year: 2016
  • Online publication date: May 2018

6 - Applications of the economic way of thinking: environmental economics

from Book II - Applications of basic economic theory


In this chapter we combine our discussion of international economics with a discussion of environmental economics for one simple reason: both market and environmental forces are now global in scope. And each set of forces affects the other. The way business is done around the world obviously affects the global environment. Pollutants emitted from factory chimneys in one country can rain down on people a world away. Environmental quality (or lack thereof) can affect business costs and profitability through, for example, workers’ health care and health insurance costs. Although environmental regulations can directly impact people's health and welfare around the globe, they also can impact business production costs and, in turn, firms’ location decisions and international trade patterns.

Managers need to know how environmental degradation affects human welfare, but also, perhaps as important for business students, business costs. Managers also need to understand how different environmental remedies can achieve environmental goals at different costs. Surely, governments, consumers, and managers share a common goal, selecting environmental remedies that make the most economic sense and also contribute to human welfare around the globe.

Environmental economics is complex, as evident in the scientific debates over the contributions of humans to global warming (and other forms of environmental decay), as well as the issue of whether or not global warming slowed between about 1998 and 2014. Initial data showed that during that period, the Earth's measured temperature rose by 0.003, well below the 0.03 percent rise for prior decades, but then a new study in mid 2015 and published in Science based on new and reported-to-be improved data showed that global warming had not slowed as claimed (as reported by Naik 2015b). Stay tuned for the release of counter-studies, and counter-counter studies – because the political combatants in the debate (including some climate scientists) have economic and professional stakes in it.

We cannot hope to cover the field or resolve the debates in the space limitations of this book, but at least we can show you how the economic way of thinking can be used to explore the basic issues and can point the way to an alternative course of corrective policy action, to the extent that corrective action is needed (and we don't have space or time to consider the vast literature, much of which is highly technical, and heated political positions on the meaning of scientific findings on global warming).

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