Introduction

Economic activity and environmental resources interact in a number of ways. We need a framework or model to sort out the channels. The framework should capture the important relations, but not be so complex that the details obscure the main connections. One purpose in this chapter is to reconcile two different views of the relationship between economic activity and environmental quality. A popular view is that there is a trade-off between the two – improvements in environmental quality can only be obtained by sacrificing some output of conventional goods and services. A second view, associated with the concept of sustainable development, is that environmental protection is necessary to support conventional economic output, and failure to maintain environmental quality undermines income and output, at least in the longer run. The second view suggests a positive relation between conventional economic output and environmental quality. We show in this chapter that elements of both views are valid and can be reconciled if one recognizes a dual role for the environment: to provide valuable services that are directly consumed (environment as a consumption good) and to provide inputs into the production of conventional goods (environment as a producer good). A second purpose of this chapter is to sketch out how economic-environmental connections might change as economic output and income grows. What factors are likely to determine the longer run relations between gross domestic product (GDP) and environmental quality?