Presentation Review: Economic Activity And Nature

ECONOMIC ACTIVITY AND NATURE PRESENTATION LEARNING Introduction (1) • To understand the concept of sustainability: it is necessary to understand the relationship between activities humans and nature are complex. • On the one hand, there is the clear and important role of nature in improving human well-being; On the other hand, human activities have the potential to alter the quality and quantity of nature. • Human beings are an integral part of nature, and as such, relationships should not be viewed as a as one between two different independent entities. • Often, different branches of knowledge view humans and nature differently. For example: the physical sciences of physics and chemistry focus only on nature, while social sciences, such as political science, study only humans and their interactions. The sciences of biology, ecology and economics recognize the mutual relationship between nature and humans, but the level of focus of each is different. • Therefore, it is necessary to know how nature is perceived and "treated" in mainstream economic analysis, which is then contrasted with the views of ecologists. Introduction (2) • The relationship between nature and economic activity, which reflects human well-being, can be seen in the following figure: SDAL The first category expressed by the relationship line 1→ 6 shows the benefits of SDAL related to the life support function of ecosystems and the preservation of the ecological structure of natural systems. The diversity of functions that result from ecosystems will provide the existence of demand for goods and services. For this reason, value categories can represent, for example, the functions of flood defenses, groundwater availability, nutrient provision, toxic containment and biodiversity maintenance. Introduction (3) The second category, depicted by the 1→4→5 line, SDAL includes SDAL values related to the supply of ecosystem space or natural habitat protection. This can be represented as an example of the impact of natural habitat destruction on the loss of natural areas due to high demand for tourism or oil a n d gas mining economic activities. The third category, depicted by the 2→5 line, The fourth category is depicted by line 3: the passive/non-use component of SDAL, reflecting moral considerations (e.g. knowledge that SDAL exists independently of nature whether utilized or not) or bequest considerations (e.g. knowledge that biodiversity will continue to exist in nature for generations to come). includes the value of SDAL benefits associated with the overall provision of species diversity. This category can represent, for example, the indirect value of biodiversity in terms of inputs to the production of market goods (e.g. revenue impacts in the pharmaceutical and agricultural industries that use plant and animal materials to develop new types of medicines and new products). Economic Perspectives on Sustainable Development (4) • The concept of sustainable development can be seen from two (2) perspectives: 1. ECONOMIC Perspective 2. ECOLOGICAL Perspective • In an economic perspective, simply put, economists are accustomed to viewing nature as a something that is used for the benefit of mankind. • This anthropogenic view views the whole of nature as a resource that can be utilized. • Not only that, the waste generated through production and consumption activities is dumped into nature as if it were a trash can with unlimited capacity. Economic Perspectives on Sustainable Development (2) • Nature and the natural environment are considered outside the economic system, providing constant and stable elements for economic activity 🡺 Resource availability nature, whether non-renewable such as coal or Oil, or renewable ones such as forests or fish, are not considered to be constraints on economic growth, and ecosystem services such as clean air, abundant water, and waste assimilation are unlimited. • This assumption was fairly accurate for the world in the 19th century, given the scale of economic activity and population pressures. However, in recent decades, the pace of growth in economic activity has put pressure on the availability of natural resources and ecosystem services, which are in reality finite. Economic Perspectives on Sustainable Development (3) • Formal economic analysis essentially looks at incremental (marginal) changes, making it difficult to adjust for major changes in natural resource availability or waste issues in the environment. • When we think about the production of goods or services, it is clear that natural resources are an important input in material production. • Physical capital stock is built from natural inputs and available labor 🡺 Labor requires food inputs (produced from natural resources) to be able to expend energy to work. • Despite the important role of natural products, economic analysis of production can be said to have failed to explicitly acknowledge the changing availability of these resources. Even today, all basic economic theory textbooks see production activity as determined by the inputs of physical capital and labor alone. Economic Perspectives on Sustainable Development (4) • The knowledge of how to combine these resources is available in the form of technology that transforms capital and labor into physical goods. • The standard notation used is Y = F(K,L), where K and L represent physical capital and labor respectively, and F embodies the technological transformation function. Y represents the material goods or services produced. • Material and energy resources, although important in production, are often not represented in the production function. Economic Perspectives on Sustainable Development: Circular Flow Model in Economics • The main economic problem is to maximize the production (or consumption, or exchange) of goods, whether it is for the economy as a whole or even constituent units such as households and business firms. • This maximization depends on the availability of resources with a degree of scarcity reflected in their price and the level of knowledge embodied in the technology. • The production and consumption process is reflected in a schematic diagram known as the circular flow of goods and income. Economic Perspectives on Sustainable Development: Circular Flow Model in Economics (2) • • • • In Figure 4, the constituent units of the economy (households and companies) are connected through the social institutions of the market. Households own labor and capital resource services, which they offer to firms. In return, RTs receive income in the form of wages, interest, profit, and rent from the company. Firms use labor and capital to make goods and services that households (and other firms) buy with the income they earn. The circular flow model of an economy The circular flow houses other important institutions, such as government and banking, and international trade in the form of exchanges with other countries in the world. • Circular flow is a basic diagram used in almost all economic theory textbooks, but as seen from the diagram, there is no explicit mention of the natural environment or the resources used and waste generated in the whole process. • Economic Perspectives on Sustainable Development: Economy and Nature (1) • If the previous Figure 4 is modified to include nature as a resource reservoir and waste disposal site, the best representation would probably be Figure 5. • Diagram 5 shows that the economy depends on nature for both ecosystem services and raw materials. • Examples of ecosystem services and facilities are water supply, climate regulation, land development, and recreational facilities. • Economy and Nature Raw materials can be extracted and processed, or harvested, from renewable and non-renewable resources. • The company processes services and raw materials to return waste to nature. There is no consideration of limits on the availability of resources and facilities from nature or nature's ability to treat waste. Economic Perspectives on Sustainable Development: Economy and Nature (2) • Furthermore, market institutions play an important role in transactions between firms and households that buy and sell resources, as well as goods and services. • When a consumer purchases an item, the title to the item is transferred from the producer to the consumer. • A market is a place where buyers and sellers voluntarily meet to transact and the price of the goods or services transacted depends on both the forces of demand and supply. In this case, if the good (or resource in question) being transacted becomes more scarce for some reason, then its supply will shrink, and its price will rise, according to demand. Economic Perspectives on Sustainable Development: Economy and Nature (3) • Under these conditions, the market treats scarcity as a situation of decreased supply, and therefore makes goods more expensive through price increases. • In some cases of natural resources, supply may be so high compared to demand that the market cannot determine a positive price for the good. • Such goods are usually referred to as "free goods", such as oxygen in the ambient air, and hence, no market is observed in such situations. The pricing mechanism for regular and free goods is shown in Figure 6. Figure 5. Supply and Demand of Regular and Free Goods Economic Perspectives on Sustainable Development: Economy and Nature (4) • • • In conditions where supply cannot be increased Furthermore, people will look for similar substitutes. For example: if fossil fuels become scarce and non-renewable, there will be a sharp rise in prices. In response, people will seek alternative resources such as solar or wind power to meet their energy needs (method 1: resource substitution). Another way society reacts to scarcity situations is to make the use of resources more efficient through technological innovation. For example, a car engine that uses gasoline derived from fossil fuels can be made more efficient, so that it can travel the same distance using less fuel (method 2: efficient technological innovation). Technological progress and resource substitution as responses to scarcity Economic Perspectives on Sustainable Development: Economy and Nature (5) • As one moves to the right of isochane unit 1 (a curve depicting the various combinations of fossil fuels and solar power that can produce one unit of electricity), fossil fuels are replaced by solar power, which will happen when the price of fossil fuels rises, due to their relative scarcity. • Alternatively, technological advancements may result in a shift to lower isocane units. Technological progress and resource substitution as responses to scarcity • A lower isocal unit indicates greater efficiency because a unit of electricity can be produced with a lower amount of both types of inputs. Economic Perspectives on Sustainable Development: Economy and Nature (6) • Economists today do not essentially ignore environmental issues arising from the use of natural resources or the waste created (pollution) during production or consumption. • Pigou (1964) as an economist, analyzed the implications of party third or externalities that need to be internalized. • For example, chemical manufacturers may produce harmful fumes as a by-product of making chemicals. These fumes are released into the atmosphere, and residents living near the plant may suffer medical problems by inhaling the fumes. Generally, the costs borne by the public (in this case medical expenses) are not borne by the producer of the pollution. • Therefore, market prices do not reflect these additional costs, leading to an overall decrease in welfare 🡺 Internalization of Externalities required (Figure 7) Figure 7. Pigovian Tax and internalization Externalities Ecological Perspectives in Sustainable Development (1) • From an ecological perspective, the relationship between humans and nature can be viewed in different ways. • One popular view described by Boulding (1966) emphasizes the concept of a planet that is "closed" to economic activity, rather than referring to unlimited reserves. • Therefore, Boulding proposes a counterview that welfare improvement is related to the conservation and more optimal utilization of limited natural resources and energy. • Welfare improvement is not only synonymous with the availability of goods and greater merit. Ecological Perspectives in Sustainable Development (2) • The basic understanding that resources are limited because planet earth is a closed system, is the basic premise of the ecological economics perspective. • Figure 8 shows the interdependent relationship between nature and the economic system made up of human activities. • As shown in Figure 8, the economy is embedded in the environment closed planetary system. • The planetary environment acts as a source of natural resources, as a production input, and as a waste disposal site. • Two other contributions of ecosystems, not explicitly recognized by economists, are that life support services (e.g., supply of clean air, fresh water, and climate moderation) and amenities (services such as fishing, birdwatching, wildlife watching, and camping) are critical to human activities. Ecological Perspectives in Sustainable Development (3) • In analyzing closed planetary systems, ecologists present some basic principles: 1. The first: living matter and the physical and chemical environment in which they live show interdependence. 2. The second: while the transformation of matter and energy takes place continuously, physical systems The economy and ecology cannot grow indefinitely. 3. Third: there is ecological succession, which is the natural tendency of an ecosystem to become increasingly complex over time. This results in ecosystems transitioning from simple and relatively unstable to more stable, diverse and complex. Therefore, it is important to conserve biodiversity from a stability perspective. 4. Fourth: in any ecosystem, nature chooses the keystone species, but species on earth must share, and one species (e.g. humans) cannot take all the resources. Cover (1) • In order to support sustainable development from both economic and ecological perspectives, an appropriate framework must be established, assuming that the planet is finite and growth with the help of physical resources cannot be sustained indefinitely. • The second assumption is that humans cannot treat the relationship with nature as a one-way dependency, i.e. utilizing nature for its own sake, such as in extracting resources and disposing of waste. • Basically, nature will also change, and these changes have consequences for human well-being. Therefore, economists need to better and comprehensively understand the interconnectedness of ecology and ecosystems and their impacts in the long run. Cover (2) • To better understand the complex interrelationship between humans and nature, we need to combine two perspectives economics and ecology. • The economist's view of nature must be matched with the ecologist's learning about natural processes and the impact of human activities on them. • Keep in mind that humanity's relationship with nature is an interactive one, with complex and dynamic changes in ecosystem composition and the services it provides. Thank You!