Environmental Sustainability — Flashcards & Quiz

Q1: What is environmental sustainability and why does it matter for economic policy?

Environmental sustainability means using resources and managing environmental impacts in ways that meet current needs without compromising future generations' ability to meet their needs. It involves: preserving non-renewable resource stocks, using renewable resources within regeneration rates, keeping pollution within absorptive capacity, and maintaining biodiversity. Economic significance includes: preventing resource depletion that undermines future production capacity, avoiding environmental costs (health, disaster damage), supporting long-term growth potential, and recognising that conventional GDP ignores environmental degradation. Sustainability requires balancing economic objectives (growth, employment) against environmental limits, acknowledging that infinite growth is impossible on a finite planet.

Q2: What is the concept of externalities and how do they relate to environmental problems?

Externalities are costs or benefits of economic activity experienced by third parties not directly involved in the transaction, causing market failure as prices don't reflect true social costs. Negative externalities (pollution, resource depletion, climate change) occur when producers/consumers impose costs on society without paying for them, leading to over-production/consumption. Positive externalities (education, research) are under-provided as producers can't capture all benefits. Environmental problems are primarily negative externalities: factories pollute without compensating affected communities, drivers don't pay for climate damage from emissions. This causes market failure, requiring government intervention through taxes, regulations, permits, or subsidies to internalise externalities and achieve socially optimal outcomes.

Q3: What are market-based instruments for environmental protection and how do they work?

Market-based instruments use price signals and economic incentives to encourage environmentally sustainable behaviour. Main types include: Carbon pricing/taxes (charging per tonne CO2 emitted, making pollution costly); Cap-and-trade schemes (setting emission limits, allowing trading of permits between firms, letting market determine price); Environmental taxes (landfill levies, plastic bag charges); Subsidies for clean technology (solar rebates, electric vehicle incentives); and Deposit-refund schemes (container deposits). Advantages include: economic efficiency (lowest-cost reductions occur first), incentives for innovation, flexibility for firms, and revenue generation. Disadvantages include: political resistance, potential regressive impacts on low-income households, and difficulty setting optimal price levels.

Q1: Environmental sustainability means using resources in ways that meet current needs without compromising future generations.

Answer: TRUE

This is the Brundtland definition of sustainable development. It requires preserving resource stocks, keeping pollution within absorptive capacity, and maintaining environmental systems so future generations have equal or better opportunities to meet their needs.

Q2: Negative externalities lead to under-production of goods because producers pay too much for environmental costs.

Answer: FALSE

Negative externalities cause over-production because producers don't pay for environmental costs imposed on society (pollution, resource depletion). This market failure leads to production beyond the social optimum, requiring government intervention through taxes, regulations, or permits to reduce output to efficient levels.

Q3: Market-based instruments like carbon taxes use price signals to encourage environmentally sustainable behaviour.

Answer: TRUE

Market-based instruments (carbon pricing, emissions trading, environmental taxes) make pollution costly, creating economic incentives to reduce environmental damage. They allow flexibility for firms to find lowest-cost reduction methods, improving efficiency compared to rigid command-and-control regulations.