Economic Growth and the Environment

Updated on May 20, 2020
Al Stine profile image

Bachelor of Science in Natural Resources with studies in Micro and Macro Economics of Natural Resources.

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Economy and the Environment

Economic development is usually measured by the total value of goods and services produced in an economy. This is referred to as the Gross Domestic Product (GDP), which is a calculation of the monetary value of all finished goods and services an economy can produce in a specific period of time adjusted for inflation. The environment is the source of the goods and services that fuel economic growth. The resources extracted from the environment are processed and manufactured into finished goods. The process of resource utilization also provides employment opportunities and services. When more resources are extracted from the environment, more goods and services are produced in the economy. Therefore, an increase in economic growth indicates an increase in natural resource utilization of the environment.

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Economic growth creates more goods and services, this increases the capital and profits margins for businesses enabling them to invest more and hire more labor. As more employment opportunities are added, the amount of income used to purchase goods and services in the economy also increases. As the population grows, the demand for goods and services also grows, this means more labor and employment opportunities will be required to produce more goods and services. A well-managed economy can continue to grow if the supply and demand elements are well maintained. The environment will also continue to provide the resources needed for goods and services.

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Economic growth has no well-defined ceiling of growth. The economy cannot reach a point were the demand for goods and services is zero. The ever-increasing population means more goods and services will continue to be needed by the economy. This means the environment will continue to be utilized for goods and services. The environment, however, has a natural resource utilization ceiling. It is not an infinite natural resource base with infinite resources that can continue to fuel economic growth, some of these resources are non-renewable. It is for this reason, economic development policymakers have developed some tools to address the fragile balance between economic development and natural resource utilization.

Economic Growth and Environmental Concerns

Some tools have been adopted and used to address environmental concerns that may arise as a consequence of economic development, these include:

  • Environmental Impact Assessments
  • Eco-System Valuations
  • Law of Diminishing Returns
  • Maximum Sustainable Yield
  • Opportunity Cost
  • Carrying Capacity
  • Limits of Acceptable Change
  • Externalities

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Environmental Impact Assessments

Before any economic activity is carried out, an Environmental Impact Assessment (EIA) is used to determine the environmental implications of that economic activity. This tool is not used to limit economic development, but rather it is used to protect the surrounding environment from exploitation arising from economic activity. It also protects the vulnerable communities environment natural resources from being degraded and exploited by large companies under the guise of economic development.

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Eco-System Valuations

It is impossible to put a monetary value on the environment, this is the reason why it easy to degrade or exploit the environment with little or no monetary consequences. The Eco-system valuation tool tries to put a monetary value on an environmental resource by calculating the benefits derived from that resource. It is practically impossible to put a specific and accurate valuation on a natural resource, therefore, the tool is only used to estimate the value of the resource. The estimated valuation amount is agreed upon by policymakers. Any economic activity conducted in that environment is well aware of the eco-system valuation, and any degradation or exploitation will attract a monetary penalty. This discourages companies with loose environmental regulations from conducting their activities in that area. It also encourages companies to be environmentally aware and use cleaner forms of energy for their economic activities.

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Law of Diminishing Returns

This law states that if one factor of production is increased while the others remain constant, the marginal benefits will decline, and after a certain point, overall production will also decline. This concept also applies to environmental resources such as fossils fuels, water, and forests. As more of these resources are overused, the benefits derived from them will start to diminish as more pollutants will be introduced to the environment.

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Maximum Sustainable Yield

This is the maximum level at which the amount of an available natural resource can be economically utilized without depleting all its stock. This tool is used to prevent economic activities from depleting all the natural resources of an area. It is also used to determine how much profit can be obtained from an environment before the maximum sustainable yield ceiling is reached. This prevents companies or individuals from depleting all the resources of an area for economic growth and profits.

In developing countries riddled with poverty, it is difficult to implement this tool. The amount of total dependency some communities have on the environment's natural resource stock means they are more likely to exceed the maximum sustainable yield threshold in order to survive.

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Opportunity Cost

This is basically the cost of the opportunity that is given up in order to gain another opportunity. The opportunity cost of going to work is staying at home and watching Netflix.

When it comes to the economy and the environment, the opportunity cost is more serious and has far-reaching consequences. The opportunity cost of economic development in the form of infrastructure development is environmental degradation in the form of resource utilization, depletion, and pollution. The opportunity cost of a protected environment is less supply of goods and services for the economy. This phenomenon is sometimes considered a trade-off, choosing one option in favor of the other. It is also considered a cost-benefit analysis. The cost and benefits of a good economy, compared to the costs and benefits of a good environment. A good cost-benefit analysis is a good foundation for a balanced economy and the environment.

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Carrying Capacity

Carrying capacity is basically the maximum number of elements or activities that an area can safely accommodate. The carrying capacity of a jar of water is the amount of water the jar can carry just before the water starts dripping out.

When it comes to the economy and environmental natural resource utilization. The carrying capacity of the environment is the number of economic activities an area can accommodate before becoming depleted, polluted, and degraded. Several economic activities such as mining, manufacturing, and even tourism happening in a small area can cause the resources of that area to be overutilized and depleted. Economic development activities require an environment with the right carrying capacity to accommodate that activity, otherwise, it will become an environmentally hazardous economic developmental activity.

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Limits of Acceptable Change

This is the change that is considered acceptable in a particular area, this change should not reduce the value or degrade the area to a level that may render it unfit for use. There is a limit of acceptable change that an economy can enforce on the environment before rendering it unfit. Policymakers use this tool to determine the number of economic activities and how long they can operate in an area before raising environmental concerns. This tool is also used to restrict certain economic activities from operating in certain environments.

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Externalities

When it comes to the economy and environment relationship, externalities are perhaps the number one source of contentions between the two elements. Externalities are the unintended consequences or side effects of economic activities on the environment or its residents. It is worth noting that some externalities have positive impacts on the environment, but it is the negative externalities that are usually the source of concerns and debates for policymakers. Externalities from beneficial economic activities can cause health-related problems through degradation of the surrounding environments, contamination of the water supply, and polluted air. Externalities are usually a contentious issue because not all externalities can be easily identified at the onset. Some externalities can take decades of economic activity before their environmental implications are observed. This is the reason policymakers introduce regulations. Policymakers are not aware of all the externalities that may arise from certain economic activities, so they regulate those activities to limit the impact of the perceived negative externalities.

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The Future of the Economy and the Environment

Whether the economy is growing or shrinking, the demand for economic goods and services will always continue to rise due to the increase in global populations. The highlighted stress that economic growth puts on the environment is something that cannot be avoided, but rather just mitigated. As global economies expand, natural resource utilization also increases, while the natural resource global stock decreases. This is the unfortunate relationship between the economy and the environment. There are very few tools that can sustain strong global economic growth and a well-kept environment at the same time. Adhering to environmental regulations and mitigations are perhaps the only way to slow down the depletion of our natural resource stocks, while at the same time sustain our economic needs.

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This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2020 AL

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    • Al Stine profile imageAUTHOR

      AL 

      5 weeks ago from South Equator, East Pacific

      @Wayne Gibbons

      Well, population growth contributes to the labor force, we cannot afford to have zero population growth, a lot of essential services will start shutting down. Keeping the population at 8 billion, and only start replacing ourselves, as you put it, might not be a viable solution. The time it takes a child to reach a laborforce age might be longer compared to the death rate of other members of the population. Essential services might start slowing down due to a shortage of available labor from a streamlined population.

      A better solution might be to spread out the populations. Statistically speaking, global populations live on 10 percent of the land on earth. That is why I was emphasizing on the 'Carrying capacity' tool. If the population is spread out, the environment can at least accommodate a lower population density per area. Obvious challenges might be borders, boundaries, and terrains types, other than that, it is possible to spread out the populations to limit their environmental impacts.

    • electricianbrisbane profile image

      Wayne Gibbons 

      5 weeks ago from Brisbane

      What happens if we don't have population growth? What if as a world we made a choice to only replace ourselves and keep the population at 8 billion or even try to reduce it by rewarding people for not having children? We will still consume, we will still have an environmental impact. But it would be less then what it will be. Maybe we need to think totally differently about it. Educate about the benefits of having no children or less children and rewarding people who do not have children for being selfless. There will still be people earning money and spending money. We will still build things or maybe repurpose things instead. We have built a system that works in a certain way. A system can always be changed.

    • Al Stine profile imageAUTHOR

      AL 

      5 weeks ago from South Equator, East Pacific

      @CHRIS57

      It's painful to admit that politics need to be attached to everything whether its science, education, economy, healthcare, or the environment.

      I come from a developing economy, choosing to preserve the environment over strong economic growth is a death sentence. People need jobs, goods, and services, restricting their access to these resources under the umbrella of environmental protection is tampering with their livelihood.

      And yes it's true, the time scale difference between economic development and environmental degradation makes it difficult to argue for the environment against economic growth. People need a strong economy because that is what puts food on the table. The environmental dept is usually paid at a later phase in time. It is good political milage to address the current needs rather than trying to address the needs of the future.

      Even though it is impossible to address environmental concerns without political willpower, I always feel politics will always favor the economy over the environment for obvious reasons.

      Thanks for your input, Chris.

    • CHRIS57 profile image

      CHRIS57 

      6 weeks ago from Northern Germany

      Very interesting look at the interaction of economy and ecology. However, it requires politics to attach value and cost to environment. If politics does not enforce this, nothing will happen, especially in economies, who inherit a culture of simply "moving on and exploit an new environment".

      There is a magnitude in time scale difference between immediate economic benefits of natural resource exploitation and long term downside of tampering with environment. Makes it difficult to push environment if you have quarterly financial statements to make, wouldn´´t you think?

    • Al Stine profile imageAUTHOR

      AL 

      6 weeks ago from South Equator, East Pacific

      Thanks Liz,

      I appreciate. It is indeed an important topic. Thanks for taking the time to read through.

    • Al Stine profile imageAUTHOR

      AL 

      6 weeks ago from South Equator, East Pacific

      @Success79

      I also thought about becoming an economist at some point, but the mathematics side of it discouraged me. I somehow still managed to find it in my studies regardless.

      It's a very interesting field and I really appreciate knowing other people with similar interests.

      Thank you for your input.

    • Eurofile profile image

      Liz Westwood 

      6 weeks ago from UK

      You have addressed important economical and environmental issues in this interesting article.

    • success79 profile image

      success79 

      6 weeks ago from New York

      Hi Al,

      In my early years as a teenager, I was very interested in economics and commerce and as a result, I gained extensive knowledge in both subjects. Your article is profoundly written with great insights as to the benefits that will be gained if these influencing factors are integrated into the economy and the environment. I certainly enjoy reading your article. Interesting content.

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