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Economic Growth and the Environment

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AL has a Bachelor of Science in Natural Resources with studies in Botany and Zoology.

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.

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.

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

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.


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.


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.


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.

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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.


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.


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.


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.



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.


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.

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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