Environmental Economics

Environmental economics is the study of the financial implications of environmental policies and practices. This field of study helps to understand the theoretical and empirical aspects of environmental policies on the economy of the nation. It helps to analyze the existing policies and determine its pros and cons and also to ascertain the effectiveness of proposed or future policies.

Environmental economics also includes the study of how an economic policy can impact the environment and the economic consequences of such an impact on the Nation. This subject helps in making the right choices based on the evaluation of an economic activity and the environment. The main goal is to balance out the cost and benefits of an economic activity with the environmental impacts.

Environmental Economics is designed to consider the current pollution and the exhaustion of non-renewable resources which a normal economic aspect of a market fails to consider. In environmental economics, the side effects of human action are accounted for which is termed as the “external cost”, by correcting the prices. The external side effects or Externality is the negative consequence of an otherwise positive economic activity. For example, the issue of overfishing in the ocean which is impacting the marine ecosystem, the impact on the ecosystem and its repercussions can be considered as the externality.

Proper pricing is of utmost importance in Environmental Economics. The environmental benefits enjoyed by everyone were limitless without any cost involved hence never scarce. This creates a pricing issue. All goods and services that are enjoyed by the environment need to be properly priced to include all the costs involved. This might mean higher prices but would ensure that the natural resources are not over-exploited. Scarcity is an instrumental term in Environmental Economics which presents the possibility of depletion is exhaustion of natural resources.


Related: What is meant by Environmental Education?

The true sense of Environmental economics is based on the approach that “There is a value from the environment and value form the economic activity”. The aim of environmental economics is to strike a balance between the economic activity with the environmental degradation with clear consideration of all cost and benefits involved.

Environmental Valuation

Economic valuation measures human attachment to a service or product. Without the existence of human attachment, the product will have no value of its own. Environmental valuation is very vital in making economic choices that involve trade and resource allocation. Economic decisions on environmental valuation are based on society’s values or preference and not the governments. Ideally, it is not the environment that is being evaluated but the preference of the greater society that is being measured. This, of course, can vary from region to region and as per the demography of the region. Environmental valuation though controversial is critical in taking a decision with regards to resource allocation.

The economic value of a service or a product is the sum of all its effective values. There are two types of values; Use value and Non-use value.

Use Value is the measure of the value that is derived by the actual usage of the service or the product while the non-use value measures the value of products or services which are not directly used but is valued for the mere existence. The use value of a service or a product also includes its indirect value to a service, for example, the value of pasture land to produce meat or dairy products. The best example can be the Mississippi Gopher Frog. Efforts are being made to preserve this unique species of frog although it is of no economic value.

Use of Valuation

Valuation is primarily used for the cost-benefit analysis of a product or service.  Only services or products that yield higher benefits than costs over time are the once that are acceptable. However, at times environmental preservation may take priority even if the cost aspect is higher than the benefit that is visible. The Cost-Benefit Analysis (CBA) is done by compiling all the benefits and cost and then determining the value of future benefits and cost.

For an Environmental Economist, the first step is to understand the project pertaining to the product or service in question and realize the impacts on the environment and the human population with or without the implementation of the project. A list of project impacts is created according to the use and non-use value of the project and the benefits that would be enjoyed on its implementation.


The analysis of the benefits requires it to be described and converted into human needs to be able to measure it. There are various methods that are utilized to determine the value of the benefits and then the discounted. Various methods are used to measure the benefit. Choice of the method depends primarily on the time and cost involved. Here is a list of some of the popular methods used for valuation;

  1. Hedonic pricing method
  2. Productivity method
  3. Benefit transfer method
  4. Travel cost method
  5. Market price method
  6. Contingent Valuation method
  7. Contingent Choice method
  8. Replacement or Damage Avoid cost method.

The analyst is required to balance the accuracy and the cost of choosing the methods after narrowing down the types of benefits according to their importance. The data requirements and limitations of a method help in determining the best method of valuation. Discounting or the process of reducing future benefits and cost to present value is often the last and the most challenging step which has the biggest effect on the cost-benefit analysis. “Because it focuses only on economic benefits and costs, the benefit-cost analysis determines the economically efficient option.  This may or may not be the same as the most socially acceptable option or the most environmentally beneficial option. Remember, economic values are based on peoples’ preferences, which may not coincide with what is best, ecologically, for a particular ecosystem.  However, public decisions must consider public preferences, and benefit-cost analysis based on ecosystem valuation is one way to do so.”

Also Read: What are the health and environmental benefits of solar energy?