CHAPTER 3Pollution and Resource Degradation as Externalities

3.0 Introduction

Any economy depends on the ecological system in which it is embedded in two fundamental ways, as illustrated in Figure 3.1. First, human production and consumption processes rely on the environment as a source of raw materials; second, they also exploit the environment as a sink (or repository) for waste materials. Both sources and sinks form what economists call natural capital. Natural capital is the input that nature provides for our production and consumption processes. Pollution is the overuse of sinks; resource degradation is the overharvesting of sources. In this sense, pollution and resource degradation are flip sides of the same process, the excessive exploitation of natural capital.

Illustration of Natural Capital: Sources and Sinks.

FIGURE 3.1 Natural Capital: Sources and Sinks

What exactly do we mean by pollution? Consider three examples:

  1. Tyler is eating in a smoky kitchen. Is he exposed to pollution?
  2. Karen routinely comes in contact with low-level radioactive waste while working at a nuclear power plant. Is she exposed to pollution?
  3. Myles is trying to get some sleep while his neighbor’s sound system blares. Is he exposed to pollution?

For the purposes of this book, the correct answers are maybe, maybe, and yes. Economists define pollution as a negative externality: a cost of a transaction not borne by the buyer or seller. Pollution is ...

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