Question

“Pollution is causing $100 million worth of damage to the environment and we are only spending $1 million to reduce pollution. We are clearly not spending enough on fighting pollution.”

Analyse and comment on this statement in a Macroeconomics context.

Answer 1

The relationship between pollution and economic development has been widely debated across various disciplines in the natural and social sciences. The prevalence of the Environmental Kuznets Curve (EKC) has blurred the more complex relations between economic development and environmental outcomes, despite the limitations of the EKC to consider ecological carrying capacity concerns. Moreover, the empirical isolation of many studies in highly specific disciplinary contexts has hitherto prevented us from considering an integrated framework for analysis. As we consider ways of moving towards a circular economy in which pollution itself could be harnessed as a material asset for usage in products to diminish waste, a more integrated framework is needed. This is particularly true in developing countries where pollution rates are rising most dramatically and where governments and firms are often being confronted with conflicting narratives about the impact of environmental regulations on economic growth and broader human development. The relationships between pollution and economic development are complex with several possible feedback loops that are predicated on drivers and consequences of economic growth, ecosystem resilience and the ultimate reliance of financial capital on nature. The aim to achieve the sustainable development goals (SDGs) is an opportunity to revise and organize the debates between pollution and economic development.

Economic growth is clearly the dominant pathway towards reaching the positive goals of development but alternative approaches are also considered in terms of ecological constraints that could take us via a circular economy or post-growth model of development which will be discussed towards the end of this review as a possible opportunity for 'win–win' outcomes. This diagram is meant to show a range of possible paths and impact categories as a heuristic exercise rather than a deterministic model.The term 'eco-primacy' reflects the assumption which proponents of that pathway make regarding environmental issues requiring priority because of long-term reliance of economic systems on the environment (Daly 2014). The role of technology in providing a positive development outcome along this pathway is an essential part of the literature that also connects economics with engineering and operations research (National Academy of Engineering 1991). In contrast 'eco-externality' refers to the dominant approach in neoclassical economics wherein environmental impact is perceived as exogenous to economic performance of firms and consumers and presents a more short-term approach to considering pollution (Oats 2006, Stavins 2012). Increased consumption, or 'affluence factors', is indicative of what comes forth as a natural outcome of development processes in most cases up to a certain point (Myers and Kent 2004). However, it is important to recognize that there is huge variation between countries regarding how this affluence effect leads to pollution. Japan, Germany and the United States are the most compelling examples of divergence in pollution impact and resource use intensity despite comparable economic development indicators (Schreurs 2003). The economic contraction is contending with the trade-offs between financial and natural capital depletion, which is investigated in further detail from the perspective of interdependence of livelihood generation on both forms of capital in the contemporary context of market economies. Let us now consider each of these key areas of interactions between the economy and the environment in terms of evidence-based research that can inform policy formulation