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As late as 300 years ago, nearly everyone was fatalistic about nature. Whatever transactions people undertook left all but their immediate environment and the social order in which they nested pretty much undisturbed. People lived in self-contained groups, which left them few options, but to adapt to the idiosyncrasies of their natural surroundings. The intellectual ferment of the eighteenth-century enlightenment changed this. Over about two centuries the idea that the social order may influence nature-for good- spread over the world. A broad consensus that this same order may also influence nature for ill was reached only in the last half of the twentieth century. Although the field of environmental economics probably dates back to the late 1950s and early 1960s, its roots are in the externality theories of Marshall and Pigou, the Public goods theories of Wicksell and Bowen, the general equilibrium theory of Walras, and the applied field of benefit-cost analysis, foreshadowed by Dupuit but cultivated to maturity by economists in the water resource agencies of the US Government. 

As in general economics the history of environmental economics can be viewed as a sequence of thought experiments or models and organized empirical observations directed at a common set of questions about economic scarcity. The need for distinctive analytical treatment of natural resources was realized by pre-World War II, economists Smith (1776), Ricardo (1817) and Marx (1865) because the services they offer are gratis. Payments to the owners of the resources are therefore rents or unearned increments. Natural resource was regarded as another factor of production similar, aside from their free provision by nature, to heterogeneous capital, which never gets out of the market process. The criterion was thereby blind to the life support and amenity services of the environment and presumed that present consumption of resource stocks did not impact on future consumption and production opportunities. Not until the early twentieth century did economists begin to explore systematically the tension between present-value maximization as if the entire economy were a single, fully informed, incentive-compatible firm indifferent to the foreclosure of its future options and to the depletion and non-market features, which pervade natural resource issues. Economists recognized external effects of economic transactions for a long time. The 1920s saw a series of articles in the Economic Journals dealing with the possible external economies that were associated with investment in decreasing cost industries. The field really took off in the 1970s with the important contributions emerging from the “think tank” Resources for the Future, and has been booming ever since. In the 1990s the payoff was seen in terms of influence on environmental policy.

Mostly environmental economics involves adapting concepts developed in other branches of economics (particularly Public finance and Industrial organization) and applying them to environmental problems, but there are some aspects of environmental economics like non-market valuation, which are unique to this field but have the potential to be applied in other branches of economics. Non-market valuation involves developing methods of measuring the demand for goods for which there is no market, for example, measuring the value of the ecosystem service that a forest provides is a non-market valuation. The markets for this service do not exist but it provides benefit to the ecosystem and hence a value is placed on this service.


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