Post on 04-Feb-2016
description
1
Physical Dimension of Economic Processes
First and Second Laws of Thermodynamic
Entropy – a measure of disorder in a system.
First Law of Thermodynamics states that in a closed system the
total quantity of energy and matter remains constant.
Second Law of Thermodynamics states that in any
thermodynamic process, the entropy of a system plus its
environment must either increase or remain unchanged.
This law has been used to explain the reasons for the lack of recycling,
since the process of recycling must itself be costly in terms of
increased entropy. Thus, entropy presents an obstacle to the design of
a sustainable system.
The lower is the entropy in a system, the more order there is and the
more energy is available.
For instance, compare a piece of wood, the ashes and escaped gases
and dispersed heat, which remain after it is burned. From the First
Law of Thermodynamics, the matter and energy in existence after the
burning are exactly the same as they were before. However, the
2
entropy has increased; the order and the amount of available energy
have both decreased.
In environmental economics the concept of entropy is relevant via the
Second Law of Thermodynamics, which states that the entropy of a
system must either increase or remain unchanged. This has been used
by the environmental economists to argue that materials should be
conserved as far as possible since their complete recycling is
impossible.
3
The biosphere
The biosphere is that part of the Earth where all life exists.
It is the thin layer of soil, rock, air and water around the Earth’s
surface that is only about 20 km thick. Within this layer, there are both
organic components – such as plants, animals, insects, micro-
organisms and their dead remains and body wastes plus inorganic
components.
The biosphere represents a huge reserve of energy. There are three
main sources of energy for the biosphere –
gravity,
solar radiation,
internal Earth forces.
Of these, the most important is solar radiation. Plants use solar energy
to make energy through the process of photosynthesis, and this energy
is then available for use by animals and people. Plants are the first
stage in the food chain (they are known as primary producers).
Without solar energy, there could be no life as we know it on the
Earth.
4
The ecosystem
An ecosystem is an independent community of plants and animals
together with the habitat to which they have adapted. All the elements
of an ecosystem are interrelated, being either directly or indirectly
dependent on every other element of the ecosystem.
A single ecosystem could be small – coastal estuary,
or big – global ecosystem.
5
Natural resources as production factor
Natural resources – assets and flows of goods which are produced by
nature (or anything people can use what comes from nature).
People gather natural resources from the Earth. Examples of natural
resources are air, water, wood, crude oil, solar energy, wind energy,
hydro-electric energy, and coal. Refined oil is not a natural resource,
for example, because people make it.
6
Classification of Natural Resources
There are two sorts of natural resource: renewable resources and non-
renewable resources.
A renewable resource grows again or comes back again after we use
it. For example, sunlight, sun energy, wave power, geothermal power,
water. Their availability is unaffected by the amount exploited at any
given moment.
Renewable resources also include those with a biological growth
potential such as forests and fish stocks. These resources can be
exploited up to a certain point without reducing the stock available in
the following period. However, if exploitation is greater than the
regenerative capacity of the resource, then the stock will decrease.
Thus, these resources, as well as being renewable, can also be called
depletable.
7
A non-renewable resource is a resource that does not grow or come
back, or a resource that would take a very long time to come back.
Non-renewable resource stocks are reduced by any extraction. For
example, fossil fuels (coal, oil, natural gas), minerals (metallic and
non-metallic) and nuclear fuel (such as uranium).
Many non-renewable resources can be recycled, which means they
can be used repeatedly. For example, metals (aluminum, zinc, lead),
some non-metallic minerals (diamonds, materials manufactured from
fossil fuels such as plastics).
Biological resources include genetic resources, organisms or parts
thereof, populations, or any other biotic component of ecosystems
with actual or potential use or value for humanity. (Convention on
Biological Diversity - Rio de Janeiro, 1992)
Natural capital consists of a nation’s environmental and natural
resource reserves. Natural capital thus includes the stock of life-
supporting system, biodiversity, and renewable and non-renewable
resources, but excludes both human and human-made capital.
This concept is useful for two major reasons. Firstly it highlights the
extent to which environmental resources contribute to economic
productivity and welfare. For instance, the environment provides
waste-disposal services for the productive process, absorbing and as
far as its capacity allows, recycling waste products and pollutants.
8
Stocks of environmental resources, including energy, raw materials,
and agricultural outputs, provide inputs to the productive process.
Secondly, the concept of natural capital highlights the implications for
the future of the depletion of environmental resources and damage to
the environment’s capacity to provide valuable services.
9
Will Resource Run Out?
The distinction between renewable and non-renewable resources
partly rests on the assumption that non-renewable resources are finite
and therefore exhaustible.
Malthus Paradigm v. Ricardo Paradigm
Thomas Malthus – English demographer (1766 – 1834) argued (An
Essay on the Principle of Population1798) that the Earth could only
support a finite population size because food supplies are limited. He
said that while the human population increases in geometric
progression (1-2-4-8-16 etc), food production only increases in an
arithmetic progression (1-2-3-4-5-6 etc). Malthus believed this was
the case because the amount of land is finite, and so food production
could not continue increasing to keep pace with population growth.
David Ricardo - English political economist (1772-1823) is
responsible for developing theories of rent, wages, and profits. He
defined rent as "the difference between the produce obtained by the
employment of two equal quantities of capital and labor." The model
for this theory basically said that while only one grade of land is being
used for cultivation, rent will not exist, but when multiple grades of
land are being utilized, rent will be charged on the higher grades and
will increase with the ascension of the grade. As such, Ricardo
believed that the process of economic development, which increased
10
land utilization and eventually led to the cultivation of poorer land,
benefited first and foremost the landowners because they would
receive the rent payments either in money or in product.
In 1972 a group known as the Club of Rome headed by Denis
Meadows wrote The Limits to Growth, in which the authors argued
that the combination of population growth and finite natural resources
would create mass misery. The group then run several computer
simulations on the future of humanity under various scenarios, all of
which seemed to end in disaster. Their arguments paralleled those of
Thomas Malthus two centuries earlier. In the 1960s, Julian Simon
supported these arguments, but later argued that the evidence didn’t
support these gloomy views. He changed his views, and published
several books, the most complete one being The Ultimate Resource 2
(1996).
He argued that the true measure of scarcity is price. If something is
becoming scarcer, its price will increase. Similarly, if something is
becoming more abundant, its price will fall. Although it seems
contrary to common sense, the evidence seems to be that over time,
the price of almost every natural resource (adjusted for inflation) is
decreasing, indicating that resource are becoming less scarce or more
abundant.
In 1931 Harold Hotelling, one of the most respected resource
economists at that time, predicted that the real price of oil and of other
fixed resources would rise as the amount left on Earth decreased.
11
However, the evidence shows that apart from politically-motivated
price increases in the 1970s and early 1980s, the price of petrol has
declined steadily. Furthermore, if the price of petrol is related to the
real cost of purchasing it, which is the number of hours needed by an
average person to earn the money to buy a litre of petrol, then the
decline in price is even more marked.
However, the high prices prompt entrepreneurs and innovators to find
new resources, or new ways of getting existing resources more
cheaply. Julian Simon quoted the example of billiard balls that used to
be made from ivory of elephants’ tusks. As the demand for billiard
balls increased, elephants become a scarce resource, because their
breeding time was slower than the increase in demand for ivory. As a
result, researchers looked for substitutes and developed celluloid,
which was prototype of plastic. Plastic is a much cheaper alternative.
Our supplies of natural resources are not finite in any economics
sense. Nor does past experience give reason to expect natural
resources to become more scarce. Rather, if history is any guide,
natural resources will progressively become less costly, hence less
scarce, and will constitute a smaller proportion of our expenses in
futures years. (J. Simon).
Barnett and Morse developed a method to estimate the per-unit
extraction cost of resource. Cost are based on actual expenditures on
labour, capital and other inputs. It can be used to estimate the
changing scarcity of a resource over time – increasing unit costs
12
reflect increasing scarcity. Barnett and Morse used this method to
conclude that mineral resources became less scarce over the period
1870 – 1970 due to the discovery of new deposits and the substitution
of less scarce resources.
When we use coal, there is less coal afterward. One day, there will be
no more of it to make goods. The non-renewable resource can be used
directly (for example, burning oil to cook), or we can find a renewable
resource to use (for example, using wind energy to make electricity to
cook). It is important to conserve (save) non-renewable resources,
because if we use them too quickly there will not be enough.
All places have their own natural resources. When people do not have
a certain resource they need, they can either replace it with another
resource, or trade with another country to get the resource. Some
resources are difficult to find, so people sometimes fight to have them
(for example, oil resources).
When people do not have some natural resources, their quality of life
can get lower. For example, when they cannot get clean water, people
may become ill; if there is not enough wood, trees will be cut and the
forest will disappear over time (deforestation); if there are not enough
fish in sea, people can die of starvation. Some examples of renewable
resources are wood, solar energy, trees, wind, hydroelectric power,
13
fish and sunlight. Non renewable resources cannot be recycled. For
example, oil, minerals, and other non renewable resources cannot be
recycled. Natural resources are very important to a human lifestyle.