Environmental economics studies how economic activity affects the environment and how economic approaches can address environmental issues. In IB ESS, it applies ideas about producing, distributing and consuming goods and services to environmental sustainability.
This is HL-only content in subtopic HL.b, Environmental economics.
Economic decisions can impose environmental costs that market prices do not reflect. For example, electricity from coal may be inexpensive for consumers while its price excludes health costs from air pollution and environmental costs from greenhouse gas emissions. This is market failure because the free market’s allocation of goods and services creates negative environmental impacts.
The polluter-pays principle attempts to correct this failure by making polluters bear the cost of their environmental damage. Governments may apply pollution taxes, quotas or tradeable permits. The European Union Emissions Trading System, for example, places a price on greenhouse gas emissions from covered industries.
Environmental accounting assigns economic values to natural resources, ecosystem services and their depletion. However, valuation is difficult when nature has non-use value, such as the value people attach to protecting a species they may never directly use or encounter.
| Approach | Central focus | View of the environment |
|---|---|---|
| Environmental economics | Applies conventional economics to environmental problems | Environmental damage can often be addressed through valuation, incentives and regulation |
| Ecological economics | Views the economy as a subsystem of the biosphere and society | Economic activity must remain within ecological limits |
A common misconception is that environmental economics simply studies “green businesses.” It is broader: it examines market failure, environmental valuation, policy instruments, resource use and the relationship between economic growth and environmental welfare.
Exam technique: For an explain question, connect an economic mechanism to an environmental outcome. For evaluate or discuss, consider both the effectiveness and limitations of economic valuation or market-based policies, use a named example, include contrasting stakeholder perspectives, and finish with a supported conclusion.
