Environmental Management & Ethics

Environmental Economics & Ethics

Externalities, polluter-pays, discounting and cost–benefit analysis — valuing the environment in decision-making.

PART 1

Topic Breakdown & Traps

The Engineering Principle

Markets fail when production imposes an uncompensated external cost (a *negative externality*) such as pollution. The polluter-pays principle (PPP) internalises that cost. Cost–benefit analysis (CBA) compares the discounted stream of benefits and costs; future values are converted to present worth by discounting. The precautionary principle justifies action under scientific uncertainty when impacts could be serious or irreversible.

The Core Formula Matrix

Present worth:

P W = \frac{F}{( 1 + i ) ^{n}}

(F = future value, i = discount rate, n = years)

Net present value:

N P V = \sum_{t = 0}^{n} \frac{B _{t} - C _{t}}{( 1 + i ) ^{t}}

— accept if

N P V > 0

Benefit–cost ratio:

B C R = \frac{PW of benefits}{PW of costs}

— viable if

B C R > 1

Polluter-pays principle: the polluter bears the cost of pollution prevention and control.

The ‘IIT Traps’

⚠
Negative externality ≠ opportunity cost. An externality falls on a *third party*, not the decision-maker.
⚠
Discounting reduces future values. A higher discount rate makes future environmental benefits look smaller.
⚠
BCR > 1 and NPV > 0 are equivalent acceptance criteria for a single project.

📚 Standard references

Environmental Economics — Charles D. Kolstad
Economics of the Environment — Tom Tietenberg & Lynne Lewis

PART 2

Progressive 3-Tier Question Suite

Q1BASIC1 Mark · MCQ

Pollution damage imposed on people who are not party to a transaction is an example of a:

Q2MEDIUM2 Marks · NAT

An abatement benefit of ₹1,00,000 is expected after 5 years. At a discount rate of 10%, its present worth (₹) is _____.

Q3HARD2 Marks · MCQ

Taking precautionary action against a potentially serious, irreversible impact even without full scientific certainty reflects the: