Question

Explain what we mean when we say that the economy exists in an ecological system. How can we add the natural capital in a circular flow diagram, and why is it important? Discuss how the concept of negative externalities and property rights are related to pollution and resource degradation.

Answer 1

Economy exists in an ecological system. This means there is a balance in terms of inputs and output. The amount of money flowing in the economy is equivalent to the money flowing out of the economy. Inputs in the form of resources and raw materials come in and the later part is converted to output which is balanced overall.

Natural capital is the stock of natural resources in the environment which includes soil, air water and living organisms. Natural capital acts as an input and is converted into final output in the form of finished goods.

Negative externality causes harm to the third party as a result of economic transaction. Pollution causes harm to the residents of the society who inhales the polluted air and suffer from various ailments. Resource degradation is the depletion of natural environment like soil, air and water which is caused by pollution and leads to degradation of the natural environment.