Ecological Economics

Written by Richard B. Primack

It is assumed that the costs and benefits of free exchange are accepted and borne by the participants in the transaction.  In some cases, however, associated costs or benefits befall individuals not directly involved in the exchange.  These hidden costs or benefits are known as externalities.  An important and frequently overlooked externality is the environmental damage that occurs as a consequence of human economic activity, such as the dumping of industrial sewage into a river as a by-product of manufacturing.  Where externalities exist, the market fails to benefit as a whole.  Market failure occurs when resources are misallocated, which allows a few individuals or businesses to benefit at the expense of a larger society.  As a result, the society as a whole becomes lessprosperous from certain economic activities, not more prosperous.  Ecological economics takes into account all costs in transactions.

Richard Primack, A Primer of Conservation Biology, pp.36-37.

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