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The Environmental Kuznets Curve states that a region’s environment will worsen as they experience economic growth but only until a certain prosperity level (income per capita) is attained. At this point, society can afford to protect the environment and ecosystems improve.

Does the Environmental Kuznets Curve hold up to reality?

We should see more environmental damage as income per capita increases and then once a certain level of income is reached the environmental damage will decrease and the environment will start to improve.

There is some evidence to support this but it doesn’t always hold up.

Once the theoretical threshold is reached and society can now afford to care about the environment does it mean that they will automatically start caring?

Maslows Hierarchy of Needs states that there are levels of needs that have to be met in sequence before you advance to the next level.

If you don’t have food or shelter, you probably won’t be concentrating on self-actualization or philosophical improvement.

If most of the people in a community are starving they won’t be worried too much about helping the environment. But once they have the resources to feel stable in their most basic requirements they can shift their priorities to other things.

Each culture may place different values on the environment at varying levels of per capita income. The threshold of income may not be the same in each economy either. And some types of pollutants may follow the Kuznets curve while others do not.

For example, India is advancing quickly up the ladder in per capita income but has not reached a threshold where the environment is prioritized. And we have seen dramatic reductions in obviously harmful pollutants around the world as income increases but invisible pollutants like carbon have not followed the Kuznets curve until now due to climate change policies.

It is clear that in many cases government regulation may be required for the Environmental Kuznets Curve to take effect. In the United States as income levels increased the number of cars on the road drastically increased but the levels of pollutants like Sulphur Dioxide from vehicles were reduced considerably due to vehicle emissions standards.

The government doesn’t always need to step in. As consumers have increased amounts of discretionary spending they often choose products that are more friendly to the environment. This is due to the diminishing marginal utility of money. Your first $20 000 of income is worth a lot more to you than your $20 000 raise that takes you from $100 K to $120 K a year. You will be willing to part with more of the last $20K in order to protect the environment than you will with the first.

Another factor behind the Environmental Kuznets Curve is that the reason an economy becomes more productive is due to improved technology. As technology advances, we are capable of producing more with less raw materials which have less impact on the environment. Another example of technology reducing environmental damage is solar power and the move to electric vehicles.

As an economy develops, there is a shift from farming to industrial manufacturing to the service sector. Generally, services have a lower environmental footprint so as a greater percentage of the economy moves to services the environmental damage is reduced. But this could also be the result of exporting environmental damage by importing more products manufactured elsewhere.

Because the Environmental Kuznets Curve relies on preferences, it may need a nudge from the government or some marketing help to change attitudes towards the environment. And in some cases, raising awareness of problems is all that is needed.

Why can’t the private sector be left alone to handle reducing its own environmental footprint? Because not all costs of economic activity are internalized by individual firms.

Whenever a cost or a benefit can not be paid or captured by an individual firm then there is an economic externality at work. For example, If I mow my lawn, I receive the benefit of a well-kept yard but my neighbor may get a headache from the noise. Or if I am playing music and my neighbor loves listening to it I have no way of charging him for it. He is getting a positive externality.

In the case of carbon and other pollutants, there is a cost associated with the production that the polluting firm doesn’t have to pay. Nor do the customers who bought the product have to pay. Society in general or specific people who are harmed is paying the price.

The Kuznets Curve is usually used to graph the hypothesis that as an economy develops, market forces first increase and then decrease economic inequality. The hypothesis was first introduced by economist Simon Kuznets in the 1950s.

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