Most economies in the world today are considered "market economies", meaning the cost of a good is determined by supply and demand.
Supply is the the amount of product the supplier has, whereas the demand is how much consumers want the product in question. When supply rises, the demand lowers; and as the supply decreases, the demand of that product becomes more intense and rises. The point where supply and demand meet is the equilibrium point.
However, the market doesn't always take all costs of production into account. Evidence of this is shown in instances of land degradation-or pollution-of an area. This also happens when a natural resource is damaged or depleted. These actions bear no direct cost. When we, or the government, use a resource that is not reflected in the purchase price, it's considered an externality. Therefore, degrading and/or polluting land, air, or water without directly paying for it is in fact an externality. If the cost were included, it would change the price of the product, therefore affecting the supply and demand.
When the cost of production rises because of taxes, the supply curve shifts, and the new equilibrium is at a higher cost. And because of this, fewer items are both manufactured and purchased. So, basically, externalities make the price rise and the demand lower. And if externalities are included in the price of a product, it reflects its true cost.
Measuring Wealth and Productivity
Wealth and productivity is measured in a ton of ways, yet the biggest and most commonly used way is the GDP (Gross Domestic Product). This refers to the value of all products and services produced within a year in a given country.
GDP envelopes four different types of spending: consumer spending, investments, government spending, and exports minus imports.
GDP, however, has been criticized for a variety of reasons. Costs for health care contribute to a greater GDP. Because of this, a society that has more illness than another equivalent society, has a higher GDP as well. This doesn't reflect the "wealth" or "well-being" of a society. And since externalities aren't reflected in the GDP, the measurement of GDP does not reflect the real cost of production.
In order to improve our world's environment, we must increase the GDP in less developed nations. As income rises and the rate of birth falls, the GDP increases and population growth slows, resulting in a reduction anthropogenic (derived from humans) environmental degradation. Developed nations, however, are able to purchase products that better the environment, like catalytic converters that control pollution. This helps to use their resources in a more efficient and regulatory way. Yet, developed countries have been shown to use more resources than developing countries. And this leads to an increase in environmental degradation.
Although GDP is the most common way of measuring wealth in a country, researchers are attempting to use another method of measurement, the GPI (Genuine Progress Indicator). The GPI is a measurement of economic status that includes personal consumption, income distribution, levels of higher education, resource depletion, pollution, and the health of a population. While the GDP within the US has been shown to increase steadily from 1950 to 2004, the calculated GPI remained level. In many European nations, they use the GPI in order to calculate their GDP. In these calculations, the country's overall wealth-including human and environmental welfare-has decreased steadily over the past 30 years.
The Kuznets Curve is a model used to demonstrate that as per capita income increases, environmental degradition increases, then decreases. Yet, this model is very controversial due to the fact that it cannot be applied to every single situation. An example of this would be that despite the increasing wealth of developed countries, carbon dioxide emission and other harmful pollution causing substances are on the rise as well. Because of this, there is speculation to if developed countries are really wealthy enough to solve environmental problems. But, not every environmental issue can be solved with the monetary.
Technology Transfer and Leapfrogging
In addition, Kuznets Curve has been shown to aid developing countries. Technology transfer is when less developed countries are exposed and adopt technological innovations and advancements formerly developed in more developed countries. An example of this is the simple concept of the cell phone. In developed countries, cellular phones are a basic and everyday necessity. This device is so widely used, that a lot of the population barely uses a landline anymore. But when developed countries use a technological device without any prior knowledge/precursor technology, it is called leapfrogging. This occurs whenever a new technology develops to essentially throw out the old. Because of this, developing countries can take developed nations as a precedent and take advantage of wealthier nation's research, development, and experience.
An example of leapfrogging would be solar energy. In more industrialized nations, solar energy cannot compare economically to gas or coal generated electrical energy. Yet, in countries that are unable to build successful electrical grids, solar energy has been extremely successful. Solar energy gives developing countries the ability to create and distribute their own electricity without the extremely expensive process of building electrical grids.