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BOOK REVIEW 
  

Revisiting Environmental Economics: Concepts, 
Methods, and Policies 
 

Ramprasad Sengupta  
 
Dodo J. Thampapillai and Matthius Ruth. 2019. Environmental Economics: 
Concepts, Methods and Policies. London: Earthscan. ISBN: 978-1-138-06005-0, 
pp. 324, GBP 34.99 (PB).  

Humans constitute one of the 
innumerable species inhabiting Earth, 
particularly its biospheric segment. Like 
other species, humans have developed 
a relationship with their natural 
environment, comprising both living 
organisms as well as their abiotic 
environment. However, the 
relationship between humans and 
nature has changed vastly over time, 
resulting in major changes in the 
biosphere, with climate change and 
biodiversity loss being two major 
consequences. The main concern of 
economic science has been the 
development of human material well-
being, which depends on the 
production, consumption, and 

                                                        
 Professor Emeritus, Centre for Economic Studies and Planning, School of Social Sciences, 
Jawaharlal Nehru University; UPOHAR Luxury Housing Complex, Tower 8, Flat 601, 
Panchasayar, New Garia, Kolkata 700094, India; rps0302@gmail.com. 

Copyright © Sengupta 2020. Released under Creative Commons Attribution-
NonCommercial 4.0 International licence (CC BY-NC 4.0) by the author.  

Published by Indian Society for Ecological Economics (INSEE), c/o Institute of Economic 
Growth, University Enclave, North Campus, Delhi 110007.  

ISSN: 2581-6152 (print); 2581-6101 (web). 

DOI: https://doi.org/10.37773/ees.v3i2.214  

https://doi.org/10.37773/ees.v3i2.214


Ecology, Economy and Society–the INSEE Journal [198] 

distribution of resources among individuals in society. In the process of 
production, a variety of material and energy resources are drawn from 
ecosystems and are converted through chemical, biological, and physical 
transformations into products and ultimately into waste at the end of the 
economic life cycle. In the process of humans rearranging matter through 
conversions of resources into waste, the molecular structure of resource 
systems is disordered, raising their level of entropy (or the degree of 
disorder). This results in a loss of efficiency in their ability to effect similar 
conversions that ensure the well-being of human society.  

If the waste flows exceed the absorptive capacity of nature, the unabsorbed 
wastes accumulate as pollutants and contaminants in the ecosystem, 
generating adverse health effects for humans as well as the ecosystem. We 
may define environmental capital as the total stock and fluxes of all 
resources of ecosystems, including their waste absorptive capacity. For long, 
economists have neglected the role of entropy and other ecological laws in 
economic processes and the specific role of environmental capital in the 
process of economic development.  

Conventional environmental economics addresses the problems arising 
from the loss of environmental capital as a consequence of market failure 
due to the public good and non-tradable nature of many of the ecoservices 
as well as the externalities caused by the residuals of material resources. The 
latter arise as waste at the various stages of production, transportation, and 
use of the products thereafter. At the microeconomic level, the analytical 
framework used for these issues has essentially been one of applied welfare 
economics. On the other hand, at the macroeconomic level, environmental 
economics has focussed mostly on the sustainable accounting of national 
income and its growth.  

These micro- and macro-level analyses do not, however, factor in the role 
of environmental capital explicitly, nor do they articulate methods of analysis 
that consider environmental issues as derivatives of the role of 
environmental capital.  

The book Environmental Economics: Concepts, Methods and Policies by Dodo J. 
Thampapillai and Mathias Ruth (2019) fills this gap in the construction of 
an analytical framework of environmental economics. The book provides 
an understanding of the connection between environmental capital and the 
allocation of resources at the micro level and the growth of income and 
capital accumulation at the macro level; here, capital is redefined to include 
all stocks of resources, natural or human-made.  

 



[199] Ramprasad Sengupta 

The book is divided into the following five parts:  

(1) The environment and economy: This part shows how environmental 
capital operates in the circular flow of values among households, 
firms, and governments while revealing the connections with the 
external sector of trade as well. 

(2) Microeconomics and the environment: This part is concerned with 
issues relating to consumer demand, the economics of renewable and 
non-renewable resources, production, costs and supply at the firm 
level and, finally, market organization in the context of allocation of 
resources, including environmental capital and human-made capital 
and labour. 

(3) Macroeconomics and the environment: This part discusses the 
adaptation of both short-run and long-run macroeconomics for the 
explicit incorporation of the role of environmental capital—its 
depreciation as well as investments in capital and associated 
technologies. Finally, this part contextualizes environmental capital 
in the analysis of the trade policies and globalization. 

(4) Theory of valuation and estimation of environmental capital: A 
framework to assess the sustainability of an economic system that 
interacts with ecosystems and to derive policies based on this.  

(5) Environmental policies: Finally, the book discusses environmental 
policies aimed at the sustenance of environmental capital by reducing 
its damage as well as investment policies for abating damages and 
restoring environmental capital.  

The book is lucidly and elegantly written, making it an extremely useful 
reference text on environmental economics. I would, in addition, like to 
highlight a few novel features in the analysis in the context of issues that 
arise while adapting the standard economic theory for environmental 
effects. 

1. At the level of microeconomic analysis, the adaptation of the standard 
theory of consumer behaviour for environmental effects has shown how 
the endowment effect of consumption due to a price change may cause 
a shift in the preference structure (indifference map) involving a choice 
between environmental and non-environmental goods and services. This 
may help to explain the difference between the result of a price change 
and that of its reversal. Such analytics also helps us to explain the 
divergence between the willingness to pay and the willingness to accept 
a change in the environmental endowment and that of a reversal of such 
change. The concerned chapter (Chapter 7) also shows how the 



Ecology, Economy and Society–the INSEE Journal [200] 

environmental attributes of consumer goods, along with income and 
other factors like advertisement spending, can influence market 
demands along with the elasticity of the environmental quality of the 
consumption good.  

2. The chapters covering production, costs, and supply show how an 
increase in the use of labour and human-made capital leads to an 
increasing use of environmental capital (KN—the notation used in the 
book), resulting in its increasing fragility due to a rise in entropy. The 
latter is shown to set a limit on the maximum output yielded by a 
production function, which in turn would shift downwards with the 
shrinking KN. Capital is defined in the book as inclusive of both 
human-made and natural capital, with such choice of their respective 
numeraires that they are additive. Such a redefinition of capital yields a 
production function that points to the overstatement of output (in a 
comparative sense) by the conventional production function, which 
considers capital only as human-made or manufactured. The concerned 
chapters show the implication of the absolute bounds on the achievable 
output and the sharp rise in marginal cost as the output rises up to the 
limit set by the entropy law. The adaptation of isoquants and cost curves 
in such an analysis is shown to have important implications regarding 
the firm-level equilibrium and expansion path of output with changes in 
firm-level budgetary conditions. The concerned chapters point out the 
important implications of the short-run and long-run planning of a firm 
for the scale of production, resource use, and costs.  

Finally, at the micro level of analysis, the impact of environmental 
capital’s use on the market equilibrium supply and unwanted emissions 
is discussed both under the conditions of perfect competition and 
monopoly and are compared with the benchmark of the sustainability 
condition. The analysis is insightful in showing the conditions under 
which the perfectly competitive market equilibrium is a better 
benchmark than a monopoly within the context of sustainability, which 
is defined with reference to the absorptive limit of the ecosystems.  

3. The treatment of the role of environmental capital in short-term and 
long-term macroeconomics has, in my opinion, been the most 
significant contribution of this book. It elegantly presents how the 
analysis of aggregate demand and aggregate supply, as functions of price 
level, can be adapted to the limitation of productive capacity due to the 
limit of environmental capital. It discusses the possibility of 
incorporating the impact of the depreciation of environmental capital on 
the one hand and of investment in KN on the other in short-term 
equilibrium income, employment and price level, etc. The implication of 



[201] Ramprasad Sengupta 

such equilibrium is also compared with the benchmark of full-
employment equilibrium in cases of both linear and non-linear 
depreciation of KN with the rise in production. 

The book further reworks the analytical framework of environmental 
macroeconomics to consider both the waste absorptive role of 
environmental capital and the impact of its entropic depreciation on 
income and output. The implications of the results are important for 
ecological sustainability, full employment, and the stabilization of 
economic fluctuations. It is also important to examine if such varying 
objectives would have any conflicting considerations with regard to the 
choice of policies.  

4. The long-run macro analysis in the book has shown how the standard 
versions of Harrod, Solow-Swan, Romer, and other endogenous growth 
models can be adjusted to incorporate the role of environmental capital 
as distinct from that of human-made capital and their joint implications 
with respect to a steady state solution. The models recognize the role of 
the productivity of the KN service and also incorporate the feedback 
effect of depreciation of KN on growth rate and on the character of its 
steady state solution. The chapters have also illustrated the results of 
both short- and long-term macroeconomic indicators as well as those of 
long-term growth for Australian and South Korean economies, 
respectively.  

Before concluding the book, the authors deal with trade, the valuation of 
environmental capital, and environmental policies, extending the same 
consistent framework of adapting economic analysis to accommodate 
environmental capital. Taking an overview of the various chapters, one can 
conclude that the book provides a highly useful alternative text for 
environmental economics, which is firmly rooted in ecological principles 
and entropy law, the latter being the source of resource scarcity and a 
limitation to economic scale or growth. The book fulfils the 
interdisciplinary purpose of integrating ecological laws into the models of 
functioning of an economy at both the micro and macro level. A reader will 
be able to discern how interdisciplinary considerations relating to ecological 
limits can be built into economic theory with appropriate adaptations. Such 
theoretical reformulations that adapt to environmental concerns will be 
helpful for both understanding and interpreting the economic 
consequences of the environmental crises of today as well as for developing 
the appropriate policy insights for achieving sustainable development in the 
future. 


