Explain the concept of Material balance model

Material balance model in environmental economics:

Energy crisis of 1970 centaury and some other environmental problems in the same period had attracted the attention of different environmental scientists and economists to relook into the interlinkage between economy and environment. 

They have seriously considered the impact of different economic activities on environment. Thus to exhibit the interlinkage between the economy and the environment. Allen.V.Kneese, Robert.U.Ayers and C.D Arge developed a model popularly known as the material balance model in 1970.

The material balance model identify a two way inter-linkage between the economy and environment.

Inflow of the natural resources from the environment to the economy:

On it's very outset the material balance model assumes that household sector is the sole owner of all factors of production including the natural resources. The household sector extracts natural resources. The household sector say 'R' from the environment and supplies to the factor market. 

The demand for the natural resources comes from the firms who uses them (R) to produce different goods and services say (F). The inter-linkage between the economy and the environment as shown by the help of the following chat-

Outflow of residuals from the economic to environment: 

By the recognizing the factors that the economic activities has come adverse effects on the environment, the material balance model has shown that in the production process, firms not only produce final goods and services (F) but also generates some amount of wastes say W¹. So, in the firm sector (R) amount of resources finally becomes equal to (F) amount of financial goods and services + W¹ amount of wastes.

The goods and services produced by the firm sector were sold to the household sector through market mechanism. Since, the household sector doesn't assume to produce anything. So, the total amount of goods and services (F) consumed by it becomes equal to total amount of wastes say W² generated in its consumption process, so in household sector F=W²

Thus accounting says:

In firm sector R= F+W¹  ------ (i)

In household sector F= W² -----(ii)

Substituting the value of 'F' from equation (ii) in (i) we get-

R= W²+W¹

Thus material balance model concludes that total amount of natural resources aspected  from nature were finally return back to environment in the form of wastes.

However, accounting identity (R=W¹+W²) as postulated by material balance model can be proved with the help of the law of thermodynamics-

(i) The first law:

The first law of thermodynamics state that matter and energy neither can be created nor can be destroyed. It can only transform from one form to another form. From the first law of thermodynamics it appears that total amount of resources expected from nature, eventually return from back to environment in the form of of wastes. This is known as the material balance principle.

(ii) The second law:

The second law of thermodynamics also has it application in material balance model. The second law of thermodynamics is known as Entropy law.

The Entropy law explain that residuals can not be recycle in such a way that we get back all the capacity of the original energy. In other words, environment can not convert all residuals which are not being recycled by environment results in environmental pollution.

Importance of material balance model:

(i) The material balance model help us to establish the scientific relationship between the economy and the environment.

(ii) The material balance model highlights the negative impact of economic activities on environment.

(iii) The material balance model shows that nature always has limited assimilative, capacity. Therefore there should be always a cap on economic activities.

(iv) The material balance model finally lays down the foundation stone of the concept of sustainable development.

Limitations of the material balance model:

(i) The implications of this model is not suitable for poverty midden countries where the need of hour is to excel-rate the peace of economic development rather than putting more emphasis on environmental quality.

(ii) The material balance model neglects the fact there may be some substitutes of natural resources.