In any economic system, be it a free market or a command economy, the elementary functions of production, distribution and consumption take place within the natural world. The natural world provides the raw materials and the energy inputs for the production process whereas production and consumption leave “residuals” or waste products which go back into nature. The manner in which the residuals are handled will infact tell us how they may lead to pollution or the degradation of the natural environment. (a) explains nature in its role as a product of raw materials and (b) explains what the impact of residuals is on the natural world. Therefore we can see that environmental economics draws from two angles. Primarily it is the study of waste flow management and secondly, it studies the impacts of human activity on environmental resources. Thus one’s misconception of environmental problems only being constrained to pollution are removed. Infact, environmental economics focuses not only on pollution oriented problems but also looks at issues such as habitat disruption caused by human activities in an economic system. A good example of this is a housing development scheme which will disrupt the natural habitat and at the same time bring an array of problems such as sanitation, house waste disposal, etc. Analysing the environment from the perspective of an economic system we have to establish how this