The Environment-Economy relationship in the figure under Material Balance Model In Environmental Economics, is rather over-simplified, just to grasp the fundamentals in the relationship. In reality, the relationship between the economy and the environment is not only complicated, but also very complex. In Material Balance Model In Environmental Economics, we have not introduced the energy industry as a source of residual flows.
In effect, the ‘Production Sector’ of the figure should consist of two important segments, namely, (i) Materials Processing Sector; and (ii) Energy Conversion Sector.
The former produces all materials to the household sector like food products, produces metal products, textile goods, wood products, paper, plastic materials, rubber and petrochemicals. The latter, i.e., the Energy Conversion Sector produces thermal and nuclear energy (electricity), transportation, industrial ore reduction, space heating and also commercial space heating and cooling.
This Energy Conversion Sector supplies useful energy 
The Household Sector in its turn produces wastes in the form of carbon dioxide from respiration, useless junk, trash, garbage and other solid waste materials, as well as sewage water etc. The figure indicates in an elaborate manner, how the Production Sector makes use of air, water and sunshine and produces materials and energy required by energy conversion for the household sector and each in their turn emits wastes into the environment.
The law of conservation of energy dictates that all energy inputs must eventually find their way back to the environment in some form or other, such as waste heat. In fact, some have suggested that the limit on economic growth depends on the capacity of the environment to absorb heat residuals from the economy, rather than the scarcity of resources. The capacity of the environment to absorb heat residues is, of course, limited.
The illustration describing the relationship between environment and economy is of considerable value to Man, as a source of material inputs for production and consumption. This factor is not recognized much; though, of late, governments have become increasingly aware of the importance of the environment and its capacity to accept and absorb and also assimilate the waste materials returned to it in the process of production and consumption. When this absorptive and assimilative capacity of the environment is overused or misused, pollution and environmental degradation will result, as we are experiencing in the present century.
