Fundamentals of the Economics of Environmental Resources The Optimal Trade-off between Environmental Quality and Economic Goods

Waste Assimilative Capacity: three key factors First, like anything else in nature, the waste assimilative capacity of the environment is limited. Thus, the natural environment cannot be viewed as a bottomless sink. With respect to its capacity to degrade waste the natural environment is, indeed, a scarce resource.

continue... Second, the assimilative capacity of the natural environment depends on the flexibility of the ecosystem and the nature of the waste. –Degradable pollutants (municipal waste) –persistent or stock pollutants (toxic waste)

continue... Third, the rate at which the waste is discharged greatly affects the ability of the environment to degrade residuals. The implication of this is that pollution has a cumulative ecological effect--i.e.; pollution reduces the capacity of an environmental medium to withstand further pollution.

Lessons from the Simple Model: W=f(X,t) The natural environment has a limited capacity to degrade waste. A certain minimum amount of economic goods can be produced without causing damage to the natural environment. Thus, zero pollution not only is a physical impossibility, but even on purely ecological considerations, it is an unnecessary goal to pursue.

continue... Although the above simple model does not adequately capture this, the cumulative effect of waste discharge into the natural environment is nonlinear. This is because pollution tends to reduce the capacity of an environment to withstand further pollution.

continue... The ecological threshold of economic activity (Xo in Figure 5.1) can be augmented by technological means.

Conditions for Clearly Defined Ownership Right First, the ownership rights of the resource are completely specified. Second, the rights are completely exclusive so that all benefits and costs resulting from an action accrue directly to the individual empowered to take actions.

continue... Third, the ownership rights of the resource are transferable. In other words, resources can be exchanged or simply donated at the “will” of the owners. Finally, ownership is enforceable. That is the ownership of resources is legally protected.

Implications of Commonly Owned Resources First, for the commons, economic pursuit on the basis of individual self-interest would not lead to what is best for society as a whole. In other words, the principle of Adam Smith’s “invisible hand” would be violated.

continue... Second, if tragedy is to be averted, the use of commons needs to be regulated by a “visible hand.”

Environmental Externalities and Their Economic Consequences Externality is defined as conditions arising when the actions of some individuals have direct (negative or positive) effects on the welfare or utility of other individuals, none of whom have direct control over the activity. Examples: The avid gardner and the fish hatchery cases.

The Root Causes of Environmental Externalities: –Lack of exclusivity (non-exclusiveness) for the following reasons: the good is non-rival the transaction cost is high the resource is commonly owned

continue... The economic consequences of Externality: –In the presence of real externalities, there will be a divergence between private and social evaluations of costs and benefits. –This would cause what economist recognize as market failure.

Final Lesson In the presence of an externality, resource allocation through the guidance of a free- market system would lead to inefficiency. More specifically, because the market lacks a mechanism by which to account for external costs, it tends to favor more production of goods and services from industries inflicting damage to the natural environment. Thus, the presence of real externality creates a misallocation of societal resources.