Lecture 20: The Environment and Development Economics and the Environment

Environment and Development: The Basic Issues The concept of sustainable development, and linkages between the environment Sustainability: a development path is sustainable ‘if and only if the stock of overall capital assets remains constant or rises over time’ Environmental accounting: the preservation or loss of valuable environmental resources should be factored into estimates of economic growth and well-being

NNP* =GNP –Dm –Dn – R –A NNP*: sustainable net national product Dm: depreciation of manufactured capital assets Dn: depreciation of environmental capital: monetary value of environmental decay over a year R: expenditure required to restore environmental capital (forests, fisheries etc.) A: expenditure required to avert destruction of environmental capital

Population, Resources, and the Environment Perception that there is a limited population size which can be sustained with the earth’s finite resources Potential for new technologies may alleviate the strain on the resources Growing populations in the LDCs have led to land, water, and wood shortages in rural areas, and sanitation and water crisis in urban areas Increasing population contributes to accelerated degradation of resources

Poverty and the Environment There exists a relationship between environmental destruction and high fertility which are both out growths of absolute poverty Preventing environmental degradation is linked to providing institutional support to the poor Insecure land rights, lack of credit and inputs and absence of information often prevent poor from marking resource augmenting investments which would help preserve the environment

Growth versus the Environment Question of whether or not it is possible to achieve growth without environmental damage The worst environmental damage by the richest billion and poorest billion of the world Therefore idea that increasing incomes of the poor would decrease environmental damage

Rural Development and the Environment Land in LDC are already being overworked by the existing population Increased accessibility of agricultural inputs and introduction of sustainable methods of farming are need to decrease destructive patterns of land use

Urban Development and the Environment Rapid population increase and rural-urban migration has led to increasing urban population growth Strain on existing urban water supplies and sanitation facilities, high costs of urban crowding Resulting in health hazards as circumstances allow for epidemics and health crises Research reveals that urban environment tends to worsen at a faster rate than urban population size increases so that the marginal environmental cost of additional residents rises over time

Traditional Economic Model of the Environment Privately Owned Resources Static Efficiency in Resource Allocation Where total net benefit is maximized when the marginal cost of producing/extracting one more unit of the resource is equal to its marginal benefit

Common Property Resources and Misallocation (11.3) Potential profits or scarcity rents will be competed away Misallocation or resources under a common property system Implication of model is the where possible privatization of resources will lead to an efficient allocation of resources Example: relationship between the returns to labor on a given piece of land Scarcity rent: Green area

Economic Solutions Allow scarcity rent to be collected Tradable rights to pollute: Individuals incorporate externalities SMC=Private marginal cost+pollution=MR Requires a cap to constrain individual and world wide totals Should all countries be required to participate?