Chapter 20 Sustainable Development Norton Media Library Dwight H. Perkins Steven Radelet David L. Lindauer

Chapter 20 Learning Objectives The problems caused by open access to common resources. How external diseconomies distort market outcomes. The concept of resource rent. The implications of the rule for optimizing the harvest of a renewable resource and the rule for optimal depletion of a nonrenewable resource. How secure, long-term, transferable property rights can reduce the market failures that cause overexploitation of natural resources. The information requirements for regulating externalities efficiently. How taxes or marketable permits (rights to pollute) can internalize external costs and lead to an efficient market outcome for natural resources.

Chapter 20: Learning Objectives efficient market outcome for natural resources. How government interventions and policy failures have contributed to the wasteful use of resources. How national accounts can be adjusted to incorporate the depletion of natural capital. The neoclassical analysis of how markets respond to scarcity, and its implications for global sustainability of development. Why widespread poverty is a threat to the global environment, and economic development is part of the solution. How rich nations and poor nations differ with regard to global resource management, so room exists for a bargain that can benefit all nations.

Chapter 20: Outline 1.Market Failures –The Commons –Externalities: A Closer Look –Sustainable Harvests –The Value of Time 2.Policy Solutions –Property Rights –Government Regulation –Taxation –Marketable Permits

Chapter 20: Outline 3.Policy Failures 4.Measuring Sustainability –Natural Capital Sustainability –Resources and National Income 5.Global Sustainability –Malthusian Views –Neoclassical Views –Environmental Standards, Global Competitiveness,& Trade –Poverty and the Environment –Rich Nations and Poor Nations

Fig. 20.1: External Diseconomies: A firm causing an external cost-produces too much

Market Failures 1.Market Failures Environmental degradation often is a result of market failure where market prices deviate from scarcity values and individuals and companies maximize their profit but cause losses or damage to other parties & society –The Commons : involves open access, free of charge to any member of the village or community: If we cansider Environment as a common resource, then private activity may generate external costs leading to market failure

Externalities Externalities are the core of common resource problem. External costs or diseconomies arise when a polluting firm impse costs on others. Because the firm does not bear these costs, the PMC is lower so more of the polluting product is produced and consumed, See figure 20.1

Sustainable Harvests Most common property resources are renewable resources that can regenerate given time The difference between rate the rate of harvest and the rate of growth is the rate of depletion. The question is what is the maximum harvest time.

Fig. 20.2: Fisheries Economics: Sustainable Harvests: Property rights & Extinction

Optimal Exploitation of the Fisheries Private profit maximizing solution will maximize net revenue (profit) at E* Common Property solution will lead to solution E1 or extension Common property resources are over used

Discoutn Value of Forest Harvest Options The timber company has 3 choices It can cut the three now for for immedicate profit and use proceeds in another business-Option A. It can wait for a future benefits from growth of trees and cut or harvest or option B discounting the present value of future net revenue Option C is a continuous harvest made possible by rapid growth of tree and price rises but less so by high discount rate.

Fig. 20.3: Discount Value of Forest Harvest Options

Policy Solutions Market failure leads to over use of natural resources stem from external costs that are not born by producers. These require government interventions in the following ways Property Rights Government Regulation Taxation Marketable Permits

Property Rights Assigning Property rights to an individual or a company. As an owner he may produce a socially optimal outcome in a competitive market. Characteristics effective property rights Long term and secured, transferable, enforceable. Longivity converts asset that the producer can invest on in the long run

Property rights can be shared by community or a group Example: The Nile Basin Initiative The Nile is 7000KM long and the basin covers 3 million square KM and shared by 10 countries: Burundi,Congo, Egypt, Ethiopia, Eritrea, Kenya, Rwanda, Sudan, Tanzania and Uganda About 150 million live on the Nile. Together they established the Nile Basin Initiative (NBI): Potential for Cooperation & Conflict See box 20.1

Fig. 20.4:Optimal Level of Pollution

Table 20.1

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Fig. 20.7

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End Chapter 20 This concludes the Norton Media Library Slide Set for Chapter 20 W. W. Norton & Company Independent and Employee-Owned Economics of Development SIXTH EDITION By Dwight H. Perkins Steven Radelet David L. Lindauer