The Environment and Development Chapter 10 The Environment and Development

Economics and the Environment Environmental issues affect, and are affected by, economic development Poverty and ignorance may lead to non-sustainable use of environmental resources Environmental decay and global warming are serious issues we face today Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

National Income Accounting GDP (or GNI) is the market value of final goods and services GDP (or GNI) excludes the externalities of production and consumption Negative externalities: costs imposed on the environment and third parties; e.g., air pollution, land contamination Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Reasons for Environmental Decay The common property right over the environment No one has private property rights over the environment being polluted (e.g., air, ocean water) The collectively consumed nature of the environment Benefits received by all users No one can be excluded from using it Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Adjustment for Environmental Decay To adjust for the negative externalities find the “sustainable” Net National Income as NNI* = GNI – Dm – Dn – R – A where Dm = depreciation of physical capital Dn = depreciation of environmental capital R = expenditures required to restore environmental capital A = expenditures required to avert destruction of environmental capital Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Causes of Environmental Decay Poverty Rapid population growth Rapid urbanization Affluence & excess consumption Industrial production Use of chemical inputs Relaxed environmental laws and weak law enforcements Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Poverty and Environment Poverty and lack of development policies would force the people to overuse natural resources: Cultivate the land without fertilization Cut the trees for fuel Contaminate the water Pollute the air Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Population Growth and Environment Rapid population growth put pressure on natural resources: Clean air Arable land Safe drinking water Forests Mineral deposits Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Urbanization and Environment Rapid urbanization and relaxed environmental laws result in environmental degradation: Air pollution from fossil fuel consumption Congestion and noise pollution Water contamination Relaxed emission control policies Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

The Global Environment Consumption patterns of the very poor and very rich Global warming and rising sea level Rapid population growth, poverty, and income inequality in LDCs Rapid deforestation due to pollution and commercial development Rapid desertification due to lack of rural development Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Private Property Rights Perfect private property rights require: Universality: all resources are privately owned Exclusivity: owner prevents others from using resources Transferability: owner can sell resources when desired Enforceability: owner receives all benefits Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Environment and Development: The Basic Issues Sustainable development and environmental accounting Population, resources, and the environment Poverty and the environment Growth versus the environment Rural development and the environment Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Private Property Rights Perfect private property rights require: Universality: all resources are privately owned Exclusivity: owner prevents others from using resources Transferability: owner can sell resources when desired Enforceability: owner receives all benefits Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Economics of the Environment Free market transactions achieve stable equilibrium, benefiting Consumer through the creation of a consumer surplus Producers through the creation of a producer surplus Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Economics of the Environment Price Supply Consumer Surplus Marginal Cost P Producer Surplus or Scarcity Rent Demand Quantity Q Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Optimal Resource Use Resource conservation results in a Higher future price Greater producer surplus Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Optimal Resource Use Price By reducing consumption from 75 to 50, price goes up to PS and producer surplus increases by PSPab a Ps P MC b Demand 50 75 Quantity Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Common Property Rights When a scarce resource (e.g., land) is publicly owned and thus freely available to all users (e.g., farming or grazing animals) Any potential benefit (i.e., producer surplus or scarcity rent) will be competed away as more people use the resource Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Common Property Rights Return to labor Initial employment is L*, where MPL = W and PS = AP*CDW. As more workers use the land, MPL < W and PS declines. At LC, MPL is very small, AP = W, and PS = 0 C AP* D E Wage W Marginal Product of Labor Average Product of Labor L* Lc No. of Workers Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Public Goods and Environment Public or collectively consumed good Provides benefits to all users Its availability won’t diminish as others use it simultaneously Is produced by the government Is subject to the “free-rider” problem The human environment is collectively consumed. Hence, it is subject to decay. Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Demand for Public Goods Aggregate demand is the “vertical” summation of individual user demands Cost of providing the good to the society is greater than the individual users’ costs Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Demand for Public Goods A+B Price Q* = Qa + Qb; Pa < Pm; Pb < Pm B Aggregate Demand A c MC Pm b Pb Aggregate Supply a Pa Qa Qb Q* Quantity Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Negative Externalities When consumption or production inflicts damages on third parties (e.g., air pollution generated by using private automobiles) The good whose production pollutes the environment is over-produced, but under-priced if producers do not pay for the cleaning cost Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Negative Externalities Price MCS MCP a Supply P* b PM Dead-Weight Loss = abc PC c Demand Q* QM Quantity MCS>MCP: QM > Q* and PM < P* where Q* and P* = “socially optimum” price and quantity; QM and PM = “market” price and quantity Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Environmental Decay As the demand for the good increases due to Economic growth Population growth The “market” price and quantity will further diverge from the “socially optimum” price and quantity Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Environmental Decay P1 Q* MCS Price MCP P2 P* Q1 QM D2 D1 Quantity Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Environmental Policies, LDCs LDCs must improve the environment: Proper resource pricing to include externalities: impose pollution taxes and standards Community involvement: education, recycling Private property rights and resource ownership Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Environmental Policies, LDCs LDCs must improve the environment: Programs to improve alternatives to the poor Improve the economic status of women Establish industrial emission abetment policies Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Environmental Policies MDCs must help LDCs improve the environment: Trade policies, reducing trade barriers Debt relief to reduce the financial burden Development assistance to improve the environment Copyright © 2009 Pearson Addison-Wesley. All rights reserved.

Environmental Policies MDCs must help improve the global environment: Emission control Research and development Import restrictions Copyright © 2009 Pearson Addison-Wesley. All rights reserved.