1. The Environment and Development
Chapter 10
The Environment and Development

2. 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
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3. 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
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4. 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
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5. 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
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6. 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
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7. 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
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8. Population Growth and Environment
Rapid population growth put pressure on natural resources:
Clean air
Arable land
Safe drinking water
Forests
Mineral deposits
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9. 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
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10. 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
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11. 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
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12. 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
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13. 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
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14. 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
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15. Economics of the Environment
Price
Supply
Consumer Surplus
Marginal Cost P
Producer Surplus or Scarcity Rent
Demand
Quantity Q
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16. Optimal Resource Use Resource conservation results in a
Higher future price
Greater producer surplus
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17. 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
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18. 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
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19. 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
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20. 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.
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21. 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
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22. 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
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23. 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
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24. 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
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25. 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
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26. Environmental Decay P1 Q* MCS Price MCP P2 P* Q1 QM D2 D1 Quantity
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27. 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
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28. 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
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29. 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
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30. Environmental Policies
MDCs must help improve the global environment:
Emission control
Research and development
Import restrictions
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