The Environment and

Development (Todaro & Smith

Ch.10)

Lecture 7

Prof. Dr. Durmuş Özdemir Department of Economics

Yaşar University

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

• Global Warming

Environment and Development:

The Basic Issues

• Sustainable development and

environmental accounting

Environment and Development:

The Basic Issues

nm DDGNINNI *

Sustainable net national product is:

Where

NNI* is sustainable national income

GNI is Gross national income

Dm is the depreciation of manufactured

capital assets

Dn is the depreciation of environmental

capital

Environment and Development:

The Basic Issues

ARDDGNINNI nm *

Alternatively, sustainable net national product is:

Where

NNI*, GNI, Dm, and Dn are as before

R is expenditure needed to restore

environmental capital

A is expenditure required to avert

destruction of environmental capital

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

Environment and Development:

The Basic Issues

• Urban development and the environment

• The global environment and economy

• Nature and pace of Greenhouse Gas-

Induced Climate change

• Natural Resource-Based Livelihoods as a

pathway out of poverty: Promise and

Limitations

The Scope of Environmental

Degradation: An Overview

• Environmental problems have consequences both for health and productivity

– Loss of agricultural productivity

– Prevalence of unsanitary conditions created by lack of clean water and sanitation

– Dependence on biomass fuels and pollution

– Airborne pollutants (especially in Urban areas)

Rural Development and the

Environment: A Tale of Two Villages

• Representative African village

– Desertification

– Low opportunity cost of women’s time

encourages waste

• Representative South American village

– Soil erosion

– deforestation

Global Warming and Climate

Change• IPCC report of April 2007 paints a dire picture for

developing economies

• Impact of global warming likely hardest on the poorest

• Resultant conflicts over natural resources

• Adverse health impacts

• Strategies– Taxes on carbons

– Caps on greenhouse gases

• Not exclusively caused by developed countries – Rapid industrial growth in Asia

– Deforestation

Traditional Economic Models of

the Environment• Privately owned resources

• Inefficiencies result from imperfections in property rights

• Perfect property rights are characterized by– Universality- all resources are privatly owned

– Exclusivity or Excludability-it must be possible to prevent others from benefiting from a privatly owned resources.

– Transferability- the owner of a resource may sell the resource when desired

– Enforceability-the intended market distribution of the benefits from resources must be enforceable.

Figure 10.1 Static Efficiency in

Resource Allocation

Static Efficiency in Resource Allocation

• Total net benefit is maximized when the marginal cost of producing or extracting one more unit of the resources is equal to its marginal benefits to the consumer.

• This occurs at Q*, where the demand and supply curves intersect.

• The resulting producer surplus is called a scarcity rent. Producer surplus area is aPb, and the consumer surplus is area DPb. Together they yield a maximum net benefit equal to Dab.

Figure 10.2 Optimal Resource

Allocation over Time

Optimal Resource Allocation over

Time

• If resources are scarce and are rationed

over time., scarcity rents may arise even

when the marginal cost of production is

constant, as in figure 10.2.

• Assumed, owner has scarce unit of 75 but

for a scarcity rent PsabP supply only 50

unit.

• Ps market price for 50 unit.

Traditional Economic Models of

the Environment• Common property resources

– Inefficiencies arise because resource is not

privately owned

– Traditional models do not concern themselves

with equity and income distribution

– Family farmers can benefit from extended

tenancy or ownership

– Who should buy publicly owned land

Traditional Economic Models of

the Environment• Public goods and bads: regional

environmental degradation and the free-

rider problem

– Internalization of externalities is not easy

– Free rider problems

• Limitations of the public goods framework

– Pricing mechanism

Figure 10.4 Public Goods, Private Goods,

and the Free-Rider Problem

Public Goods, Private Goods, and the Free-

Rider Problem• The MC associated with the preservation of an additional

tree is equal to the forestry maintanence cost plus the opportunity cost of the tree,that is the most valuable alternative use of the tree, such as for firewood, charcoal, lamber etc. Figure 10.4 illustrate the problem of pricing public good.

• Q*: Socially optimal number of trees.

• Pm D C : total net benefit of society from the public good maximized area.

• Due to free rider problem, free market will not lead to this optimal quantitiy.

• At price Pm the free market will satisfy person B’s demand QB while not denying person A’s requirements of QA; A can free ride on B’s contribution. The market will provide a suboptimal level of forest preservation, QB.

• To restore optimality (Q* of public good), some form of government intervention is required.

Public Goods, Private Goods, and the Free-

Rider Problem (Cont.)

• The most effective solution is to charge each

consumer just enough per unit, PA and PB for

individuals A and B, respectively, to entice each

of them to demand the preservation of the

optimal quantity of trees, Q*.

• Their joint payments, PA X Q* for A plus PB X Q*

for B, represent a total contribution equal to PM

X Q* exactly the sum required to purchase the

socially optimal level of preservation.

Urban Development and the

Environment• The ecology of urban slums

– Health threatening pollutants

– Unsanitary environmental conditions

– Serious impact on poor

• Industrialization and urban air pollution– Environmental Kuznets curve

– Pollution tax

– Absorptive capacity of the environment

– Severity of industrial pollution- impact on health

Figure 10.5 Pollution Externalities:

Private versus Social Costs and the

Role of Taxation

Figure 10.6 Increasing Pollution

Externalities with Economic Growth

Urban Development and the

Environment• Problems of congestion, Clean water and

Sanitation

– High health and economic costs associated

– Drag on development

– Impact on poor

– Private wells have led to land subsidence and flooding

– Impact on export earnings

The Need for Policy Reform

• The recognition that action to reduce

environmental hazards has been

insufficient is now widespread

• However, budgets are limited

• Better pricing policies would improve

matters

• Inclusion of women in the design of

environmental policy is important

The Local and Global Costs of

Rain Forest Destruction• Many scientists are alarmed by recent evidence

regarding greenhouse gases

• Economists also are concerned with the costs of global climate change

• Rainforest preservation as a global public good- a restorative mechanism for the environment

• Sustainable management of rain forests

• Reduction of trade barriers to promote developing country exports

• Provide funds, debt relief (not aid) to help enhance biodiversity

Policy Options in Developing

and Developed Countries• What LDCs can do

– Proper resource pricing

– Community involvement

– Clearer property rights and resource ownership

– Improved economic alternatives for the poor

– Improved economic status of women

– Industrial emissions abatement policies

– Proactive stance toward adapting to climate change

Policy Options in Developing and

Developed Countries (cont’d)

• How developed countries can help LDCs

– Trade policies: barriers, subsidies

– Debt relief and debt for nature swaps

– Development assistance

• What developed countries can do for the

environment

– Emissions controls

– R&D

– Import restrictions on unsustainable production

Concepts for Review

• Absorptive capacity

• Biomass fuels

• Clean technologies

• Common property

resource

• Consumer surplus

• Debt-for-nature swap

• Deforestation

• Desertification

• Environmental

accounting

• Environmental capital

• Externality

• Free-rider problem

• Global warming

• Greenhouse gases

Concepts for Review (cont’d)

• Internalization

• Marginal cost

• Marginal net benefit

• Ozone depletion

• Pollution tax

• Present value

• Private costs

• Producer surplus

• Property rights

• Public bad

• Public good

• Scarcity rent

• Social costs

• Soil erosion

• Sustainable development

• Sustainable national

income

• Total net benefit

Conclusion

• Questions

• Discussions