Lecture Economic development - Chapter 10: The environment and development

Chapter 10
The Environment
and Development

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Economics and the Environment
• Environmental issues affect, and are
affected by, economic development
• Poverty and ignorance may lead to nonsustainable use of environmental resources
• Environmental decay and global warming
are serious issues we face today
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10­2


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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10­3

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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10­4


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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10­5


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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10­6

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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10­7


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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10­8

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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10­9


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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10­10


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
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Enforceability: owner receives all benefits
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10­11


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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10­12


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
• Copyright © 2009 Pearson Addison­
Enforceability: owner receives all benefits
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10­13


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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10­14


Economics of the Environment
Supply

Price

Consumer Surplus 

Marginal Cost

P

Producer Surplus or Scarcity Rent 

Demand
Q

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Quantity

10­15


Optimal Resource Use

Resource conservation results in a
• Higher future price
• Greater producer surplus
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10­16


Optimal Resource Use

Price

Ps
P

By reducing consumption from 75 to 50, price goes
up to PS and producer surplus increases by PSPab
a
MC

b
Demand
50

75

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Quantity

10­17


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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10­18


Common Property Rights

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 

Return to labor

AP*

C

W

D

E

Wage
Marginal Product of  Labor
Average Product of  Labor

L*

Lc

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No. of Workers

10­19


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.
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Hence,
it is subject to decay.
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10­20


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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10­21


Demand for Public Goods
A+B
Price
Q* = Qa + Qb; Pa < Pm; Pb < Pm
B
Aggregate Demand

A

c

Pm
Pb

b

MC
Aggregate Supply

a

Pa
Qa

Qb Q*

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Quantity

10­22


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 underpriced if producers do not pay for the
cleaning cost
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10­23


Negative Externalities
Price

MCS
MCP

a

P*
PM
PC

Supply

b

Dead­Weight Loss = abc

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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10­24


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
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10­25