Lecture Economic development - Chapter 10: The environment and development

In this chapter we examine the behavior of competitive firms, such as your local gas station. After completing this chapter, students will be able to learn what characteristics make a market competitive, examine how competitive firms decide how much output to produce, examine how competitive firms decide when to shut down production temporarily,...

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Chapter 10

The Environment

and Development

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Economics and the Environment

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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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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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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Adjustment for Environmental Decay

• To adjust for the negative externalities find

the “sustainable” Net National Income as

NNI* = GNI – Dm – Dn – R – A where

capital

environmental capital

• Use of chemical inputs

• Relaxed environmental laws and weak law enforcements

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Poverty and Environment

• Poverty and lack of development policies

would force the people to overuse natural

resources:

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Urbanization and Environment

• Rapid urbanization and relaxed

environmental laws result in environmental degradation:

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The Global Environment

• Consumption patterns of the very poor and very rich

• Global warming and rising sea level

• Rapid population growth, poverty, and income

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Private Property Rights

Perfect private property rights require:

• Universality: all resources are privately owned

• Exclusivity: owner prevents others from using

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Environment and Development:

The Basic Issues

environmental accounting

• Population, resources, and the environment

• Poverty and the environment

• Growth versus the environment

• Rural development and the environment

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Private Property Rights

Perfect private property rights require:

• Universality: all resources are privately owned

• Exclusivity: owner prevents others from using

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Economics of the Environment

Free market transactions achieve stable

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Optimal Resource Use

Resource conservation results in a

• Higher future price

• Greater producer surplus

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Optimal Resource Use

MC P

P s

b a

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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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Common Property Rights

Wage W

AP*

D C

L* L c No. of Workers

Initial employment is L*, where MPL = W and PS =  AP*CDW.  

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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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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

Q* = Qa + Q b ; P a  < P m ; P b  < P m

A B A+B

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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

MC S >MC P : Q M > Q* and P M < P* where Q* and P* = “socially optimum”

price and quantity; Q M and P M = “market” price and quantity

c

Supply

• The “market” price and quantity will further

diverge from the “socially optimum” price

and quantity

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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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Environmental Policies, LDCs

LDCs must improve the environment:

poor

policies

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Environmental Policies

• Trade policies, reducing trade barriers

• Debt relief to reduce the financial burden

• Development assistance to improve the

environment